Fed Must Remain Independent, Goldman's Kaplan Says

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00:00Let's talk about the here and now in the U.S. economy and what you see weakening in the labor

00:04market. Is it right that the market, that the Fed, should focus on the weakness in the labor

00:09market right now? There's no question that the labor market is weaker and very sluggish. There's

00:15three reasons why. One, tariffs, at least in the short run, are slowing growth in the United States

00:21and they're affecting small business disproportionately. And you saw in this

00:27recent job weakness. A lot of the weakness was in small business. That makes sense.

00:31Second, there's been constraints on labor force growth, which reduces supply, but also there's

00:38a multiplier effect when jobs go unfilled. It creates other jobs that would have been created.

00:45You know, there's another half a job that would be created for every job goes unfilled. And then the

00:49shutdown has been a headwind for growth. So it's not surprising you're seeing some weakness.

00:54The trick for the Fed is, as you head into 26, we've got a few tailwinds that may come to the

01:00fore. Tax incentives, tax on tips, tax on overtime, accelerated depreciation, regulatory relief,

01:07getting more, getting further along, and then still the AI data center power boom, I think is

01:13underway. So that's why they're balancing what's the here and now versus the headwinds likely in 26.

01:20And of course, there's a lot of focus on who's going to lead the Fed and who is going to be

01:23leading those conversations about the balance between inflation risks and joblessness risks

01:28in the United States. What's your thinking on the extent to which the market is concerned about

01:34the person themselves? I mean, this is, in the end, setting policy as a group activity,

01:39but the chair clearly has a big voice at the table. What should we know about the way these

01:44decisions are made and how much it matters who leads?

01:46So the Fed is focused on full employment and meeting a 2% inflation target. And the reason

01:53they're sticking with the 2% inflation target is there's still 85 million workers in the United

01:58States that make 50 or 55 grand a year who are struggling to make ends meet. So affordability

02:03is a big issue in the US. I think any of the candidates mentioned have the intellectual capability

02:09and leadership capability to balance those issues. I think whoever's in the job, and I won't go in

02:16through individual names, they will need to show that while they may be from the administration or

02:24other sources, they're going to be intellectually willing to balance those issues and have that

02:30debate without regard to political pressure or political considerations. And that's, I think,

02:36what the market wants to see. Yes. I mean, how nervous are you about political pressure to get

02:41rates lower in the United States? Is this something that should preoccupy market participants?

02:45Well, it is natural for administrations to want lower rates. Lower rates mean higher real GDP growth,

02:52higher nominal growth. But that's why the Fed is a little bit, has to be independent,

02:58and when necessary, push against that. So I think any of the candidates have the capability of doing it.

03:04And my advice to any candidate would be, if you're in the job, you want to reiterate that you're going

03:10to respect and try to preserve the independence of the Fed, at least on setting the Fed funds rate.

03:15If the White House, and if the Fed wants lower interest rates in the States, and if that's what

03:20they deliver, if the market then worries about inflation, does that mean that the lower rates

03:25the Fed sets don't necessarily get passed on to the real economy? So could lower rates actually

03:29be self-defeating? So the Fed only controls the front end of the curve. And so what you've seen,

03:35the Fed has cut 150 basis points since September of 24. The 10-year has hardly budged. Okay, it's down

03:43just a touch. And so the curve has gotten steeper. So yeah, the market sets rates along the curve,

03:50and the further out the curve, the more their market determined. And so the Fed's got to be aware

03:57that has to have credibility for its actions. And are you concerned about overheating at all in the

04:02U.S. economy around the AI theme? You talked about how there are going to be some tailwinds around

04:07fiscal stimulus in the States, tax cuts, also the AI build-out. There is going to be a firming,

04:14we believe, at Goldman Sachs. We believe that in 26, GDP growth is likely to firm. I think there's

04:22clearly enormous infrastructure spending for AI data centers power. We're in the early stages of

04:28AI adoption. I think there's a lot of worry, gee, is the AI infrastructure build overdone? I don't

04:34think it's overdone yet. We'll get to the point where we will think it's overdone. But we're in

04:39the early stage of downstream adoption. And so I think we see firming growth. I don't see an overheating.

04:47But when you have firming growth, you've got to be worried. Inflation is running two and three

04:51quarters, 3%. Yes. And so the Fed just got to be very mindful of that. And at the coalface of the

04:57sort of news flow around corporate adoption of AI, we get drip fed little nuggets of information about

05:03these businesses adopting quickly. Here, there's some pushback. What's your big picture expectation

05:08about how quickly this can change the productivity narrative for the U.S. economy?

05:12When we're sitting here talking five years from now, I would guess that you're going to see

05:19productivity growth in the United States and globally. But let's take the United States as

05:23and that could be a half a percentage point, we believe higher. Corporate margins could be better.

05:30That's on the one hand. On the other hand, businesses are more likely to get disrupted.

05:35They've got to spend on AI in the short run. That may come out of margin. Over the long run,

05:40I think businesses who do it well are going to be more productive. So I think we're going to see

05:44the benefits. The surprise is going to be which use cases work and which use cases we thought would

05:50work but don't. And how does it affect industry and how does it affect labor? Yes. And so we're early

05:58in that workers are going to get disrupted out of functions, out of companies. They're going to have

06:05to move to other functions and companies. This is where early childhood literacy, secondary education,

06:10skills training and adaptability of the labor force is going to get more important and successful

06:16countries will invest in that. So labor markets will need to adapt and policy. What should

06:23policymakers, I suppose, keep in mind when it comes to labor markets and how quickly we might see

06:28the effects of AI on redundancies? I think the thing about AI, unlike other technological and other

06:36structural change, is how fast it's going to happen. So policies need to be, makers need to be aware,

06:42you're going to have mismatches. You're going to have lots of people looking for jobs, you know,

06:46computer programmers who used to have plentiful jobs. Now we'll need to find other types of work,

06:52but there's lots of open jobs also. Window installers, automotive technicians, electricians,

07:01and we've got mismatches. I would guess in the next two or three years, you'll see that continue.

07:07Those will get solved with the passage of time. But I think we're going to have to help people make

07:13the adjustment. So there's cyclical issues where lack of demand creates labor slowing. And then the

07:19structural mismatches, I think we're going to see more structural mismatches, maybe even if cyclically

07:25we're firming. And on that structural story, is it your sense then that the negatives kick in

07:29more quickly than the positives? So the job cuts come and then the productivity gains come later?

07:34I think human beings sometimes takes them a while to change their aspirations,

07:41change their job goals. And I think this is where we have to do a better job educating workers,

07:47helping them adjust, making that transition. But AI is happening so fast that the workforce may lag

07:55adopting. And also worker mobility, geographic mobility is probably historically low right now.

08:02You know, the house situation, you have already own your home, fixed rate mortgage.

08:06We're going to have to help people adjust.

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