Goldman's Robert Kaplan on Fed Dissention, Inflation, Bubbles

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00:00The big story really is dissents and how much is this going to be a fractured Fed going into 2026?

00:06You think maybe we're overplaying that? Maybe I think so. There's a reason that there that there

00:12was a lot of debate going into December meeting. They're now at what I would estimate the neutral

00:18nominal rate. There's some people on the committee. I might have been one of them who would have said

00:23if inflation is running above target and GDP is going to firm in the next year because of tax

00:28benefits, et cetera, you want to be a little above neutral. But they've made a decision and that

00:34they've gone ahead and cut. I think from here, I don't think you're going to see as many dissents.

00:39And here's why. I think there's pretty good consensus that if they're going to move further

00:44from here, you either need to see a weakening in labor, which I think is unlikely, or a improvement

00:51in inflation. But I think there's pretty good consensus now. There's a lot of debate, and I

00:57understand why on whether they should have cut in December. But that's that's behind us now from

01:02here. I think you'll see them be pretty conventional. And I would guess if there's a dissent

01:07here or there, it'll be episodic. I think they've got pretty good consensus now, even with any new

01:13leadership on the Federal Reserve. Well, so I'm talking between now and there's a lot of there's a

01:19lot of daylight. So in May, here will be the change in May. And and so then this is what will

01:25make it. And I think this Fed is going to be reluctant to anticipate disinflationary improvements.

01:34They're going to want to see inflation improvements before they move again. I think in May you'll see

01:39a new Fed chair be more inclined to anticipate improvements in inflation, either due to AI or Chinese

01:47manufacturing overcapacity. It depends on who's around the table. I think some members will be

01:53less inclined to want to anticipate that. But I think that's the direction of the new Fed is going

01:59to be more inclined to anticipate inflation improvements. So I was struck by a couple of

02:04things yesterday, and I have a more sort of dovish read on the Fed. And I think that that was what the

02:08market was picking up in the immediate aftermath. Maybe they're incorrect to do so. But a focus on

02:12downside surprises to the labor market, indicating job losses of 60,000 to the 40,000 gains that we

02:19had been seeing reported. And then this focus on productivity, the idea that you could have your

02:24cake and eat it, too, with more robust GDP without inflation on the flip side. Why do you think that's

02:29not going to necessarily gain the mainframe of the Fed and allow them to cut much more aggressively

02:34going into 2026? So the two things that jumped out at me from the Fed forecast, the summary of

02:40economic projections, is the firming and GDP they see going into next year. So that tells you if

02:47unemployment is weaker, it's not going to be cyclical. It's going to be a structural issue. I don't think

02:52that's the role of the Fed to deal with structural. People looking for jobs don't want the jobs that are

02:58open. I think they should be focused more on cyclical. They're projecting a firming. The other

03:03thing that struck me is their inflation forecast is pretty benign. They show an improvement down to

03:09the mid twos. So if that's the case, that's how they get room for another cut. Because if the neutral

03:18rate right now is three and a half, three and three quarters, if inflation improved another 25 basis

03:23points, I think they'll think neutral is three and a quarter, three and a half. It all makes sense to me.

03:28I would call this now a more balanced Fed from here to May, not so dovish, more balanced. I think

03:36you need to see movement either again in jobs or inflation for them to move. In May, that's where

03:41you'll see the tilt again. And you'll see new debates about whether that tilt toward anticipating

03:47inflation, whether that's appropriate. I want to ask you about inflation in the context of tariffs. And

03:51the Fed chair yesterday defended that two percentage target once again, when he was asked about it by a

03:56reporter. But he also had this admission, which stood out to me, which was, if you took tariffs

03:59out of the picture, you're kind of in the low twos. How are you thinking about the role that

04:04tariffs are having in an inflationary sense right now? And what did you make of him saying that? I

04:09mean, not not really equivocating when he said that to reporters. So I'll take give you a slightly

04:13different tilt. Goods up to 2025 have been disinflating. Goods have not been the inflation

04:21problem in the United States. Services have been the inflation problem. They're running in the mid

04:25threes. They're still running in the mid threes. Tariffs have temporarily interrupted the goods

04:32disinflation. So I agree goods won't be the problem over the horizon. But services are still sicky.

