Chapter 1: What is the main topic discussed in this episode?
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Any potential foreshadowing for the FOMC's pivotal September meeting and any commentary around the Fed's framework, particularly as it relates to central banks' independence. Pleased to see you joining us right now is Robert Kaplan, former Dallas Fed president and now vice chairman over at Goldman Sachs. Thanks for joining us here today, Robert.
And of course, before I ask you specifically about Jay Powell and what we're going to learn out of Jackson Hole, I do have to ask you about some of the allegations surrounding Lisa Cook, the political undertones that some people think that there is a concerted effort to try to reshape the Fed board.
And of course, the general idea here of what Fed independence even means in this current environment. Yeah, so I've obviously read the reports. I don't have anything to comment on there. I do think the main thing is it's critical for members of the Fed to do their work without regard to political considerations or political influence and come to the best judgments they can.
And I'm hopeful that will continue to be the case. I am curious about just the general process here because, I mean, there are a lot of allegations that we know so little publicly. There has to be an investigation both by the Fed internally and it looks like at this point maybe potentially by the DOJ. But you were the subject of allegations several years ago when it came to trading.
You decided to step down, in your words, to avoid that distraction. Only, you know, what was it, maybe about three years later to have the Fed come out and say after doing an investigation they found you actually did nothing wrong. Do you regret stepping down when you did? No, I made the best decision that I thought was the best interest of the institution. But I think I'm sympathetic.
The situation that you're currently talking about has its own set of facts. And I don't want to comment or say anything about it. I think the people involved will do the best they can to deal with it. And I think I'll leave it at that. Thank you for sharing that, Robert.
If you believe that President Trump is trying to secure a majority of the Federal Reserve Board, the seven-member board, what would that really accomplish? And I ask that, Robert, because we know that the FOMC is more than just the board itself, right? You have Fed presidents who also vote on the FOMC. There are 12 votes in every meeting.
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Chapter 2: What should investors watch for in Powell's Jackson Hole speech?
And they're the governors as well as five of the presidents. And no one person makes the decision. The chair doesn't make the decision. he or she has to form a consensus around the table.
And I think you've got an ethic at the Fed, which is very strong, of looking at all the available analysis, talking to businesses, understanding all the structural drivers in the economy, and trying to come to the very best judgment that you can, and then bring that to the meeting and debate it out.
And I think it's a healthy process, and I'm very hopeful that that's the process that will continue. And of course, one of the things everyone will be debating about is what the economic data show about the state of the economy and what's in store for the economy.
As a former Fed official, as a former voting member of the FOMC, how would you interpret the data that we've seen the last two weeks, which includes consumer and wholesale inflation seemingly at odds? You have rising jobless claims. You now have a rebound in manufacturing, at least according to surveys. Yeah. So here's the challenge for the Fed.
On the one hand, we have a relatively sluggish jobs market and relatively sluggish GDP growth. We're at full employment. But the reason we're at full employment is because labor supply has been decelerating. Hiring has been very sluggish. And so I think the Fed probably would like not to see a further weakening in the labor market. That's on the one hand.
On the other hand, we're running inflation above target. We've been running inflation above target for the last three or four years. It's been primarily services. This is before we even talk about tariffs. Goods, ironically, have been disinflating. We'll have to understand how the tariffs flow through goods.
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Chapter 3: How do political pressures affect the independence of the Federal Reserve?
And what the Fed is trying to balance is... I think if the job market were stronger, I think it would be clear to be patient and wait to see how the inflation is going to unfold and be more patient to see a trend further down toward target. But I think with this weakening in the labor market, it's going to push the Fed, I think, to be more forward leading and maybe do an adjustment in September.
But the caution I would give, if they do move in September, I don't think that's the start of a cycle. I think it's an individual decision, then they'll wipe the slate clean and take the next six weeks, try to understand these cross currents again. And so I think they'll shorten up the timeframe and take it one meeting at a time. I am curious as to what you think that debate's going to be like.
We got the FOMC minutes from the last meeting, and there was clear division there as to what the Fed should do and when they should start doing it, if at all. And I assume that's going to intensify by the time we get to mid-September, now that we've had some additional economic data. Having been in that room and knowing how those debates go out, does that debate...
Is that going to center around, in your view, much more on the inflation side? Or do you think it's going to lean a little bit more on the labor market side of the mandate? So while there's a lot of focus on J-PAL's speech tomorrow, the reality is we're going to get at least one more inflation print, and we're going to get the jobs numbers for August.
