Rob Kaplan
Appearances
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
They're looking at the whole mosaic. And what I hear more and more from investors now is there's a lot more uncertainty in USMCA was an agreed trade agreement. They see some of the other things going on with higher education, other things that are a little jarring and surprising coming out of the United States.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And what they're starting to think is maybe we started the year being over allocated the dollar in US assets. Maybe we should be rebalancing and reducing our dollar, not eliminating, but reducing our dollar exposure because there's enough unpredictability. And they're asking more questions.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Is the institutional framework, is the predictability, which is one of the reasons I wanted to invest in the U.S., is that deteriorating? And that's causing people to change asset allocation.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
They are already either making plans or starting to act on plans. Here's the issue. And I'll give you a good example. Many folks, companies I talked to, had moved some manufacturing from China to Vietnam. Now we've got a very high tariff on Vietnam. So if we move to Vietnam, do we stay there and hope there'll be a trade agreement, or do we move?
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And they're trying to make risk management decisions. The one decision that many are struggling with is how much can they move to the United States. We know that's the one place where we won't have a tariff. However, costs are higher. is this going to be a globally competitive investment?
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And if the only reason it's competitive is a tariff moat, what if that tariff moat goes away in four or five years? So that's one of the issues folks are wrestling with. And also, they're talking a lot about, can we use technology to lower the costs? And so you'll see a lot of this manufacturing that does get moved here, I would guess, is going to be heavy use of technology, 3D printing,
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
other methods to lower the cost.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And so let me just put all this in context because it's easy to lose sight of this. The U.S. economy is predominantly a services economy. We manufacture in the United States, I'll pick another 13 or 14 percent of GDP. We import let's say, 10%, 11%, 12% goods. And global manufacturing as a percentage of GDP globally is declining.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
OK, so we shouldn't forget as we go through this, we run a services surplus with the world. We're primarily a services economy. You want to make sure that we don't do damage to services while we're trying to bolster goods. And so that's, again, the balance we have to weave.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
This week, yeah.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
So here's why these new trade deals, as they're announced, are going to be very informative. There are some number of capital committers in the market. And I talked to a number of them who believe this has all been a negotiating strategy and that tariffs are going to come down to closer to zero. I'm afraid.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
That there's another scenario, which is the Trump administration wants the tariff revenue based on their comments. It's unclear how much money Doge is saving. Hopefully they'll do it. They'll say, but it's unclear. They want more tariff revenue and their objective may not be to negotiate down to zero. It might be negotiate down to 10 or 20 or 30.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Good to be here. Thanks for having me.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And that is going to make the create significant challenges. And we don't know. exactly which way we're going, but you hear officials saying, we want the tariff revenue and how useful the tariff revenue is, particularly when they're talking about the tax bill and a desire to do more than extend the Trump tax cuts, to get tax on tips, tax on overtime, deductibility for buying a car.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And so I think there's some confusion in the market and it's affecting securities buying, the dollar, gold, treasuries, all these asset classes. Marc Thiessen All right.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
I think the U.S. exceptionalism thesis is not dead. It's alive and well. But I think it's very critical that we come out of this period over the next few years having retained U.S. exceptionalism, the greatest companies in the world, the most innovative. I think our higher education system is one of the gems of the United States, an independent fed world. rule of law, predictability.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
I hope when some of these structural changes we've worked through, we want to get back where the world has confidence in the United States and we keep building many of our great strengths, which have put us in a position to outperform the world.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
I think there will be some repair to do, but I actually believe we can. We can do the damage control, but I think it will be broader than tariffs. It has to do with some of the decisions we're making on foreign policy, what we're doing with our own institutions. A number of these decisions, including tariffs, I think are central to that. And yes, we can come out of this with U.S.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
So what you're seeing is a shift in that for the last couple of years, I think a lot of the focus was on the Fed. And first they're tightening and then they're beginning to ease. We're now shifting more towards structural drivers in the U.S. economy, which the Fed doesn't drive. The executive branch and Congress drive the structural drivers.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
preeminence and having strength in our country, but it will require a real focus on that as an objective and some prioritization of many of these structural changes.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Okay. So I talked about confidence in the institutional framework of the United States, rule of law, other significant aspects that people have come to rely on. One of those institutional staples has been an independent
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
politically independent Federal Reserve, independent central bank, which means that the Fed, at least as it relates to monetary policy and setting the Fed funds rate, does it independent of political pressures and political considerations. So why is that so important? Because there are times, the last few years is a great example, where it's very unpopular to
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
for the Fed to do what it needs to do. It needed to raise rates dramatically in order to bring inflation down. It's very unpopular. You want to take that out of the political sphere and put it in an independent organization that can make these tough decisions. Okay. So now we move to today. We've got these structural changes. Growth is slowing.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
I think the president, understandably, and others are hoping the Fed will be able to see their way clear to lower rates. However, there's an inflation issue. And I think Jay Powell, as I said, is trying to jawbone at a minimum that issue. And he wants to make sure that they balance their dual mandate of full employment and price stability. And so...
