Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma

Summary

WSJ What’s News: Goldman Vice Chairman and Former Fed Official Kaplan on Rate-Cut Dilemma

Release Date: May 4, 2025
Host: Gunjan Banerjee and Telis Demos
Guest: Rob Kaplan, Vice Chairman of Goldman Sachs and Former President and CEO of the Federal Reserve Bank of Dallas

In this insightful episode of WSJ’s What’s News, hosts Gunjan Banerjee and Telis Demos engage in a comprehensive discussion with Rob Kaplan, delving into the Federal Reserve's current predicament regarding potential interest rate cuts amidst a backdrop of economic uncertainty and shifting structural dynamics.

Federal Reserve at a Crossroads

The episode opens with an overview of the Federal Reserve's upcoming meeting, highlighting the central bank's dilemma in navigating widespread economic uncertainties and political pressures. As Gunjan Banerjee introduces the conversation, Rob Kaplan emphasizes the shift from short-term Fed policy adjustments to more profound structural changes influencing the U.S. economy.

"What you're seeing is a shift... we are now shifting more towards structural drivers in the US Economy, which the Fed doesn't drive."
— Rob Kaplan [02:09]

Shifting Structural Drivers

Kaplan outlines five significant structural changes impacting the economy:

1. Government Spending Cuts: Efforts to reduce deficits.
2. Regulatory Reforms: Overhauls across various industries.
3. Energy Ecosystem Restructuring: Aimed at lowering fuel prices.
4. Immigration Policy Changes: Resulting in reduced workforce growth.
5. Tariffs: Continuing to play a pivotal role in economic dynamics.

He stresses that the Federal Reserve thrives on clarity in economic outlooks to adjust policies effectively. However, the ambiguity surrounding these structural factors, particularly tariffs, complicates the Fed's decision-making process.

"The Fed is most comfortable when there's a clear outlook... When you've got this many structural changes and some of them are still unclear."
— Rob Kaplan [02:09]

Economic Slowdown and Stagflation Concerns

The discussion transitions to the current economic slowdown, with GDP growth estimates declining and recession probabilities rising. Kaplan expresses concern over stagflation—a combination of slow growth and persistent inflation.

"Stagflation means slower growth and stickier prices... that's why you hear people talking about stagflation."
— Rob Kaplan [04:32]

Kaplan explains that recent negative GDP figures and weakening economic indicators like reduced shipping and tourism reinforce fears of stagflation. He points out that government spending cuts and tariffs contribute both to slower growth and potential cost-push inflation, where rising costs prevent prices from stabilizing.

Inflation Perspectives and Fed Policy

Telis Demos probes how the Fed differentiates between inflation caused by economic overheating versus policy-driven cost increases. Kaplan clarifies that the Fed adjusts its response based on the nature of the inflation.

"The Fed ... will react differently."
— Rob Kaplan [05:59]

He elaborates that previously, inflation was driven by excess demand, primarily in services and rents. Currently, however, tariffs introduce a supply-side cost push, making the inflation scenario more complex and less predictable.

Investor Expectations vs. Fed Actions

Addressing investor sentiment, Kaplan acknowledges that many anticipate rate cuts in the event of a recession. However, he cautions that the Fed may adopt a more reactive stance rather than responding preemptively to economic downturns.

"The Fed is going to be more reactive than preemptive."
— Rob Kaplan [07:29]

Kaplan advises investors to prepare for various scenarios due to the high level of uncertainty, emphasizing the difficulty in predicting Fed actions amid ongoing structural changes.

Unemployment as a Rate-Cut Tipping Point

The conversation shifts to the Federal Reserve's criteria for implementing rate cuts, with unemployment rates playing a crucial role. Kaplan suggests that a significant spike in unemployment, potentially reaching around 5%, could prompt the Fed to consider reducing rates.

"If you saw the unemployment rate begin to spike higher where it's clear it's on its way to 5%, I think that would get me on my front foot to maybe cut rates."
— Rob Kaplan [10:37]

He underscores that the Fed focuses on full employment and price stability, and disruptions in financial markets could also influence their decisions.

Impact of Tariffs and Business Adjustments

Rob Kaplan delves into the ramifications of ongoing tariff policies, highlighting the challenges businesses face in adjusting to abrupt changes. He discusses the complexities companies encounter when relocating manufacturing operations, especially with varying tariff implications in different countries.

