Goldman Vice Chairman & Former Dallas Fed President Rob Kaplan Talks Fed Might Not Be Cutting Rates This Year
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Bloomberg Audio Studios. Podcasts. Radio. News. Let's get over to the Goldman Sachs conference in California. Shanali Basik standing by. And welcome to our Bloomberg television and radio audiences. I'm Shanali Basik and I'm standing by with Robert Kaplan. You might know him from his former time at the Dallas Fed. You might know him now as Goldman Sachs' vice chairman and EVP.

In either direction, there's a lot to talk about in this market, from your macro hat as well as your client-facing hat. But let's start with the latter. What are clients saying to you right now in the wake of what you saw just less than 24 hours ago with pressure on the Trump administration's tariff policy? Does it actually clear anything up for clients? Probably not. I think most clients are just now reacting, and we're actually at Goldman

Piecing this through, and I think our own judgment is the administration is more likely to find other authorizations to continue to do what they're looking to do. It's still our best guess that when this is all said and done, the tariffs will settle out in the low to mid-teens. That'll create challenges for companies. They'll adjust to it. It'll create bigger challenges for

for small business who don't have the levers to adjust. So what's the key advice? What are businesses preparing to do for those tariffs? Well, if you're a bigger company, you're reviewing all your logistics and supply chains. And the reason they're in the middle of doing this, this happened abruptly. And so given six or 12 months, most companies I talk to can reshift, but not overnight. It'll take six months to a year. And

And then the thing they're telling me is they're also, in light of this, they're going to pressure suppliers. They're going to take some out of margin. They'll put some in price. They don't know how much yet. And they're also looking how to tighten their belt a little bit because they realize if they're taking some margin, they may need to find other ways to pay for it in their company. So I was listening to your chief economist, Jan Hatzius, a little earlier. He reiterated that 35% probability of a recession, saying that's still possible.

quite material. It's an elevated level. What could make that worse? What are you most concerned about right now in terms of the economy slowing down? So there's a couple of big structural issues

that are probably reducing the probability of recession. Maybe very sluggish growth, but not a recession. First of all, we started the year thinking we were going to do deficit reduction. And the sense on the tax bill was it would be primarily extending the Trump tax cuts. It now appears that we haven't done as much cost cutting.

And the tax package is more expansive, not done yet. So fiscal policy may be more expansionary or neutral, not contractionary. We've got labor force growth decelerating because of change in immigration policy. It means the labor force is tighter, means the probability of unemployment is spiking up rather than just drifting up.

is less likely. You need to have a severe downturn. You normally would have a spike up in unemployment. And then the other thing going on is obviously tariffs, which have been well articulated. Those tend to slow growths.

and raise prices. But when you put all that together, I think we're going to have sluggish growth, probably not a recession, but probably sluggish growth, at least for the remainder of this year. With that worry about sluggish growth, as well as potential inflation on the heels of these tariffs, a lot of concerns about at least the dual mandate for the Fed, which direction the Fed goes in, if not stagflation outright. If you were still at the Fed, what would you do this year in terms of cuts? So I

I've been counseling for the last number of months to be patient.

You have a lot of uncertainty, big structural changes, let them unfold. The thing that would force the Fed's hand if you saw unemployment start to spike up, then the Fed might have to lean in more and take more risk. But that doesn't appear to be happening. And I think the tight labor force makes that less likely. So what they're waiting for is to see, and I'd be waiting for, how will these tariffs feed through the economy? We'll have a better sense of that through the summer and into the fall.

And so I think you're going to see him take it one meeting at a time, be patient,

There's an SEP, summary of economic projections they have to submit in June. If I were in my former seat, I would probably say one to two cuts, probably more likely one. That's less than the market had been expecting. But I think you're going to see them take a patient wait and see approach, and it's the right approach, I think. The big frustration from our viewers here is that the market is pricing in two or less rate cuts.

There is Morgan Stanley, which Mike Wilson believes could have seven rate cuts by the end of next year. Now, our audience is really wondering whether there are no rate cuts this year. Is there a chance that the Fed does not have room to cut? Yes. And the Fed, the thing is, I don't know. And more importantly, the Fed doesn't know. And why don't they know? Because we haven't decided on what the tariff rates are going to be. We're still in the middle of negotiating a tax bill. I don't know what the tax bill is going to say.

We have a lot of uncertainty. And so when you're in a period like this, sort of shorten up the prognostications, be more of a risk manager, take it one meeting at a time. And so I think that's what they'll do. And so there'll be people prognosticating out there. I would say the Fed's reaction function is going to be more immediate at a time. Now, how much control does the Fed really have when it comes to long end rates? You're looking at

the bond market start to hiccup here and there. We have not seen alarming levels yet. We have not seen that 5% level on the 10-year that a lot of investors are looking out for. How big of a risk is there that we get there? So the Fed doesn't have a lot of influence over the 10-year. Fed decides on the Fed funds rate. I actually think my focus, and I think to some extent our clients' focus, is more on the 10-year than on the Fed funds rate. And the reason is the deficit.

Again, we went into this year with six in a fraction, close to 7% deficits. We've been outgrowing the world the last few years because of excess fiscal. I think people thought, okay, now we're going to reckon with this and we're going to start reducing these deficits. And it may not be materializing. And so I think you're seeing the back end inch up, maybe the term premium inch up, makes it harder to be a duration buyer.

And I still think we're going to be wrestling with that for the rest of the year. Robert Kaplan, of course, now Goldman Sachs vice chairman. You might have known him previously as president of the Dallas Fed, of course, weighing in here on these bond markets and what the Fed might do next.

Back to you.

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