As the U .S. economy faces a stagflationary shock, how will the Fed navigate this tricky environment?
I'm Allison Nathan, and this is Goldman Sachs Exchange.
My guest today is Rob Kaplan, the vice chairman of Goldman Sachs and the former president of the Dallas Fed.
Rob, welcome back to the program.
Good to see you, Allison.
So Rob, there is so much to talk about today.
But of course, there is a lot of concern that the U .S. is headed for a stagflation shock, which is notoriously difficult for monetary policymakers to deal with.
So, first of all, let's just get your view.
Do you think that we are facing stagflation ahead?
We are facing most likely slower growth and stickier prices.
So I guess that might be the definition of stagflation.
And there's several reasons why not just tariffs.
We're right now in the middle of an effort to cut government spending and lower deficits.
So it's a question mark how effective it's going, but that would normally slow growth.
You've got a regulatory review in every industry that should help growth, but it might take a year or two.
You've got immigration flows due to deportations.
Immigration and flow of workforce is decelerating, is declining.
Workforce growth helps growth.
We're accustomed to one to 2 million workers per year over the last eight years, including in the first Trump administration, it looks like it could be in the low hundreds of thousands this year.
That makes growth lower, makes the job force in the service sector stickier.
And then you've got tariffs, which should slow growth and provide a cost shock.
But we don't know how much of a cost shock because we don't know what the tariff levels are.
So if you wrap it all together, it makes sense that growth is going to slow and prices are likely to be stickier.
We just don't know how much. So how does the Fed weigh these risks of slower growth but higher inflation?
We have an FOMC meeting coming up.
What will the conversation be like in the Echols Building?
So the smartest thing the Fed could do, and if I were in my former seat, agree what you know and acknowledge what you don't know.
And right now, the things you don't know are significant.
I don't know what the tariff levels are going to be.
We haven't announced any of these trade levels yet.
I do know that immigration growth is slowed and workforce growth is slower and I know what they're trying to do with the government.
So what I would say is the soft data, I know that's weaker, but so far other than travel, leisure, shipping, those are clearly soft, but the hard data otherwise is kind of hanging in there.
And inflation at the moment is kind of hanging around in the mid 2's, but I know we're about to get a cost shock.
And so the smartest thing you do with this amount of uncertainty is kick the can.
They won't be prepared to act in May, and then they'll take with a clean sheet of paper for June and then figure out as they get into the June meeting, so what's the puzzle look like now?
And so don't try to prejudge, don't be rigid, don't be predetermined, and realize there's a puzzle, but you don't know what the pieces are yet, and so I'd be careful about making public comments on what you will or won't look through, Because you don't know?
And I'd be careful about talking about dates like June meeting versus July meeting.
I would be aware of that.
And then the last thing they have to do is realize inflation expectations in the surveys are getting unanchored.
And so you need to at least jaw bone a little tougher and remind people you haven't given up your fight on inflation.
And that's why you've heard Jay Powell in a speech in Chicago a couple of weeks ago Sound a little tougher.
It's not that he's not prepared to lower rates down the road, but he doesn't want inflation expectations to become unanchored So you basically think the Fed sits tight here in May in May Watches weights and that's the message they've been given I mean They basically said we will wait to see how this evolves and how the data evolves and we'll go from there So they could not cut it all this year or they could cut by a lot Yeah and what Jay is going to try to do, his big opportunity is in the press conference then.
I think he'll try to sound balanced, even -handed, but also keep their options open and be clear that they're still very focused on not just worrying about higher unemployment but also fighting inflation.
I think you'll hear that from him in the press conference.
So I'm going to pivot here, Rob.
The last time we spoke we had discussed concerns about Fed independence.
you were the head of the Dallas Fed during Trump's term.
And when I asked you, first term, and when I asked you about that originally, you said, look, on the supervisory side, yes you can feel some political pressure.
But on the operational side, in terms of interest rates and how they're managing monetary policy decisions, you didn't feel that during Trump 1 .0.
Obviously, this rhetoric around Fed independence has ramped up.
Have your views at all evolved since we last spoke about this.
So, between now and the end of Jay Powell's term, I think that the Fed will fight and strive around the table to be making decisions that are divorced from political pressures and political considerations.
I think the issue will be whoever the new head of the Fed is gonna be, I think it's very important for that person, whoever he or she is, to be seen to not have made any pre -commitments to the administration about what they will or won't do.
And I think there's probably some creeping skepticism out there whether that will be the case.
That'll be a challenge for the next Fed chair, but I think as long as J -PAL is in the seat and with this cast of folks around this FOMC table, I think you may hear from one or two some comments that I think would be wiser not to make.
But with the exception of that, But I think they are going to strive to make whatever they think is the best decision to create full employment price stability without regard to political pressures.
And it's an important point you just made there that I think sometimes gets unappreciated, which is, it's around the table.
You know, there are many members of the FOMC and Chair Powell and the chair in general has one vote.
So how does that work?
If we think about the potential scenarios, how much influence can a chair have relative to everyone around the table?
So in a typical meeting, remember there's seven governors.
And then you have a rotating group of presidents who vote.
And so, normally a Fed Chair doesn't want more than a couple of descents.
Maybe you could live with three descents.