"They can't do it overnight. Might take me 6 months, 12 months, I can inch away different things."
— Rob Kaplan [15:24]

Kaplan notes that while some businesses are beginning to make adjustments, the unpredictability of tariff decisions hampers strategic planning and affects investor confidence.

US Exceptionalism and Institutional Confidence

A significant portion of the dialogue centers on the concept of American exceptionalism and the importance of institutional frameworks like Fed independence. Kaplan affirms that US exceptionalism remains robust but acknowledges the need for continued confidence in American institutions to maintain global competitiveness.

"The US Exceptionalism thesis is not dead. It's alive and well."
— Rob Kaplan [22:54]

He also discusses recent political pressures on the Federal Reserve, particularly regarding Fed Chair Jerome Powell, and reiterates the critical role of Fed independence in ensuring market confidence.

"An independent Fed gives a lot of confidence to the financial markets, in my opinion, makes them more willing to buy the dollar, buy duration, buy US Assets."
— Rob Kaplan [25:14]

Conclusion: Navigating Uncertainty

In wrapping up, Kaplan emphasizes the enduring strengths of the US economy, including its innovative capacity and strong educational system, while cautioning about the ongoing structural challenges that require careful navigation.

"They may have concluded that removing Jay Powell would be legally problematic, but also would be institutionally very unsettling to the world and it might not cause any change."
— Rob Kaplan [28:05]

Kaplan's insights underscore the delicate balance the Federal Reserve must maintain in managing inflation and economic growth amidst evolving structural factors, while investors and businesses grapple with heightened uncertainty.

Key Takeaways

• Structural Changes: Government spending cuts, regulatory reforms, energy restructuring, immigration policy shifts, and tariffs are reshaping the US economy.
• Stagflation Risks: Combining slower growth with persistent inflation poses significant challenges for the Federal Reserve.
• Fed's Reactive Stance: Anticipated rate cuts are contingent on clear signs of economic downturn and rising unemployment.
• Investor Preparedness: High uncertainty necessitates flexible investment strategies and risk management.
• Importance of Fed Independence: Maintaining an independent Federal Reserve is crucial for sustaining market confidence and economic stability.
• US Exceptionalism: Continues to be a driving force, contingent on preserving institutional strengths and responsiveness to structural changes.

This episode provides a nuanced exploration of the Federal Reserve's strategic considerations in a tumultuous economic landscape, offering valuable perspectives for investors, policymakers, and business leaders alike.

Transcript

[Gunjan Banerjee]

Capital Group and KKR are bringing public and private credit together, seeking to unlock opportunities previously out of reach for you and your clients. Visit capitalgroup.com/to learn more. Capital Client Group, Inc. Hey, what's news, listeners?

[Luke Vargas]

It's Sunday, May 4th. I'm Luke Vargas for the Wall Street Journal, and this is what's New Sunday, where we take a step back to look at the stories moving the agenda. So we thought you would enjoy this episode of our podcast, WSJ's take on the Week, which cut cuts through the noise by talking to the people closest to the hottest topics in markets and business news this week. The Federal Reserve is set to meet on Tuesday with the central bank at a crossroads, facing widespread uncertainty in the economy and pressure from the Trump administration. So what can we expect from the upcoming interest rate decision and what could it mean for markets, businesses and consumers? Hosts Gundjan Banerji and Telesdemos speak with Rob Kaplan, vice chairman of Goldman Sachs and former president and CEO of the Federal Reserve bank of Dallas. If you like what you hear, go and subscribe to WSJ's take on the Week. We've left a link to help you do that in our show notes.

[Gunjan Banerjee]

Welcome to WSJ's take on the Week. I'm Gunjan Banerjee.

[Telis Demos]

And I'm Telis Demos.

[Gunjan Banerjee]

We are facing one of the most uncertain economic moments in recent history, and the Federal Reserve is at a crossroads. Will it cut interest rates this year? And how are central bankers thinking about the intense volatility in financial markets? We have the perfect person to chat with us about this today. We have Rob Kaplan, who is vice chairman at Goldman Sachs. He previously served as president and CEO of the Federal Reserve bank of Dallas. Rob, thank you for joining us.

[Rob Kaplan]

Good to be here. Thanks for having me.