And so that actually, that jobs number for August is going to be very telling and will shape the debate. You're either going to see a jobs number that shows a further weakening or continued sluggishness. I think that would tilt toward taking some action in the September meeting. Or you may see something stronger.
But the debate is going to be about the fact that we are at risk of not meeting either side of our dual mandate. We're already above target on inflation. And how serious is the threat that the job market is going to weaken further. That's what they're going to debate. And the reason there's a disagreement is for good reason. It's not clear.
And I think the fact that there's debate and disagreement, I think, is a good thing. I think there ought to be where there's these type of cross currents. So I think that's a good thing that they'll be disagreeing and debating. But when it comes to where the inflation rate or where the inflation target should be, there's been a lot of talk about 2 percent or I guess now it's 2 percent ish.
But the idea that the economy has been running relatively OK with at least headline inflation in the 3 percent range, core inflation in the high twos. Is there an argument to be made, Rob, that longer term, maybe we can live with a higher target rate, a higher neutral rate? Yeah, I would argue against that, and here's why.
There are approximately 80 million workers in this country that make $50,000 or $55,000 a year or less. They've lost 25% plus purchasing power over the last three or four years. They are struggling to make ends meet. If headline inflation is 3%, headline inflation for them based on share of wallet might be five or six or seven.
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Chapter 4: What lessons can be learned from Robert Kaplan's resignation from the Fed?
They'll figure it out and they'll make it work. Where I'm more concerned is small businesses I talk to who don't have these levers to pull. And I think for them, for many, they're actively debating whether they can make it through the end of the year because they don't have the flexibility to manage tariffs the way big companies do.
Yeah, they don't have as many options, and I really appreciate your bringing that up. I mean, all of that adds up to a very complicated economic picture where the economic indicators that we rely on and debate over don't always capture the cross-currents and the nuances that are taking place underneath.
All this anecdotal insight from companies, particularly small companies, as you put it, around the country is incredibly valuable. And all that is encapsulated in something called the Beige Book. Do you feel like the Beige Book should be more valuable to the FOMC than it has been up to this point?
I mean, I know that as a reporter, we sometimes get the Beige Book and we kind of look at it and say, oh, that's backwards looking. It didn't really tell us anything. Yeah, the Beige Book for me is a critical part of the process. There's a whole mosaic of things you look at.
You talk to businesses, you look at data that is published, you look at the Beige Book, you try to understand structural drivers and macro factors. But the Beige Book is very valuable. It's one of the unique things that the Fed is set up to do because it is
distributed all over the United States and has relationships locally and we get these survey results, it's very informative, but it's a piece of the puzzle that's very helpful. In periods like this, where you have a number of structural changes going on, I think being closer to business That includes the Beige Book. It can be talking to businesses.
I think that becomes more important because the data, again, is backward looking. It's aggregated. It may be lagging. It gets revised. And so I think you have to look at the whole picture. And that's a good point. And I think a lot of people in the market have been trying to do that even prior to some of the recent developments.
And it gets to this idea as to whether you see any opportunity to actually improve the government, the official government data, the collection of that data, the timeliness of that data, and more importantly, the accuracy of that data. I mean, what can we do to actually update that? Well, so there's been a lot of discussion. I think I've mentioned you before.
I remember I learned when I first got to the Fed, the first piece of advice I got is don't over-rely on any one data print. It tends to be backward-looking. It's aggregated. It's going to get revised. And so I think... We also are aware of post-COVID, the survey response rates have declined.
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Chapter 5: What are the implications of Trump's influence on the Federal Reserve Board?
And I'm curious if that worries you at all. It's always a concern. It should be a concern. However, This is where I used to teach leadership, as you may know, at Harvard Business School for 10 years. This is where people matter.
It's up to the people involved to adhere to an ethic that they're going to make decisions based on their best available information without regard to political influence or political consideration. That ethic is very strong today at the Fed. I am very hopeful that that ethic will continue and it'll be up to the leaders of the Fed to make sure of that. All right. Thank you so much.
Rob Kaplan is the former Dallas Fed president and, of course, current vice chair of Goldman Sachs. This is Scarlett Fu. And I'm Paul Sweeney, inviting you to join us for the Bloomberg Intelligence Podcast.
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