Chapter 1: What is the main topic discussed in this episode?
Hello and welcome. This is The Michelle Hussein Show. I'm Michelle Hussein. I speak with people like Elon Musk. I think I've done enough. And Shonda Rhimes. That's so cute. This will be a place where every weekend you can count on one essential conversation to help make sense of the world.
So please join me, listen and subscribe to The Michelle Hussein Show from Bloomberg Weekend, wherever you get your podcasts. You certainly ask interesting questions. Bloomberg Audio Studios. Podcasts. Radio. News. I'm very pleased to say joining us now is Robert Kaplan, vice chairman at Goldman Sachs, previously, of course, served as the president of the Federal Reserve Bank of Dallas.
Robert, very nice to have you with us. Thank you so much for coming in. So let's talk about the here and now in the U.S. economy and what you see weakening in the labor market. Is it right that the market that the Fed should focus on on the weakness in the labor market right now?
There's no question that the labor market is weaker and very sluggish. There's three reasons why. One, tariffs, at least in the short run, are slowing growth in the United States. And they're affecting small business disproportionately. And you saw in this recent job weakness, a lot of the weakness was in small business. That makes sense.
Second, there's been constraints on labor force growth, which reduces supply, but also there's a multiplier effect when jobs go unfilled. It creates other jobs that would have been created. You know, there's another half a job that would be created for every job goes unfilled. And then the shutdown has been a headwind for growth. So it's not surprising you're seeing some weakness.
The trick for the Fed is as you head into 26, we've got a few tailwinds. That may come to the fore. Tax incentives, tax on tips, tax on overtime, accelerated depreciation, regulatory relief getting more for getting further along. And then still the AI data center power boom, I think, is underway.
So that's that's why they're balancing what's the here and now versus the headwinds likely in twenty six.
And of course, there's a lot of focus on who's going to lead the Fed and who is going to be leading those conversations about the balance between inflation risks and joblessness risks in the United States. What's your thinking on the extent to which the market is concerned about the person themselves?
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Chapter 2: What insights does Rob Kaplan provide about the current U.S. economy?
I mean, this is in the end setting policy as a group activity. Yeah. But the chair clearly has a big voice at the table. What should we know about the way these decisions are made and how much it matters who leads?
So the Fed is focused on full employment and meeting a 2 percent inflation target. And the reason they're sticking with the 2 percent inflation target is there's still 85 million workers in the United States that make 50 or 55 grand a year who are struggling to make ends meet. So affordability is a big issue in the U.S. I think any of the candidates mentioned.
have the intellectual capability and leadership capability to balance those issues. I think whoever's in the job, and I won't go through individual names, they will need to show that while they may be from the administration or other sources, they're going to be intellectually willing to balance those issues and have that debate. without regard to political pressure or political considerations.
And that's, I think, what the market wants to see.
Chapter 3: How is the labor market currently affecting the Federal Reserve's decisions?
Yes. I mean, how nervous are you about political pressure to get rates lower in the United States? Is this something that should preoccupy market participants?
Well, it is natural for administrations to want lower rates. Lower rates mean higher real GDP growth, higher nominal growth. But that's why the Fed is a little bit has to be independent and when necessary, push against that. So I think any of the candidates have the capability of doing it.
And my advice to any candidate would be if you're in the job, you want to reiterate that you're going to respect and try to preserve the independence of the Fed, at least on setting the Fed funds rate.
If the White House and if the Fed wants lower interest rates in the States and if that's what they deliver, if the market then worries about inflation, does that mean that the lower rates the Fed sets don't necessarily get passed on to the real economy? So could lower rates actually be self-defeating?
Chapter 4: What factors are contributing to the weakness in the labor market?
So the Fed only controls the front end of the curve. And so what you've seen, the Fed has cut 150 basis points since September of 24. The 10 year has hardly budged. OK, it's down just a touch. And so the curve has gotten steeper. So, yeah, the market sets rates along the curve and the further out the curve, the more their market determined.
And so the Fed's got to be aware that has to have credibility for its actions.
And are you concerned about overheating at all in the U.S. economy around the AI theme? You talked about how there are going to be some tailwinds around fiscal stimulus in the states, tax cuts, also the AI build-out.
There is going to be a firming, we believe, at Goldman Sachs. We believe that in 26, GDP growth is likely to firm here. I think there's there's clearly enormous infrastructure spending for AI data centers power. We're in the early stages of AI adoption. I think there's a lot of worry. Gee, is the AI infrastructure build overdone? I don't think it's overdone yet.
We'll get to the point where we will think it's overdone. But we're in the early stage of downstream adoption. And so I think we see firming growth. I don't see an overheating. But when you have firming growth, you've got to be worried. Inflation is running two and three quarters, three percent.
Yes.
And so the Fed just got to be very mindful of that.
And at the coalface of the sort of news flow around corporate adoption of AI, we get drip fed little nuggets of information about these businesses adopting quickly. Here, there's some pushback. What's your big picture expectation about how quickly this can change the productivity narrative for the U.S. economy?
When we're sitting here talking five years from now, I would guess that you're going to see productivity growth in the United States and globally. But let's take the United States. It could be a half a percentage point, we believe, higher. Corporate margins could be better. That's on the one hand. On the other hand, businesses are more likely to get disrupted.
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Chapter 5: Who are the potential candidates for the next Fed chair and what qualities do they need?
Rob Kaplan, vice chairman of Goldman Sachs and previously, of course, of the Dallas Fed. Our thanks to Rob for joining us. Very great. Really great to get his perspective on the AI up and downsides for the U.S. economy and the Fed conversation, of course.
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