[Gunjan Banerjee]

So we have a really big Fed meeting coming up. It feels like more than ever the Fed and investors are just navigating a really, really uncertain time. How are you thinking about this moment in light of tariffs, the economy and everything else going on right now?

[Rob Kaplan]

So what you're seeing is a shift in that for the last couple of years, I think a lot of the focus was on the Fed. And first they're tightening and then they're beginning to ease. We are now shifting more towards structural drivers in the US Economy, which the Fed doesn't drive. The executive branch and Congress drive the structural drivers. And those include an effort to cut government spending, reduce deficits, regulatory review in every industry, an effort to restructure the energy ecosystem to lower Prices at the pump. And for low, moderate income families, we're seeing a dramatic change in immigration and immigration policy, which is reducing workforce growth. And then the last big one is obviously tariffs, which we could spend the whole time talking about. But those are five very significant changes. The Fed is most comfortable when there's a clear outlook, and then they can adjust policy to those outlook. When you've got this many structural changes and some of them are still unclear. Tariffs is a good example. I think the Fed has to wait until some of these decisions clarify. And the other reason to wait is we still have an inflation issue. And so the Fed has to be patient for this to clarify because they're still trying to make sure people know they're fighting inflation.

[Gunjan Banerjee]

And on top of that, you might have an economy that's already slowing, as we saw in the data recently.

[Rob Kaplan]

So the economy is reacting to these structural changes. We started the year, I think most economists might have called for two and a quarter 2.5% GDP growth. Those estimates have steadily declined. Probabilities of recession have increased. What we're actually seeing in the economy, in terms of the real data is shipping is down, travel is down, tourism is down. Most companies I talked to in the first quarter, business has been not great, but it's been solid. And even today they haven't seen a substantial fall off, but they're expecting it. And that's where we are right now.

[Gunjan Banerjee]

You've said you're worried about stagflation. Tell us why.

[Rob Kaplan]

Stagflation means slower growth and stickier prices. So we obviously just got the actual GDP number for the first quarter, although it'll be subsequently revised, but was negative. Not surprising. It was a little disappointing to some. And you see economists slowing down their growth estimates for the year. So why are they doing that? Government spending cuts, slow growth. Regulatory reform should help. Productivity would help growth, but it takes time. Immigration reduction, workforce growth, reduction, slow growth, and tariffs probably slow growth, but also create a cost push that might actually cause prices to be stickier. And that's what the Fed's trying to figure out. And so, yeah, that combination means slower growth and stickier prices, at least in this first phase. And that's why you hear people talking about stagflation.

[Telis Demos]

How does the Federal Reserve think about price growth when it's being driven by something that's so specific, policy driven? Right, because sometimes prices rise because the economy is overheating. Right. That's the kind of early 1990s sort of type. Type price growth, right?

[Rob Kaplan]

That's right.

[Telis Demos]

This Is something a little different. Does the Fed think differently about it or is a rising price a rising price? A rising price. And the Fed always reacts similarly.

[Rob Kaplan]

It'll react differently. So going in, I'll call it pre January 20th, goods ironically were disinflating globally. Okay. One of the reasons for that is dramatic overcapacity in China and global manufacturing overcapacity. The inflation issue was due with services, sticky rents and maybe sticky wages. And that was probably driven to some extent by excess government spending. Excess demand, not supply. Now we're heading into this new set of policies and the Fed is adjusting tariffs are about goods. Well, we haven't had a goods problem. Well, we may now. And so they're trying to figure out will increasing costs to to tariffs translate into higher prices. Now, the reason I say will they. It's not a certainty. You can negotiate with your suppliers, you can take some amount out of your margin. If you're a company, you can increase prices. You may not increase prices all at once. And you don't know what the level of the tariffs are going to be. And it varies by country. And the jury's still out. And so what they're struggling with is the inflation nexus has changed to a cost push issue on goods. And it's unclear how much demand destruction that is slowing growth might offset that cost push. You just don't know yet.

[Gunjan Banerjee]

So it's interesting because I think a lot of investors think that if we tip into a recession this year, the Federal Reserve would cut.

[Rob Kaplan]

One question I have is, and they might be right.

[Gunjan Banerjee]

Right. They might be right. In 2022, though Powell did say, like I thought, I thought that Powell made it clear that he was willing to accept a recession.

[Rob Kaplan]

Yes.

