Rob Kaplan on the Fed, AI, and How Globalization Is Happening Without the US

SPEAKER_2 (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

Joe Weisenthal (0:18)

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

Tracy Alloway (0:22)

And I'm Tracy Alloway.

Joe Weisenthal (0:24)

Today you are listening to a special episode of the podcast. It was recorded live at the Future Proof Conference in Huntington Beach.

Tracy Alloway (0:31)

Yep, we're gonna be speaking with former Dallas Fed President, Robert Kaplan. He is now Vice Chairman of Goldman Sachs. Again, this was recorded live on stage at Future Proof, so take a listen.

Joe Weisenthal (0:42)

All right, let's just kick it straight off. That jobs report that we got last week, in your view, with your Fed hat on, maybe, is a 50 basis point rate cut in play for the next meeting?

Robert Kaplan (0:55)

I think 50 basis points is still unlikely. I think we've been of the view for the last few months, the job market was weak. This latest report was a little weaker. Having said that, the reason 25 is more likely than 50 is the jobs market has not fallen off a cliff. We didn't get shrinkage and inflation is running at 2 3 quarters to 3 percent above target. And so, it sort of puts a little bit of a headwind on doing more than 25 basis points.

Tracy Alloway (1:29)

I mean, I take your point, but the report was still a huge surprise. So, if you were in the newsroom, when that number came out, just 22,000 jobs added, there was a sort of collective gasp because it was way below basically the entire range of expectations for that particular month. If you're at the Fed and you see a number like that, what does 22,000 actually tell you? Or are you sitting there going, well, maybe I'll wait for the revision until I really make up my mind?

Robert Kaplan (1:57)

I don't know that the weakness in the jobs market was a big surprise to the Fed. They didn't know exactly what the number would be, but they expect it to be anemic. The reason that the unemployment rate has stayed low is, we are not, we've shut down undocumented immigration. We have not ramped up legal immigration, and as you well know, we are deporting some number of workers and chilling 10 to 15 million undocumented immigrants who are in the workforce. And some percentage of them are not going to work. And so supply is anemic. We've thought for the last few months that hiring was kind of, we said, at stall speed.

You should assume if GDP growth is one-a-quarter, one-and-a-half percent, hiring is going to be anemic. So we could debate the number, but I don't think it was a big shock that it was weak. And I think it wouldn't surprise me to see the next number also lethargic. So why aren't we falling off a cliff? We still are running a large deficit. We have tax incentives coming. We're in the middle of an AI data center power boom, as you just heard about in the previous session. And I think that's still bolstering the economy.

Joe Weisenthal (3:13)

Well, then let me take the flip side of Tracy's question because, okay, maybe setting aside reasons for concern, the flip side, as you mentioned, inflation still running above target by most measures. The stock market, I haven't actually, I don't know what it's doing today, but it's very close to all time highs regardless of what it's doing today. All kinds of people are having a really nice time on the beach in Southern California. What is the evidence that as currently standing that Fed policy is actually restrictive? Clearly the FOMC has come around to this view of cuts. It seems like cuts are locked in, but you don't have to have the FOMC view anymore. Is it obvious that cuts are needed at this point?

Robert Kaplan (3:52)

Yeah, I think if it were not for the weakness that we've seen in the labor market, the Fed would want to stand, Pat, because we are, it's one thing to be above your inflation target.

We're not moving toward the inflation target. We're going sideways to backing up. But with this weak labor market, I think it brings the fact you need to cut into play. Now, what's the neutral rate? I think the neutral rate today, you got a two and three quarters percent inflation rate, 75 basis point real Fed funds rate, means the neutral rate to me is around three and a half percent. We don't have a lot of space to cut to get to neutral, but I think you've got 75 to 100 base points. I think the goal of the Fed will be cut in September, stay restrictive, and if the labor market stays, we keep going. If it stabilizes, then you have the option to hold off. And I think that's what they'll do.