Rob Kaplan

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.

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.

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.

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.

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.

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.

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.

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.

Yes.

Yes.

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.

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.

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.

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.

And so...

And so...

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.

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.

They're not wrong to think it.

They're not wrong to think it.