[Gunjan Banerjee]

And his priority was getting inflation back down to 2%.

[Rob Kaplan]

And that's all true. And he was. And he warned that in order to get inflation down to 2, we may have to accept a recession. So why didn't we have a recession? I'll tell you why I think why we didn't. Fiscal spending has been historically high. American Rescue Act, Inflation Reduction ACT, Infrastructure Act, CHIPS Act. We're running 6.5% plus of GDP deficits, historically high. And so I think that helped cushion some of the Fed rate hikes. Now we're switching where we'll see how successful it is. Maybe unclear right now. Government spending, they're going to try to reduce it as a percentage gdp, unclear whether they're going to have success. And it's clear the economy is now slowing. And so I think the Fed's going to be more balanced. On the one hand, looking at unemployment, inflation. But this is why Jay Powell, in a speech a couple of weeks ago in Chicago, I believe, made clear we haven't given up on fighting inflation because he's worried if he suggests that inflation expectations might inch up more and become unanchored and doesn't want that to happen because if that happens, it's going to be harder to cut rates, not easier.

[Gunjan Banerjee]

Are investors wrong to think that the Fed will cut them in light of all of this?

[Rob Kaplan]

They're not wrong to think it. I think here's what we know and here's what we don't know. I think the Fed is going to be, in my opinion, more reactive than preemptive. In 2019, I was at the Fed when we had a tariff issue. I advocated for preemption, but we could do that because we didn't have an inflation issue. The Fed here will be more reactive. If you see a severe slowing that I think on balance offsets some of this cost push. I think the Fed may well see its way clear to reducing rates multiple times. But the Fed shouldn't be in the business of predicting that because it needs to see it before it acts, because it's unclear. And so the market has to make predictions because you've got to invest. The Fed should be more of a risk manager. And I would advise investors realize there's a whole bunch of scenarios because we don't know what the tariffs are going to be. We don't know ultimately how far we're going to go on deporting undocumented immigrants, reducing workforce growth even further, and you don't know how this government spending effort is going to work out. That's a lot of uncertainty. And so just be prepared. This may be. This is unpredictable. I think investors think that is there.

[Gunjan Banerjee]

A level of unemployment at which the Fed would say, hey, we need to cut now? What is the tipping point?

[Rob Kaplan]

I think you will see. If you saw the unemployment rate, remember the Fed's mandate is full employment and price stability. It's not gdp, it's unemployment. If you saw unemployment begin to spike higher where it's clear it's on its way to 5%, I think that would, if I were at the Fed, that would get me on my front foot that maybe I might be willing to take some liberties in thinking that demand destruction will offset some of this cost push. The other thing that would cause the Fed to act. If you saw disorder in either the treasury market or the other financial markets, we haven't Seen it.

[Gunjan Banerjee]

We got close.

[Rob Kaplan]

Well, we haven't seen it yet. I think it's not a great combination. We talked right before this interview. When gold is going up, the dollar is weakening, the 10 year is inching back up, we while the market is selling off. That is not what you want to see.

[Gunjan Banerjee]

Scary, yeah.

[Rob Kaplan]

But it happened in an orderly way. I think the Fed is on their toes looking at overnight liquidity and market function. If that continues to be orderly, they won't act, but they're watching it.

[Gunjan Banerjee]

So the market is expecting around three rate cuts this year. How many do you think we'll get?

[Rob Kaplan]

I'll put it this way. There'll be a new SEP summary of economic projections in June. If I were submitting my estimate in March, I would have said two. If I were submitting in June, believe it or not, I might also say two. That's less than the market expects. But I want to do that deliberately in that I want to leave our options open depending on what happens with these tariff and other decisions. And I don't want to be in a position where we sort of indicated to the market we're going to do more than we're really able to do. And so I think the market is likely to be disappointed with the Fed forecast in June for how much they're going to do. That doesn't mean they won't do more. It means they want to retain their operating flexibility. And again, I've said this, you want to be in this period a risk manager, not necessarily a prognosticator.

[Telis Demos]

We've talked a lot over the last several years about economic data and the economic sentiment, the vibes. You've been in the room for these Fed conversations. How seriously do they take those sentiment indicators?