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
An independent Fed gives a lot of confidence to the financial markets, in my opinion, makes them more willing to buy the dollar, buy duration, buy US assets. But the other thing I would say is J-PAL doesn't set the Fed funds rate. There's a vote. Now, the voters are all the governors and a portion of the presidents, those votes rotate. I ran the Dallas Fed. I voted on a rotating basis.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Even if J-PAL were gone, I can tell you I don't think there's a consensus around the table to cut rates in the May meeting. They're open to it, but that's even if J-PAL wasn't there. And so I think there's some realization that institutionally you've got to build a consensus. It's got to be based on facts and analysis and debate.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And I think they may have concluded that removing J-PAL, one, would be legally problematic, but also would be institutionally very unsettling to the world. And it might not cause any change. J-PAL will leave next year, first half of next year. They will pick someone new. You want that new person to be seen as also independent, I think.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
and preserving the independence of the Fed and not make any pre-commitments to the administration about what he or she will or won't do. And I think they're going to have to be careful about that.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And those include an effort to cut government spending, reduce deficits, regulatory review in every industry, an effort to restructure the energy ecosystem to lower prices at the pump. and for low-moderate-income families. We're seeing a dramatic change in immigration and immigration policy, which is reducing workforce growth.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
On the being late point, I've been critical of the Fed in 2021 and 22 that I thought the Fed should
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
start tapering bond buying soon sooner than they did and start looking at raising rates sooner so in that regard you could criticize them and they might criticize themselves they were somewhat late the best analogy that i can think of is you're driving on the highway and you're going 65 or 70 miles an hour and people are in the back seat and they want you to go faster the same time let's take that same highway
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
but there's a rainstorm, there's a hailstorm, there's terrible visibility. I don't think anybody's going to be beating on you to go 65, 70 miles an hour. They're going to say, you know, I'm going to go 35. And I don't think anybody's going to say, you're late, you're slow. We're going to get there 10 minutes later. You'd say, let's get there in one piece.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And so he's right that the Fed is going to be more reactive. However, There's a lot of fog and rain and maybe some hail that makes their being slower, I think, justifiable, particularly given inflation is still sticky in the United States.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Good to talk to you.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And then the last big one is obviously tariffs, which we could spend the whole time talking about. But those are five very significant changes. The Fed is most comfortable when there's a clear outlook, and then they can adjust policy to those outlook. When you've got this many structural changes and some of them are still unclear, tariffs is a good example.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
I think the Fed has to wait until some of these decisions clarify. And the other reason to wait is we still have an inflation issue. And so the Fed has to be patient for this to clarify because they're still trying to make sure people know they're fighting inflation.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
So the economy is reacting to these structural changes. We started the year, I think most economists might have called for two and a quarter, two and a half percent GDP growth. Those estimates have steadily declined. probabilities of recession have increased. What we're actually seeing in the economy in terms of the real data is shipping is down, travel is down, tourism is down.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Most companies I talked to in the first quarter, business has been not great, but it's been solid. And even today, they haven't seen a substantial fall off, but they're expecting it. And that's where we are right now.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Stagflation means slower growth and stickier prices. So we obviously just got the actual GDP number for the first quarter, although it'll be subsequently revised, but was negative. Not surprising. It was a little disappointing to some. And you see economists slowing down their growth estimates for the year. So why are they doing that? Government spending cuts, slow growth.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Regulatory reform should help productivity, would help growth, but it takes time. Immigration reduction, workforce growth reduction, slow growth. And tariffs, probably slow growth, but also create a cost push that might actually cause prices to be stickier. And that's what the Fed's trying to figure out.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And so, yeah, that combination means slower growth and stickier prices, at least in this first phase. And that's why you hear people talking about stagflation.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
It'll react differently. So going in, I'll call it pre-January 20th, goods ironically were disinflating globally. OK, one of the reasons for that is dramatic overcapacity in China and global manufacturing overcapacity. The inflation issue was due to services, sticky rents and maybe sticky wages. And that was probably driven to some extent by excess government spending, excess demand, not supply.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Now we're heading into this new set of policies and the Fed is adjusting its Tariffs are about goods. Well, we haven't had a goods problem. Well, we may now. And so they're trying to figure out, will increasing costs due to tariffs translate into higher prices? Now, the reason I say will they, it's not a certainty. You can negotiate with your suppliers.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
You can take some amount out of your margin if you're a company. You can increase prices. You may not increase prices all at once. And you don't know what the level of the tariffs are going to be, and it varies by country, and the jury's still out.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And so what they're struggling with is the inflation nexus has changed to a cost push issue on goods, and it's unclear how much demand destruction, i.e. slowing growth, might offset that cost push. You just don't know yet.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And that's all true. And he was. And he warned that in order to get inflation down to two, we may have to accept a recession. So why didn't we have a recession? I'll tell you why I think why we didn't. Fiscal spending has been historically high. American Rescue Act, Inflation Reduction Act, Infrastructure Act, CHIPS Act.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
We were running six and a half percent plus of GDP deficits, historically high. And so I think that helped cushion some of the Fed rate hikes. Now we're switching where we'll see how successful it is. Maybe unclear right now. Government spending, they're going to try to reduce it as a percentage GDP. Unclear whether they're going to have success. And it's clear the economy is now slowing.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
