Bloomberg Audio Studios, podcasts, radio news. Our next guest used to be on the FED. He used to head the Dallas FED, and he says that investors should actually be watching for two things out of this meeting. Any potential foreshadowing for the fmc's pivotal September meeting, and any commentary around the fed's framework, particularly as it relates to Central banks independence, pleases say. 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 allegation 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 to 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 asked that, Robert, because we know that the FMC is more than just the board itself, right, You have FED presidents who also vote on the FLMC.
There are twelve votes in every meeting, and they're the governors as well as five of the presidents. And no one person makes the decision. That chaired 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 very 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 at the FMC, 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 and play employment. But the reason we're add 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 and what the FED is trying to balance is I think if the job market were stronger, I think it would be clearer to more 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 the labor market, it's 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 will 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 FMC 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, once we have 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 Jpal'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 market. We're going to get the jobs numbers for August, and so that actually that job's number for August is going to be very telling and will shape the debate. But you're either going to see a job's 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.
When it comes to where the inflation rate or where the inflation target should be. There's been a lot of talk about two percent or I guess now it's two percent ish. But the idea that the economy has been running relatively okay with at least headline inflation in the three percent range, core inflation in the high twos, is there an argument to be made Robed 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 eighty million workers in this country that make fifty or fifty five thousand dollars a year or less. They've lost twenty five percent plus purchasing power over the last three or four years. They are struggling to make ends meet. If headline inflation is three, headline inflation for them, based on share of wallet might be five or six
or seven. And so I actually think it's very critical, particularly for low moderate income workers, that the FED continue to work on getting the headline inflation rate down to two and not be satisfied with three.
Rob I got to get your sense as well about what we've learned from companies this earning season, particularly of late with the retailers reporting results. We already know Nike, SONOSP and g I've been mulling raising prices. Walmart said as much as well, that it would have to at some point start raising prices in the second half of
the year. Dittover Home Depot as well. So how do you fold that into the thinking of inflation as we anticipate higher prices due to higher costs from presumably the teriffs.
So there are four areas that are going to impact on the tariffs. One is, can you We've got a world of manufacturing over capacity, which tells you that companies here that are buying from overseas may have more leverage over suppliers. Dollar. Although it's weakened this year, the dollar could strengthen. That'll take a bite out of the terrace.
They companies may take some of that out of margin, and yes, they may put some in prices, but you've got to remember the consumer has the ability to substitute. They can be very price sensitive. About twenty four to twenty five percent of the US economy is goods, seventy five percent of services. Consumers can decide not to buy a good and they can decide to go out to
dinner or do something else instead. And so to the extent companies can pass on tariffs to consumers is going to depend a lot on their pricing power, how strong demand is. And so there's a lot of these things that companies I talk to still are uncertain about. They're feeling their way. 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 to dating 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 you 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 encapitulated in something called
the Beige Book. Do you feel like the Beige Book should be more valuable to the FMC than it has been up to this point. I mean, I know that as a reporter, we sometimes get the Bagebook 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 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 viable. 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, 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. Got to 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 anyone data print 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. So I think in this world at AI high frequency data, a lot of private sources as well as public sources
use of technology. I think the BLS will be well served and I'm confident they will do this to look at how to upgrade the accuracy of their data. Even with that, I would say the data is never going to be perfect, and I think you're always better off looking at the three to six month trend, not overreacting to anyone data print. And I think that ethic is always worth a reminder.
When you're at the FED, I am curious.
I mean, you sit in a very unique position, having of course worked in the government, at the FED and obviously a long career on Wall Street and now back there as vice chairman of Goldman Sachs. There is the idea that we have to be as a market I say, the we Royal we not necessarily relying on that data, but at least have some faith in it, in the data, faith in the independence of the FED, faith in the
reliability of US government economic data. That faith is being tested right now, 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 ten 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'm very hopeful that that ethic will continue, and I'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