[Rob Kaplan]

So you look at all of it. You look at the soft data, you look at the hard data, and I know from experience sometimes weakness in the soft data doesn't always translate into what happens with the hard data. And also you've got governments in the midst of making decisions that can change sentiment. The one piece of soft data that I would rank above many of the others is inflation expectations. The Fed is very focused not only on bringing inflation down to 2, but making sure that inflation expectations remain anchored so that people still believe the 2% goal is credible.

[Telis Demos]

Why? Why is that so important? What does that change about people's behavior if those expectations.

[Rob Kaplan]

History is showing that if inflation expectations start to inch up, then maybe businesses start to preemptively raise price, consumers start to buy, thinking prices are going up. We just saw that recently where consumers increase their purchases, we think because they thought prices are going up, that means inflationary expectations are moving up. You do not want that at the Fed. You want them to be anchored because if they become unanchored and behavior changes as a result of it, it's harder to get to the 2% target. So they're going to be watching that very carefully. So if you see Jay Powell or other Fed speakers sound more hawkish, I would be too. Even if I were thinking I want to look for a way to cut, I would talk hawkish because I want to keep these inflation expectations anchored.

[Telis Demos]

Interesting.

[Gunjan Banerjee]

Well, right now they're very high.

[Rob Kaplan]

They're at the, they're moving up and they're moving in the wrong direction. And it does reflect behavior on the ground. Businesses are, are, are preempting. They're having the. There's a new word in the dictionary, it's called surcharge and I always heard the word, but it's on bills now. There's a surcharge and it's for either current or anticipated tariffs. And consumers are starting to get in their mind that if prices are moving up, you want to anchor that. And the best way right now the Fed can do that is jawboning. So people shouldn't misinterpret a Gee, Jay Powell sounded very hawkish. That means they're not going to do X, Y or Z. No, to me it means he wants to keep their options open and he wants to anchor inflation.

[Telis Demos]

Well, you talk to CEOs, you talk to business leaders.

[Rob Kaplan]

I talk to investors around the world.

[Telis Demos]

Too and talk to investors. What is coming up in those conversations is tariffs and inflation. Sort of topic number one. Are there other things on people's minds?

[Rob Kaplan]

Yeah. So for businesses, by and large they'll adjust. But what's hard for them is something that happens abruptly. So if there's a well telegraphed change, they have time to adjust to it. The auto companies are a good example. In a couple of years, over a year or two, they can make adjustments, they can make investments, they can change locations. But if it happens abruptly, which this has a lot of businesses I talk to have a number of things they're working on to adjust. But what they're saying to me is I just can't do it overnight. Might take me 6 months, 12 months, I can inch away different things. In the meantime, they have to make plans on how much they're going to take out a margin, how much they're going to put in prices, how much is going to come out of dollar strengthening, although we're going the other way right now. That's what businesses are doing and they'll adjust to it, but they're working on it on investors. Investors are not just looking at tariffs, they're looking at the whole mosaic. And what I hear more and more from investors now is there's a lot more uncertainty. USMCA was an agreed trade agreement. They see some of the other things going on with higher education, other things that are a little jarring and surprising coming out of the United States. And what they're starting to think is maybe we ought to, we started the year being over allocated the dollar in US Assets. Maybe we should be rebalancing and reducing our dollar, not eliminating, but reducing our dollar exposure because there's enough unpredictability. And they're asking more questions is the institutional framework, is the predictability, which is one of the reasons I wanted to invest in the US Is that deteriorating and that's causing people to change asset allocation.

[Telis Demos]

So we know that the message on tariffs changes day to day. Is there a point at which you think decision makers are going to say, you know what, I will make a decision to reshore to build my next plant in the United States to move production from one. I mean Apple has talked about moving things to India, right? That's already in train. So it seems like people aren't necessarily waiting for full certainty because a it may never arrive. I mean, you'd have to wait to at least the midterms. Heck, you'd have to see, you know, who's the next president, right. Are businesses acting today? Would you say?

[Rob Kaplan]

Yes, they are already either making plans or starting to act on plans. Here's the issue and I'll give you a good example. Many folks companies I talked to had moved some manufacturing from China to, to Vietnam. Now we've got a very high tariff on Vietnam. So if we move to Vietnam, do we stay there and hope there'll be a trade agreement or do we move and they're trying to make risk management decisions. The one decision that many are struggling with is how much can they move to the United States. We know that's the one place where we won't have a tariff. However, costs are higher and is this going to be a globally competitive investment? And if the only reason it's competitive is a tariff moat, what if that tariff moat goes away in four or five years? So that's one of the issues folks are wrestling with and also they're talking a lot about can we use Technology to lower the costs. And so you'll see a lot of this manufacturing that does get moved here, I would guess is going to be use heavy use of technology, 3D printing, other methods to lower the cost.