04:40We're very tight on the labor force. And so I think what they're going to be looking for and what I'll

04:46look for is, is there improvement in services or services stay sticky in the mid threes? And I think

04:53the jury's out on that, particularly in a firming economy with a very tight labor force.

04:59Something Jay Powell didn't bite at yesterday were questions about Fed independence and personnel

05:03took us to May. Let me take us a little bit beyond there. There is this kind of popular

05:06misapprehension about what a new Fed chair is going to be able to do. And I don't want to

05:11intimate that the president shares that misapprehension about it, but he's certainly

05:14fueling this notion that he can put somebody in that job and he or she would be able to take the

05:20Fed in a new direction. So with your confidence in the level of unanimity so much as there is among

05:25policymakers now, and that might continue, what does a Fed chair have to have or be able to do

05:30to herd the cats, keep them in line going forward in May? And as he's talking to all these folks,

05:34the Kevins and Mickey. Yeah. All these folks. What should he be asking? What should he be trying

05:39to identify about that person's capacity to play that very important role in running the FOMC?

05:44So I think there'll likely be three changes post May. And I would say, number one, I don't think the

05:51goal of the new Fed chair should be to minimize dissents. It should be to have a good process,

05:56a good debate, to be able to explain decisions. And if there's more dissents, it's okay to me.

06:01But there are three tilts you're going to see. One I mentioned earlier, they're going to be more

06:05likely, the new Fed chair is going to be more likely, I would guess, to anticipate inflation

06:10improvements. Not everybody around the table is going to love that. But I would guess he or she

06:15is going to be able to get seven votes. So in other words, they'll be able to make the decision.

06:18Second, the Fed balance sheet. Is the new Fed chair going to be more inclined to want to extend

06:25maturities in the composition of the Fed balance sheet, go from a reverse twist, less short,

06:31a little more long. And I would guess in the years ahead, the bar for QE may be a little lower.

06:37That's the second. And then the third thing, regulatory reform is well underway. Mickey

06:42Bowman is driving that. I think a new Fed chair will be an enthusiastic partner that might help speed

06:50that along even further. I think those will be the three changes you're likely to see.

06:54Which, just leading over to your current role, how much do you see right now, the risks building,

07:00not necessarily in 2026, but 2027, 2028, when you have financial institutions that are encouraged

07:07to take risk? You have elevated asset prices as a result of an easy Fed policy, maybe not now,

07:14but certainly down the line, which is what's expected. Do you see that as becoming increasingly

07:19a risk to watch as people talk about bubbles? Well, so I personally don't think we're in a

07:26bubble right now. And I think even on the AI front, the AI CapEx is a percentage of GDP based on,

07:34and right now we're talking, when we say AI bubble right now, we're talking about infrastructure.

07:38I think if you look at the infrastructure spend, I think based on a percentage of GDP,

07:44based on the cash flow of the companies doing it, someday it will get overdone. It's not overdone

07:50yet. And remember, the big opportunity in AI is not the infrastructure for the economy. It's the

07:56adoption. And I would argue we're in the early innings on the adoption. The adoption that should

08:02help drive, we hope, a half a percentage point jump in productivity growth as part of GDP and will

08:09drive margin improvement. I would argue in the first couple of three innings of it, that's going

08:15to unfold over the next two or three years. And we're all going to learn a lot about what use cases

08:20work and which ones don't. And so I think that's a great opportunity. I think the next Fed chair

08:26is going to have to, there'll be the zeal to anticipate improvements, but I think he or she is going

08:32to have to be more, it's going to have to be balanced and apolitical because yes, the markets

08:38are watching, global markets are watching and you also don't want to run up in the long end

08:44of the Treasury curve.

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