I think the Fed's going to be more balanced on the one hand looking at unemployment and inflation, but this is why Jay Powell in a speech a couple of weeks ago in Chicago, I believe, made clear we haven't given up on fighting inflation because he's worried if he suggests that, inflation expectations might inch up more and become unanchored and doesn't want that to happen because if that happens, it's going to be harder to cut rates, not easier.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
They're not wrong to think it.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
think here's what we know and here's what we don't know i think the fed is going to be in my opinion more reactive than preemptive in 2019 i was at the fed when we had a tariff issue i advocated for preemption but we could do that because we didn't have an inflation issue the fed here will be more reactive if you see a severe slowing that i think on balance offsets some of this cost push i think the fed may well see its way clear to reducing rates
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
multiple times. But the Fed shouldn't be in the business of predicting that because it needs to see it before it acts because it's unclear. And so the market has to make predictions because we've got to invest. The Fed should be more of a risk manager. And I would advise investors, realize there's a whole bunch of scenarios because we don't know what the tariffs are going to be.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
We don't know what ultimately how far we're going to go on deporting undocumented immigrants, reducing workforce growth even further. And you don't know how this government spending effort is going to work out. That's a lot of uncertainty. And so just be prepared. This is unpredictable. I think investors think that.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
I think you will see if you saw the unemployment rate. Remember, the Fed's mandate is full employment and price stability. It's not GDP. It's unemployment.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
If you saw unemployment begin to spike higher where it's clear it's on its way to 5%, I think that would – if I were at the Fed, that would get me on my front foot that maybe I might be willing to take some liberties in thinking that demand destruction – will offset some of this cost push. The other thing that would cause the Fed to act if you saw disorder
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
in either the treasury market or the other financial markets.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
Well, we haven't seen it yet. I think it's not a great combination. We talked right before this interview. When gold is going up, the dollar is weakening, the 10-year is inching back up while the market is selling off. That is not what you want to see.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
But it happened in an orderly way. I think the Fed is on their toes looking at overnight liquidity and market function. If that continues to be orderly, They won't act, but they're watching it.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
I'll put it this way. There'll be a new SEP, summary of economic projections, in June. If I were submitting my estimate in March, I would have said two. If I were submitting in June, believe it or not, I might also say two.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
That's less than the market expects, but I want to do that deliberately in that I want to leave our options open depending on what happens with these tariff and other decisions, and I don't want to be in a position where we sort of indicated to the market we're going to do more than we're really able to do.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
And so I think the market is likely to be disappointed with the Fed forecast in June for how much they're going to do. That doesn't mean they won't do more. It means they want to retain their operating flexibility. And again, I've said this, you want to be, in this period, a risk manager, not necessarily a prognosticator.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
So you look at all of it. You look at the soft data. You look at the hard data. And I know from experience, sometimes weakness in the soft data doesn't always translate into what happens with the hard data. And also, you've got governments in the midst of making decisions that can change sentiment. The one piece of soft data that I would rank above many of the others is is inflation expectations.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
The Fed is very focused not only on bringing inflation down to two, but making sure that inflation expectations remain anchored so that people still believe the 2% goal is credible.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
that if inflation expectations start to inch up, then maybe businesses start to preemptively raise price. Consumers start to buy thinking prices are going up. We just saw that recently, but where consumers increase their purchases, we think, because they thought prices are going up. That means inflationary expectations are moving up. You do not want that at the Fed. You want them to be anchored
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
because if they become unanchored and behavior changes as a result of it, it's harder to get to the 2% target. So they're going to be watching that very carefully. So if you see Jay Powell or other Fed speakers sound more hawkish, I would be too. Even if I were thinking I want to look for a way to cut, I would talk hawkish because I want to keep these inflation expectations anchored.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
They're moving up and they're moving in the wrong direction. And it does reflect behavior on the ground. Businesses are preempting. There's a new word in the dictionary. It's called surcharge. And I always heard the word, but it's on bills now. There's a surcharge and it's for either current or anticipated tariffs. And consumers are starting to get in their mind that prices are moving up.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
You want to anchor that. And the best way right now the Fed can do that is jawboning. So people shouldn't misinterpret it. Gee, Jay Powell sounded very hawkish. That means they're not going to do X, Y, or Z. No, to me, it means he wants to keep their options open and he wants to anchor inflation.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
I talk to investors around the world too.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
So for businesses, by and large, they'll adjust. But what's hard for them is something that happens abruptly. So if there's a well-telegraphed change, they have time to adjust to it. The auto companies are a good example. In a couple of years, over a year or two, they can make adjustments. They can make investments. They can change locations.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
But if it happens abruptly, which this has, a lot of businesses I talk to have a number of things they're working on to adjust. But what they're saying to me is, I just can't do it overnight. Might take me six months, 12 months. I can inch away different things.
WSJ What’s News
Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma
In the meantime, they have to make plans on how much they're going to take out of margin, how much they're going to put in prices, how much is going to come out of dollar strengthening, although we're going the other way right now. That's what businesses are doing. And they'll adjust to it, but they're working on it. On investors, investors are not just looking at tariffs.