[Telis Demos]

So the biggest decision would be to start manufacturing again here in the United States. And that's the one that's the toughest to ultimately make.

[Rob Kaplan]

Right. And so let me just put all this in context because it's easy to lose sight of this. The US Economy is predominantly a services economy. We manufacture in the United States. I'll pick another 13 or 14% of GDP. We, we import, let's say 10, 11, 12% goods. And global manufacturing as a percentage of GDP globally is declining. Okay, so this we shouldn't forget as we go through this. We run a services surplus with the world. We're primarily a services economy. You want to make sure that we don't do damage to services while we're trying to bolster goods. And so that's again, the balance we have to weave.

[Gunjan Banerjee]

It's interesting because in the market, it feels like at times people are buying stocks again, people are buying Treasuries again. The dollar is going up, gold is falling. Well, I think over the past week we've seen moments where that kind of buy America trade comes back. So it feels like people are still grappling with how different are things really going to be.

[Rob Kaplan]

So here's why. These new trade deals as they're announced, are going to be very informative. There are some number of capital committers in the market and I talked to a number of them who believe this has all been a negotiating strategy and that tariffs are going to come down to closer to zero. I'm afraid that there's another scenario which is the Trump administration wants the tariff revenue. Based on their comments, it's unclear how much money Doge is saving. Hopefully they'll do it. They'll say, but it's unclear. They want more tariff revenue and their objective may not be to negotiate down to zero. It might be negotiate down to 10 or 20 or 30. And that is going to make create significant challenges. And we don't know exactly which way we're going. But you hear officials saying we want the tariff revenue and how useful the tariff revenue is, particularly when they're talking about the tax bill and a desire to do more than extend the Trump tax cuts to get tax on tips, tax on overtime deductibility for buying a, a car. And so I think there's some confusion in the market and it's affecting securities, buying the dollar, gold, treasuries, all these asset classes.

[Telis Demos]

All right, well, we're going to get more into this buy or sell America trade after a quick break. When we come back, we'll have more with Rob Kaplan. And if you're enjoying the show, check us out on video. We're on YouTube. We'll leave a link in the show notes. You can find us on WSJ's podcast page.

[Rob Kaplan]

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[Gunjan Banerjee]

One thing that almost every investor I'm chatting with is watching is, you know, this Buy America trade. Right now it feels like we started the year with everyone banking on another year of American exceptionalism. U.S. stocks have outperformed almost every single year since the global financial crisis. What do you think of that trade right now?

[Rob Kaplan]

I think the US Exceptionalism thesis is not dead. It's alive and well. But I think it's very critical that we come out of this period over the next few years having retained US Exceptionalism. The greatest companies in the world, the most innovative. I think our higher education system is one of the gems of the United States, an independent Fed rule of law, predictability. I think when, I hope when some of these structural changes we've worked through, we want to get back where the world has confidence in the United States. And we keep building many of our great strengths which have put us in a position to outperform the world.

[Gunjan Banerjee]

Some people say that, okay, even if we were to rewind the clock and say, just kidding, no more tariffs, that confidence in America as a trading partner has been dinged. Do you think that's the case?

[Rob Kaplan]

I think there will be some repair to do, but I actually believe we can do the damage control. But I think it'll be broader than tariffs. It has to do with some of what we're deciding, decisions we're making on foreign policy, what we're doing with our own institutions. A number of these decisions, including tariffs, I think are central to that. And yes, we can come out of this with US Preeminence and having strengthened our country, but it will require a real focus on that as an objective and some prioritization of many of these structural changes.

[Telis Demos]

Rob, you mentioned in what goes into American exceptionalism, you mentioned Fed independence. So let's talk about that for a second. A Few weeks back, the Journal reported that the White House lawyers were exploring whether or not President Trump could effectively fire Jerome Powell before the end of his term as fed chair in 2026. President Trump has said that since that he has no intention of firing Jerome Powell. But he's also not shy about how he thinks the Fed is doing basically a terrible job in his eyes by not slashing rates. Why is Fed independence so important? Why did that episode really focus everyone's attention on this?

