Fed Getting Closer to Neutral Rate, Says Goldman's Kaplan

Bloomberg

Watch Fed Getting Closer to Neutral Rate, Says Goldman's Kaplan - Bloomberg on Dailymotion

Transcript

00:00Let's talk about the data if we can. You're in a position now where you've got a ton of data

00:04yourself. What's it like at the Federal Reserve, just this idea of flying blind without having

00:07that official data? What does that mean? On the margin, they can still use private sources and

00:16they can talk to businesses. The sense is that hiring is sluggish. I think you hear that from

00:22business. You also hear from business, we're not, we may be bell tightening, but we're not firing

00:28significantly either. And so the reason the unemployment rate's not going up is because

00:34supply of labor is flat to down. And that's, that's, that's so far what the data says and what

00:41anecdotes say. I think it would be helpful to the Fed to start getting more of the formal data just

00:46to reinforce their views, particularly as they get closer to neutral. If you're above neutral,

00:53if you're still restrictive, it gets more of a urgent need as you get closer to neutral,

00:59which I think neutral is in the range of three and a half, three and three quarters.

01:02They're getting closer. You think we're pretty close based on that estimate.

01:06I do. There's a range of estimates on the FOMC. There always is. What's interesting to me is to

01:10see this step down in payrolls growth without seeing that real step up in unemployment. Do you

01:15think there's evidence that slack has increased and how would you anchor your view around the labor

01:19market right now on payrolls or around a pretty stable unemployment rate? So here's what, here's

01:23what we're seeing out there. Uh, there are college graduates who are having a hard time finding jobs,

01:29hiring is less. However, also talk to businesses, construction and other industries where they've

01:34got a large number of own unfilled positions. So there's a mismatch issue. So the part I think

01:41I'd be trying to figure out if I'm a former job, is this a cyclical slowing or is a lot of this

01:47and matching issue that over the next year or two will get fixed by better matching. And right now,

01:55I think the jury's out. It looks like some cyclical slowing. That's why the Fed is cutting. But,

02:00but I think there's a point at which they're going to need to, they need to keep retesting that thesis

02:05based on your estimate of neutral. It implies that you don't think we're that restrictive right now.

02:09And therefore that's right. It would suggest that you don't think much of this is cyclical.

02:12Yeah. And the reason, by the way, for the debate about neutral, again, when most people say the

02:18long run neutral rate is two and three quarters, they're assuming a 2% inflation rate. But inflation

02:23is not 2% right now. It's two and three quarters to three. I still think the real Fed funds rate

02:29that's neutral is about three quarters. And that's why I say three and a half, three and three quarters.

02:33The issue is if inflation is still 7,500 basis points over target, you want to really scrutinize

02:41what's going on in the labor market, because do you really want to get to neutral with inflation

02:46this much above target? I think right now they're trading this off and saying, listen,

02:51we've got to guard against a weakening in labor. I would agree with that. And I would cut in October, too.

02:56But beyond October, even though the market thinks it's a done deal for December,

03:01in my mind, if I were my former job, I'd really want to be vigilant about it.

03:06Do you think we're that close to questioning the credibility of this pursuit

03:09of 2% inflation at the Federal Reserve?

03:11I don't think so. And here's why. Yes, we've been above target now for three or four years.

03:17Having said that, China over capacity, disinflationary. AI over the horizon,

03:23disinflationary. And the reason this matters, there's 85 million Americans roughly who make

03:2950 or 55 grand a year or less, have lost 25% purchasing power, are struggling to make ends meet.

03:37And for them, inflation above target is like a regressive tax. And so that's why I think it's

03:43still important to get in the neighborhood of two. It doesn't have to be exactly two,

03:47but in the neighborhood of it. Chinese over capacity, disinflationary,

03:50now for the rest of the world, maybe not for America. The rules have gone up. How does that

03:54change the story? Well, so the Fed over the last couple of years has benefited from the fact

03:59service sector inflation has been running in the mid threes, but goods have been disinflating,

04:05fueled heavily by China. The tariff episode has stalled that, at least for us. But over the horizon,

04:13once the tariff situation settled down, I still think that disinflation may start to seep in, but

04:20we've interrupted it. And that's why you see overall inflation kind of just stuck and going sideways.

04:25How do you view the tariff story in terms of its impact on goods?

04:29Well, so in the near term, tariffs, I can tell you from businesses I talked to, have slowed growth.

04:37They may spur growth over the long run if it spurs more investment. But in the short run,

04:43it slows growth. It comes out of margin. And for goods, many companies I talk to

04:50are taking it in margin because making a price increase decision is a big strategic decision.

04:57They're not prepared to do that. So they're going to accept lower margins. They're going to do some

05:00belt tightening. Over the horizon, though, the next year or two, most companies also I talked to

05:05want to get some of that margin loss back and price when they can. But for the moment,

05:10I think they're taking a lot of it out of margin. How are companies you're talking

05:15to thinking about IEPA and the fact that the tariffs they're paying that might actually get

05:19refunded for? I think the assumption by businesses and I would guess other countries is if this

05:27authorization doesn't stand up in the courts, the administration will find other authorizations.

05:33So I think people are proceeding on the assumption these are going to continue.

05:37You're traveling the world, speaking to businesses all around the planet,

05:41across several geographies. We were just talking. You're recently back from Brazil.

05:45You're a very well-traveled man at the moment. You don't have that sort of regional Fed bias

05:50anymore if you ever had one. You're not just US-centric now. Are you hopeful for the global economy

05:55based on what you're seeing? Listen, there are two or three tailwinds for the global economy.

06:02One AI data center power boom has the promise to improve productivity growth globally. And one of

06:12the big problems around the world is aging populations, not everywhere, and over leverage.

06:18If we can get productivity growth higher, that's great. In the US, we've got regulatory relief coming.

06:23Maybe that will spread to other parts of the world. And we've got tax incentives coming. And so

06:27there's a lot of optimism. However, I would say deglobalization makes it harder for many countries

06:37outside the United States to solve some of the problems that they're facing. And it likely raises costs.

Category

Transcript

Be the first to comment

Recommended