Goldman Sachs Vice Chair Robert Kaplan, former president of the Federal Reserve Bank of Dallas, says he expects sluggish growth but not a recession. Speaking with Sonali Basak at the Goldman Sachs Tenth Annual Leveraged Finance and Credit Conference in Dana Point, California, Kaplan also discusses the outlook for Fed monetary policy this year.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:07):
Let's go go to the Goldman Sachs conference in California.
Shanali Busks standing by and.
Speaker 1 (00:11):
Welcome to our Bloomberg television and radio audiences. I'm Shanali Bassik,
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 as vice chairman,
and 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
(00:34):
of what you saw just less than twenty four hours ago,
with pressure on the Trump administration's tariff policy, Does it
actually clear anything up for clients?
Speaker 2 (00:44):
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's 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
(01:05):
is all said and done, the tariffs will settle out
in a load of mid teens that will create challenges
for companies, they'll adjust to it. It'll create bigger challenges
for small business who don't have the levers to adjust.
Speaker 1 (01:19):
So what's the key advice. What are businesses preparing to
do for those tariffs?
Speaker 2 (01:23):
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 twelve months, most companies I talk to can reshift,
but not overnight. It'll take six months to a year.
(01:44):
And then the thing they're telling me is they're also
in light of this, they're gonna pressure suppliers. They're gonna
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 bell 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.
Speaker 1 (02:04):
So I was listening to your chief economist Jian Hatias
a little earlier. He reiterated that thirty five percent probability
of a recession, saying that's still 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.
Speaker 2 (02:20):
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 will be
primarily extending the Trump tax cuts. It now appears that
we haven't done as much cost cutting, and the tax
(02:43):
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 changing immigration policy. It
means the labor forces tighter, means the probability of unemployment
(03:03):
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 growth and raise prices. But when
you put all that together, I think we're going to
(03:24):
have sluggish growth, probably not a recession, but probably sluggish
growth at least for the remainder this year with that worry.
Speaker 1 (03:31):
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 stabflation outright. If you were
still at the FED, what would you do this year
in terms of cuts.
Speaker 2 (03:47):
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 an 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.
(04:09):
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 them take it one mellion 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,
(04:32):
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.
Speaker 1 (04:40):
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 the
Fed does not have room to cut?
Speaker 2 (05:02):
Yes, And the Fed thing is, I don't know. And
then more importantly, the Fed doesn't know, and why don't
they know? Because we haven't decided on what the tear
freights 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
(05:24):
risk manager, take it one met 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.
Speaker 1 (05:37):
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 hiccop here and there. We have
not seen alarming levels yet. We have not seen that
five percent level on the ten year that a lot
of investors are looking out for. How big of a
risk is there that we get there?
Speaker 2 (05:54):
So the FED doesn't have a lot of influence over
the ten yeared fed FED decides on the FED funds.
I actually think my focus, and I think to some extent,
our client's focus is more on the ten year than
on the FED funds, right, And the reason is the deficit. Again,
we went into this year with six in a fraction
close to seven percent deficits. We've been outgrowing the world
(06:16):
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
(06:36):
I still think we're going to be wrestling that with
that for the rest of the year.
Speaker 1 (06:40):
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, Jim
back Shinai busset with Goldman Sachs Vice chairman Rob Kaplan,
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:07):
Let's go go to the Goldman Sachs conference in California.
Shanali Busks standing by and.
Speaker 1 (00:11):
Welcome to our Bloomberg television and radio audiences. I'm Shanali Bassik,
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 as vice chairman,
and 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
(00:34):
of what you saw just less than twenty four hours ago,
with pressure on the Trump administration's tariff policy, Does it
actually clear anything up for clients?
Speaker 2 (00:44):
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's 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
(01:05):
is all said and done, the tariffs will settle out
in a load of mid teens that will create challenges
for companies, they'll adjust to it. It'll create bigger challenges
for small business who don't have the levers to adjust.
Speaker 1 (01:19):
So what's the key advice. What are businesses preparing to
do for those tariffs?
Speaker 2 (01:23):
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 twelve months, most companies I talk to can reshift,
but not overnight. It'll take six months to a year.
(01:44):
And then the thing they're telling me is they're also
in light of this, they're gonna pressure suppliers. They're gonna
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 bell 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.
Speaker 1 (02:04):
So I was listening to your chief economist Jian Hatias
a little earlier. He reiterated that thirty five percent probability
of a recession, saying that's still 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.
Speaker 2 (02:20):
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 will be
primarily extending the Trump tax cuts. It now appears that
we haven't done as much cost cutting, and the tax
(02:43):
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 changing immigration policy. It
means the labor forces tighter, means the probability of unemployment
(03:03):
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 growth and raise prices. But when
you put all that together, I think we're going to
(03:24):
have sluggish growth, probably not a recession, but probably sluggish
growth at least for the remainder this year with that worry.
Speaker 1 (03:31):
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 stabflation outright. If you were
still at the FED, what would you do this year
in terms of cuts.
Speaker 2 (03:47):
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 an 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.
(04:09):
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 them take it one mellion 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,
(04:32):
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.
Speaker 1 (04:40):
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 the
Fed does not have room to cut?
Speaker 2 (05:02):
Yes, And the Fed thing is, I don't know. And
then more importantly, the Fed doesn't know, and why don't
they know? Because we haven't decided on what the tear
freights 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
(05:24):
risk manager, take it one met 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.
Speaker 1 (05:37):
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 hiccop here and there. We have
not seen alarming levels yet. We have not seen that
five percent level on the ten year that a lot
of investors are looking out for. How big of a
risk is there that we get there?
Speaker 2 (05:54):
So the FED doesn't have a lot of influence over
the ten yeared fed FED decides on the FED funds.
I actually think my focus, and I think to some extent,
our client's focus is more on the ten year than
on the FED funds, right, And the reason is the deficit. Again,
we went into this year with six in a fraction
close to seven percent deficits. We've been outgrowing the world
(06:16):
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
(06:36):
I still think we're going to be wrestling that with
that for the rest of the year.
Speaker 1 (06:40):
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, Jim
back Shinai busset with Goldman Sachs Vice chairman Rob Kaplan,
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