Bloomberg Audio Studios, podcasts, radio news. I'm very pleased to say joining us now is Robert Kaplan, vice chairman at Goldwyn 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 US economy and what you see weakening in the labor market. Is it right that the market that the Fed should focus on the weakness in the labor market right now?
There's no question that labor market is weaker and very sluggish. There's three reasons why. Won 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 while 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 creative for every job goes untilled. 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 twenty six, we've got a few tailwinds that may come to the four tax and centers, tax on tips, tax and 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 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. I mean, this is in the end setting policy as a group. Activity share 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 needs.
So the FED is focused on full employment and meeting a two percent inflation target. And the reason they're sticking with the two percent inflation target is there's still eighty five million workers in the United States that make fifty or fifty five grand a year who are struggling to make ends meet, So affordability is a big issue in the US. 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 in 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.
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.
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 even 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 lower the lower rates the Fed sets don't necessarily get passed on to the real economy. So could lower rates actually be self defeating?
So the FED only controls the front end of the curve. And so what you've seen the Fed is cut one hundred and fifty basis points since September of twenty four, has hardly budged. Okay, 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 of 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 US economy? Around the AI theme is that you talked about how that there aren't going to be some tailwinds around fiscal stimulus in the state's tax cuts. Also, the AI build.
Out there is going to be a firming We believe at Golden Sex we believe that in twenty six GDP growth is likely to firm. I think there's clearly enormous infrastructure spending for AI data center's power. We're in the early stages of AI adoption. I think there's a lot of worry geas 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 call face of the sort of news flow around corporate adoption of AI, we get drip fed little nuggets of information about these businesses adopting. Quickly hear this and pushback, what's your big picture expectation about how quickly this can change the productivity? Nar? It's it for the US 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 as and that 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. They've got to spend on AI in the short run that may come out of margin. Over the long run, I think businesses who do it
well are going to be more productive. So I think we're going to see the benefits. The surprise is going to be which use cases work and which use cases we thought would work but don't, And how does it affect industry, and how does it affect labor. Yes, and so we're early in that workers are going to get disrupted out of functions, out of companies. They're going to
have to move to other functions and companies. This is where early childhood, literacy, secondary education, skills, training, and adaptability of the labor force is going to get more important, and successful countries will invest in that.
So labor markets will need to adapt and policy what should policy make as I suppose keep in mind when it comes to labor markets and how quickly. We might see the effects of AI on redundancies.
I think the thing about AI, and like other technological, technological and other structural change, is how fast it's going to happen. So policies need to be makers need to be a where you're gonna have mismatches. You're gonna have lots of people looking for jobs. You know, computer programmers who used to have plentiful jobs now will need to find other types of work. But there's lots of open jobs. Also,
window installers, automotive technicians, electricians, and we've got mismatches. I would guess in the next two or three years you'll see that continue. Those will get solved with the passage of time, but I think we're gonna have to help people make the adjustment. So there's cyclical issues where lack of demand creates labor slowing, and then these structural mismatches. I think we're going to see more structural mismatsages, maybe even if cyclically we're firming.
And on that structural story, is it your sense then that the negatives kick in more quickly than the positives, So the job cuts come and then the productivity gains come later.
I think human beings. Sometimes takes them a while to change their aspirations, change their job goals. And I think this is where we have to do a better job educating workers, helping them adjust making that transition. But AI is happening so fast the workforce may lag adopting, and also worker mobility, geographic mobility is probably historically low. Right now, you know the house, it's situation. You have already owned your home, fixed rate mortgage. We're going to have to help people adjust.
Okay, Robert, thank you very much. Thanks for joining us. Roll Kaplan, vice chairman of Goldman Sachs and previously, of course, of the Dallas FED. Thanks to Roll for joining us. Very great, really great to get his perspective on the AI up and down sides for the US economy and the FED conversation. Of course,