The Fed's Tightrope: Inflation, Labor, and the Path Ahead

The US economy is navigating some tricky waters right now with still high inflation, a weakening labor market, and an evolving policy landscape making the outlook and the Fed's next steps quite uncertain. My guest today is Robert Kaplan, vice chairman of Goldman Sachs and former president of the Dallas Fed. Rob, welcome back to exchanges.

Good to be with you.

So, Rob, let's start right in with the Fed. Chair Powell made some pretty hawkish comments after the last FOMC about the prospect of a December rate cut. It surprised some people. We, in Goldman Sachs Research, are still expecting a cut in December. The market seems somewhat less convinced. What's your read on those comments?

So you may know going into the October meeting, I had been saying that the market expectation of a further rate cut in December, the probabilities of that rate cut were from to my eye way too high. It doesn't mean the Fed won't cut rates in December, but I think it's a much tougher decision. And so I was glad that Jay, in the press conference, balanced the decision a little bit more and left the Fed more time to really debate this out. And you see more articles about a split in the committee. It's understandable. So what's the split about? The labor market is weak. We know that. And Jan Hatziu

And ultimately, Powell gave more room then, basically, in those comments to wait and see how some of this evolves.

Yeah. And I would actually add one thing. There are times where the views of the group matter, and he's got to reflect those. I think when you go into an agonizing decision like we're heading into December where there are pro and cons arguments and there are legitimate arguments on both sides, what chair Powell wants to do will have outsized influence. And that there are many people on the committee that will vote. They might be 55, 45, sixty, forty. And if he feels strongly one way or the other, they'll be inclined to back him. And my guess is it wouldn't surprise me if he hasn't decided yet

There's a lot to unpack there, Rob, and I wanna ask you some follow-up questions about many things you just said. But let's just take a step back. As you mentioned, government shutdown, it's been the longest shutdown on record. It's come to an end this week. But in the meantime, there has been this vacuum of data. And so that in itself must be complicating the Fed's decision making process. Talk to us a bit from your experience as a former president of the Fed. How does the Fed even go about navigating this lack of data amid these headwinds and tailwinds as you just pointed out?

So the Fed loves data. The Fed is led by predominantly PhD economists, just a few business people. And they like data because they can fit it into models, and that data is very valuable. And it confirms what you're hearing from business and what you're seeing in your own work. And they don't have that. My guess is when we do get data, it wouldn't surprise me if that data confirms the sluggishness I talked about earlier, but they don't know. And so that makes their job harder. That means they've gotta do more to look at private sources. They've gotta talk to businesses more. That's anecdotes. I

Me just ask you a bit more about the labor market, which you've mentioned. But ultimately, as I hear you talk about it, are you thinking that this is mostly cyclical factors or more structural? I heard both, Rob, entering into your comments.