[Rob Kaplan]

Okay, so I talked about confidence in the institutional framework of the United States rule of law, other significant aspects that people have come to rely on. One of those institutional staples has been an independent, politically independent Federal Reserve independent central bank, which means that the Fed, at least as it relates to monetary policy and setting the Fed funds rate, does it independent of political pressures and political considerations. So why is that so important? Because there are times, the last few years is a great example where it's very unpopular for the Fed to do what it needs to do. It needed to raise rates dramatically in order to bring inflation down. It's very unpopular. You want to take that out of the political sphere and put it in an independent organization that can make these tough decisions. Okay, so now we move to today. We've got these structural changes. Growth is slowing. I think the President, understandably, and others are hoping the Fed will be able to see their way clear to lower rates. However, there's an inflation issue. And I think Jay Powell, as I said, is trying to jawbone at a minimum that issue. And he wants to make sure that they balance their dual mandate of full employment and price stability. And so an independent Fed gives a lot of confidence to the financial markets, in my opinion, makes them more willing to buy the dollar, buy duration, buy US Assets. But the other thing I would say is Jay Powell doesn't set the Fed funds rate. There's a vote now. The voters are all the governors and a portion of the President's those votes rotate. I ran the Dallas Fed. I voted on a rotating basis. Even if Jay Powell were gone, I can tell you I don't think there's a consensus around the table to cut rates in the May meeting. They're open to it, but that's even if Jay Powell wasn't there. And so I think there's some realization that institutionally you've got to build a consensus. It's got to be based on facts, analysis and debate. And I think they may have concluded that removing J pal 1 would be legally problematic, but also would be institutionally very unsettling to the world and it might not cause any change. J Pal will leave next year, first half of next year they will pick someone new. You want that new person to be seen as also independent, I think, and preserving the independence of the Fed and not make any pre commitments to the administration about what he or she will or won't do. And I think they're going to have to be careful about that.

[Gunjan Banerjee]

We're going to take a quick break and then we have one final question for Rob.

[Rob Kaplan]

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[Telis Demos]

So Rob, President Trump has been pretty vocal that he thinks Fed chair Jerome Powell is not doing a great job, that he is too late to trim interest rates. Granted, he does not often say this in a very respectful way, but in 30 seconds or less, is there any merit in the economic point that that the President is making about rates?

[Rob Kaplan]

On the being late point, I've been critical of the Fed in 20, 21 and 22 that I thought the Fed should start tapering bond buying sooner than they did and start looking at raising rates sooner. So in that regard, you could criticize them and they might criticize themselves. They were somewhat late. The best analogy that I can think of is you're driving on the highway and you're going 65 or 70 miles an hour and people are in the backseat and they want you to go faster at the same time. Let's take that same highway. But there's a rainstorm, there's a hailstorm, there's terrible visibility. I don't think anybody's going to be beating on you to go 65, 70 miles an hour. They're going to say, you know, I'm going to go 35. And I don't think anybody's going to say you're late, you're slow, we're going to get there 10 minutes later. You'd say, let's get there in one piece. And so he's right that the Fed is going to be more reactive. However, there's a lot of fog and rain and maybe some hail. That makes their being slower I think justifiable, particularly given inflation is still sticky in the United States.

[Telis Demos]

Well, Rob Kaplan, thank you so much for this wide ranging and very interesting conversation about the Federal Reserve, the economy and all else.

[Rob Kaplan]

Good to talk to you both. Great.

[Gunjan Banerjee]

Thank you.

[Rob Kaplan]

Thank you.

[Telis Demos]

And that's everything you need to know to take on your week. The show is produced by Trina Menino, Jessica Fenton and Michael Lavall, with help from Jess Jupiter. Michael Lavall and Jessica Fenton are our sound designers, and Michael also wrote our theme music. Aisha Al Muslim is our development producer. Scott Salloway and Chris Zinsley are the deputy editors. And Philana Patterson is the head of news audio for the Wall Street Journal. For even more, head to WSJ. Com. I'm Teles Demos.

[Gunjan Banerjee]

And I'm Gunjan Banerjee. Until next time, Fed speak.

[Telis Demos]

You should get foreign language credit in college for taking macroeconomics.