Odd Lots Podcast Summary: Rob Kaplan on How the Fed Will Think about the Tariffs
Podcast Information:
- Title: Odd Lots
- Host/Author: Bloomberg
- Description: Bloomberg's Joe Weisenthal and Tracy Alloway explore the most interesting topics in finance, markets, and economics. Join the conversation every Monday and Thursday.
- Episode: Rob Kaplan on How the Fed Will Think about the Tariffs
- Release Date: April 10, 2025
Introduction
In this episode of Bloomberg's Odd Lots, hosts Joe Weisenthal and Tracy Alloway engage in a deep discussion with Rob Kaplan, Vice Chairman at Goldman Sachs and former President and CEO of the Federal Reserve Bank of Dallas. The conversation centers around the Federal Reserve's strategy in navigating the current economic turbulence influenced by recent tariff implementations.
Current Economic Environment
The episode opens with Tracy Alloway highlighting the prevailing concerns of a potential stagflationary environment. She states:
"The consensus right now seems to be that we're heading for some sort of stagflationary scenario, at least in the short to intermediate term. So higher inflation, lower growth, possibly even recession." ([01:23])
This sets the stage for a discussion on the complex interplay between inflation, growth, and unemployment, and the challenges it poses to the Federal Reserve.
Monetary Policy Challenges
Joe Weisenthal reflects on the Fed's historical challenges, noting:
"When we're talking about restructuring the global economy or the internal economy, these are questions that there is a limit to the degree to which monetary policy can solve them." ([02:36])
Rob Kaplan elaborates on the Fed's current stance, contrasting it with past actions:
"The Fed goes into this already before the tariff situation with an inflation issue and that inflation's sticky... the Fed is going to sit back, let the situation unfold and try to understand it. And they're going to be more reactive, not proactive." ([04:00])
Impact of Tariffs
Kaplan delves into the specifics of how recent tariffs are influencing the economy:
"The irony going into this, the source of the sticky inflation has been services, not goods... Now we've got a supply shock issue related to tariffs, which relates ironically to goods, not services." ([04:00])
He explains that while tariffs typically affect goods, current circumstances have led to persistent inflation in the service sector, complicating the Fed's response.
Market Reactions
Recording on April 8, 2025, the hosts discuss a volatile day in the markets:
"S&P 500 ended down 1.57%. It had been up over 4% at one point." ([02:55])
Kaplan observes the market's uncertainty:
"Businesses are still hopeful that this will be a negotiation, but they're not sure about that... Capital allocators, on the other hand, started the year wanting to be long the dollar, and what's happened is they have been moving on the margin away from the dollar." ([09:00])
This shift indicates a lack of confidence in the stability of the current economic policies and their long-term implications.
Fed's Response to Market Movements
Tracy Alloway probes into the Fed's thresholds for intervention:
"What's the pain threshold for the central bank in terms of movements in the financial market? Like how bad does it need to get before maybe they start rolling out some tools?" ([17:57])
Kaplan responds by outlining the Fed's cautious approach:
"If you start seeing evidence that there is a slowing, you might start thinking... The Fed does have an inflation issue. They are going to be more reactive until you're clearly seeing evidence that there is a slowing." ([18:14])
He emphasizes the Fed's reluctance to act prematurely, balancing the dual mandate of price stability and low unemployment.
Energy Sector Outlook
The conversation shifts to the energy sector, with Kaplan referencing the Dallas Fed Energy Survey:
"What we're seeing is... drilling activity doesn't increase. They are going to be more careful, particularly as the prices come down." ([21:53])
He discusses the interplay between U.S. drilling activities, OPEC's production strategies, and the administration's energy dominance plan, highlighting the complexities in stabilizing oil prices amidst geopolitical maneuvers.
Lessons from Past Tariffs
Drawing from his tenure at the Dallas Fed, Kaplan shares insights from the 2018-2019 tariff implementations:
"Tariffs could have some price impact. But the biggest impact we saw of tariffs is the potential of they had to slow growth." ([24:56])
He reflects on the limitations of tariffs in influencing economic growth and the unintended consequences they can have on GDP and employment.
Structural Economic Changes
Kaplan outlines five major structural changes reshaping the U.S. economy:
- Reduction in Fiscal Spending: Transitioning from high fiscal deficits to a more private sector-led economy.
- Regulatory Review: Aimed at improving productivity but hindered by time lags in policy implementation.
- Energy Ecosystem Restructuring: Encouraging drilling and increasing OPEC's production to stabilize energy prices.
- Decline in Workforce Growth: Due to reduced immigration and the uncertain status of undocumented workers affecting labor participation.
- Tariffs: Continuing to act as both a supply-side shock and a growth inhibitor.
He warns of the potential for significant GDP slowdown:
"If these tariffs continue, those estimates may even get revised down. You've got a risk of a meaningful slowdown in growth." ([26:12])
Closing Remarks
As the episode winds down, the hosts and Kaplan engage in lighter banter about market indicators like swap spreads and rig counts, underscoring the pervasive uncertainty in financial markets. Kaplan expresses cautious optimism about resolving the tariff-induced uncertainties but acknowledges the lingering challenges.
"The problem with uncertainty going on for too long is it slows activity... I think all this does is cause them to be more careful, pause actions they might have otherwise taken." ([16:38])
Conclusion
This episode of Odd Lots provides a comprehensive analysis of the Federal Reserve's strategies amidst tariff-induced economic challenges. Rob Kaplan offers valuable perspectives on monetary policy, market reactions, and structural shifts within the U.S. economy, painting a nuanced picture of the complexities facing policymakers and investors alike.
For more in-depth discussions and analysis, tune into the latest episodes of Bloomberg's Odd Lots on Bloomberg.com.