Rob Kaplan on How the Fed Will Think about the Tariffs

Rob Kaplan (0:02)

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Joe Weisenthal (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:23)

And I'm Tracy Alloway.

Joe Weisenthal (0:25)

Tracy, there are many dimensions of the ongoing market turbulence and trade tensions that we can't stop talking about. But a big one, and in a way, it's almost like people aren't talking about it that much right now, because there's so many other things top of mind. A lot of questions about how the Fed is gonna think about what's happening right here.

Tracy Alloway (0:41)

Right, and I know it's probably not very popular to sympathize with the central bank, but I gotta say, I would hate to be Jerome Powell right now, because in my mind, the consensus right now seems to be that we're heading for some sort of stagflationary scenario, at least in the short to intermediate term, so higher inflation, lower growth, possibly even recession. And that to me just seems like a nightmare scenario for a central bank, which constantly has to balance its twin mandate of price stability and low unemployment.

Joe Weisenthal (1:15)

It's really tricky, right? Because we've sort of been used to environments where it's really obvious, right? So in 2022, 2023, it was clear that they were missing on one specific side, which was the price. For much of, you know, post 2007 or 2008, the story was weak growth, disinflation, whatever. So poor employment. I mean, this is going to be tricky. And look, when we're talking about restructuring the global economy or the internal economy, these are questions that there is a limit to the degree to which monetary policy can solve them. They can maybe, you know, maybe smooth things out a little bit, but at the end, these aren't really monetary policy questions we're talking about here.

Tracy Alloway (1:54)

Right. And I think we all internalized that lesson in the 2020 pandemic, right? We saw all these real world disruptions, supply chain issues, and that gave rise to the infamous transitory inflation, as the Fed called it. And it seems very much like that's a possibility again, right?

Joe Weisenthal (2:13)

Totally. And like we've been saying, we've been going back to talking to all our old supply chain guests because, you know, the whole world may be redrawn. Anyway, we're recording this after the market closed. It's April 8th, 2025 It's 4:09 PM. We just had another crazy day in the market. S&P 500 ended down 1.57 percent. It had been up over 4 percent at one point. So we continue to whipsaw. Anyway, I'm excited to say, we really do have the perfect guest, someone we've had actually on the show once before. We are going to be speaking with Rob Kaplan. He is a vice chairman at Goldman Sachs, member of the management committee. Prior to that, he was the president and CEO of the Federal Reserve Bank of Dallas. Prior to that, he had been Harvard, and prior to that, he had been at Goldman Sachs. Truly the perfect guest for right now. Rob Kaplan, thank you so much for coming back on Odd Lots.

Rob Kaplan (3:00)

Thanks for having me. Good to talk with you.

Joe Weisenthal (3:02)

Tracy said she wouldn't want to be Jerome Powell. I would still take that job, but just let's start. Let's say this is all happening a few years ago and you're still at the Fed. How stressful is this kind of environment for charting a course for monetary policy?

Rob Kaplan (3:18)

Well, the last time we had a tariff issue, you gotta go back to 2019 I was at the Fed at the time, and you may recall we preemptively cut the Fed funds rate three times. I think we called it a tactical recalibration or something like that. And the reason we were able to be preemptive is we didn't have an inflation issue. So we could afford to be preemptive. As we're sitting here today, the Fed goes into this already before the tariff situation with an inflation issue and that inflation sticky. Now, the irony going into this, the source of the sticky inflation has been services, not goods. Goods have been disinflating up to now, up until say two months ago or a month and a half ago. And China over capacity has fed that disinflation. But despite that, you know, we're hanging around two and a half, two and three quarters on the PCE. And I would argue that the excess inflation has been more about excess demand due to outsized fiscal spending. So we are now in a new administration where they are dialing down fiscal spending. So that excess demand is being pulled away. You would normally consider that disinflationary.