Robert Kaplan Talks Rate Hikes, Warsh at Jackson Hole

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News.

**Lisa Abramowicz** (0:07)
Begin this hour with stocks and bonds steady as CPI eases September rate hike bets. The next read on inflation out at 830 a.m. Eastern with PPI on deck, Goldman Sachs vice chair and former Dallas Fed president Robert Kaplan joins us now for more. Rob, great to catch up with you. I want to start just by asking you your take on the economy and whether you are surprised by the relatively weak labor market report, and then the very much inline yet confusing CPI report.

**Robert Kaplan** (0:37)
What I'm seen in the economy, if it's associated with the AI infrastructure build or AI adoption, then it's strong. What I hear from a number of companies who are more tied to housing, autos, the strength of the low-moderate income consumer, I would say they describe the economy as OK, not great, somewhat sluggish. And so in that regard, the job market report kind of was in line with that. You don't see aggressive hiring, but you don't see aggressive firing. And I still think we're several months or a year away from companies having enough confidence in the AI use cases to more aggressively use AI to replace people. But that is likely to happen. I think there'll be new jobs created also.
But the point is, unit labor costs are very well behaved. And I think you and I have talked about this. The share of GDP going to profit is increasing. The share going to labor is more muted.

**Lisa Abramowicz** (1:46)
What's the Fed's role given this backdrop right now?

**Robert Kaplan** (1:50)
So, you've got a lot of cross currents.
And in fairness, if we didn't have the war in Iran and the spike in oil prices, which I think has raised headline inflation and bleeds into other items, my guess is we might not even be talking about the prospect of a rate increase. And I think the Fed's role here should be to try to understand these cross currents. The AI infrastructure build is probably inflationary, and you've got tariffs, labor constraints, oil spike that exacerbate that. On the other hand, AI adoption should ultimately be disinflationary. Chinese overcapacity should be disinflationary. And so, it's not surprised to me that there's a lot of debate, and they're trying to weave through this. I think what I would be doing in my former seat is I would not have raised rates in July. I think they made absolutely the right decision. I probably wouldn't have cut in December either, by the way. That last cut I would not have done. And I would be keeping an open mind between now and September. If I see meaningful improvement, I might be willing to kick the can and do nothing, but I want to take every bit of time between now and September before I make a judgment, and avoid being rigid or predetermined in assessing this.

**Lisa Abramowicz** (3:11)
People talk about the death of forward guidance. In part, forward guidance has no role at a time where no one knows what's going to happen, and it's very hard to predetermine what exactly could transpire. At the same time, reaction function does seem to be important. And from your vantage point, Rob, what would you be looking for to see that there is some sort of departure from this sort of mess, this muddle, to something that is more of a protracted, persistent inflation?

**Robert Kaplan** (3:37)
So, the term forward guidance gets used very broadly. What it started out as is, I'm going to make a current commitment today to a future action.
Bernanke used it during the Great Recession. We I think overused it in the fall of 2020 and into 21 in committing to keep rates low until we reach full employment. I dissented on that. But, I think the Fed has learned its lesson there and is much more reluctant to use that type of forward guidance. Now, what forward guidance seems to mean is I don't want to over predict. I agree with that too. And I always say the Fed's job is to be a risk manager, not a prognosticator. Having said all that, I do think in the press conferences, you ought to be able to explain why you made the decision you made and to describe what the pros and cons and what the debate was. And I would probably like to see that more in future press conferences. And I think that would illuminate the debate that's going on. And I think that would be useful.
And I don't think that box is in the Fed at all.

**SPEAKER_4** (4:49)
Do you think that there's a understanding of the reactionary function right now of this Federal Reserve?