So you need to keep a consensus around the table.
There has been a tendency, historically, for the governors to not descend, although we've had a couple this year.
But yeah, Jay has to build a consensus of the group and get people on the same page.
And so part of his job is to assess the group, give his own views, but he can't cut rates or raise rates or act by himself.
He has to get the view of the group.
And so this is part of the reason why there are two reasons why I think you didn't see any action recently.
One, I think there's already some concern around the world about the institutional framework of the United States and willingness to invest in the dollar and by duration.
I think replacing a Fed chair before his or her term or over would undermine some of that confidence.
That's one reason not to do it.
And then the second point is, even if J -PAL weren't there, the remaining people around the FOMC table are going to strive to be true to what they believe and operate without regard to political pressure or influence, and I think you'll get the same results whether he's chair or not.
Interesting. So it just wouldn't be that effective in achieving the administration's goals?
I don't think so. Interesting.
OK. So a lot of uncertainty.
We don't know what the Fed will do because we don't know what tariffs and other policies are going to do.
Right. What do you say to investors who are asking you, what does this mean, and how should I respond and react and navigate all of this?
So we go through a couple of things.
One, I talk about the broad framework of all the structural changes that are going on.
The other thing I talk about is how this affects the U .S., but how it affects outside the U .S., and this is where there's a divergence.
We've gotta remember, for most countries around the world, they're fighting a trade war with only one country.
So, the United States is fighting a trade war broadly.
It means our companies are struggling to figure out how to realign their supply chains and logistics, and they're somewhat hesitant to domicile more in the United States unless they think it would be globally competitive.
And so, outside the US, this tariff change is likely a growth shock, might in fact be disinflationary, in that we have overcapacity in goods around the world, just not in the United States with these tariffs, but we will in other countries.
And so it might in fact be clear for their central banks, they may have more latitude to cut rates, maybe do fiscal stimulus.
The United States is a little bit not the only country, but kind of unique in that we're likely to have an issue with supply of goods.
And we may have some issues with supply of workers because of what we're doing on immigration.
So we're the one country that will have a growth shock, potentially negative, but also a cost shock.
Other countries around the world may have a little more clarity and latitude on how to manage this.
And so that's another thing we talk with global investors about.
Right, so are you essentially saying, look abroad.
Look abroad in a way that we haven't been looking because the US has performed so well and outperform substantially.
I still think the U .S. exceptionalism thesis, it's got a few chinks in it and in particular the chinks come from people questioning, does our institutional framework in the U .S., is it still in place?
That includes terrific companies, very innovative companies, higher education, innovation, science research was part of that, bedrock rule of law, free speech. There's maybe a few questions being asked.
I think today, as you and I are sitting here, META and Microsoft just announced earnings last night.
I think that's a reminder to people around the world, you know, the US exceptionalism thesis, that's a key part of it.
And you'll notice today, dollar strengthening, gold selling off, tenure actually rounding a little bit.
It kind of reminds people okay, that's the reason why, you know, I was so heavily allocated to dollar denominated assets.
So those kinds of things help.
And my big hope is as we come out of this two or three years, you want to come out of this period with U .S. exceptionalism thesis intact.
We don't do everything perfectly, but our institutional framework is intact, our global competitiveness is intact, our great innovative superb companies are intact.
And that's my hope for the next few years, but in the near term, there have been a few chinks in it that have caused people to, on the margin, allocate a little more away from the dollar.
Right, which you think is warranted.
But we'll see. I share your hope.
Yeah, it's warranted, but it's not a wholesale reallocation.
So we're fortunate.
There are stages to park outside the U .S., but at the moment, from what I've observed, it feels more like parking than high -conviction investing.
Whereas when people are investing in the U .S., I think it was more high -conviction investing because a lot of these exceptional attributes, they're still, that pull is not gone.
I think we have to make sure to preserve it.
I think everyone would agree that it's very hard to have high conviction today.
Thanks again, Rob, for joining us.
Thanks, Alison. Good to talk to you.
This episode of Goldman Sachs exchanges was recorded on Thursday, May 1st, 2025.
I'm Alison Nathan. Thank you for listening.
The opinions and views expressed in this program may not necessarily reflect the institutional views of Goldman Sachs or its affiliates.
This program should not be copied, distributed, published or reproduced in whole or in part, or disclosed by any recipient to any other person without the express written consent of Goldman Sachs.
Each name of a third -party organization mentioned in this program is the property of the company to which it relates, is used here strictly for informational and identification purposes only, and is not used to imply any ownership or license rights between any such company and Goldman Sachs.
The content of this program does not constitute a recommendation from any Goldman Sachs entity to the recipient and is provided for informational purposes only.
Goldman Sachs is not providing any financial, economic, legal, investment, accounting or tax advice through this program or to its recipient.
Certain information contained in this program constitutes forward looking statements and there is no guarantee that these results will be achieved.
Goldman Sachs has no obligation to provide updates or changes to the information in this program.
Past performance does not guarantee future results which may vary neither Goldman Sachs or any of its affiliates makes any representation or warranty expressed or implied as to the accuracy or completeness of the statements or any information contained in this program and any liability therefore including in respect of direct indirect or consequential loss or damage is expressly disclaimed
