Odd Lots - Rob Kaplan on the Fed, AI, and How Globalization Is Happening Without the US

Episode Date: September 12, 2025

In this live episode, recorded at the Future Proof Festival in Huntington Beach, California, we speak with Rob Kaplan, the former president of the Dallas Federal Reserve Bank and the current vice chairman of Goldman Sachs. We discuss his views on the rate path, and why he does not see the Fed cutting by 50 bps at the next meeting. We also discuss the general macroeconomic environment, the US vs. China AI race, and why he sees globalization on the march — except it's happening without the US.Odd Lots is coming to Chicago for a live episode! Get your tickets hereOnly Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Today you are listening to a special episode of the podcast. It was recorded live at the Future Proof conference in Huntington Beach. Yep. We're going to be speaking with former Dallas Fed President Robert Kaplan. He is now vice chairman of Goldman Sachs. Again, this was recorded live on stage at Future Proof, so take a listen. Let's just kick it straight off. That jobs report that we got last week, in your view, with your Fed head on, maybe, is a 50 basis point rate cut in play for the next meeting? I think 50 basis points is still unlikely. I think we've been of the view for the last few months. The job market was weak. This latest report was a little weaker. Having said that, the reason 25 is more likely than 50 is, It wasn't, the jobs market is not falling off a cliff.

We didn't get shrinkage. And inflation is running at two and three quarters to three percent above target. And so it sort of puts a little bit of a headwin on doing more than 25 basis points. I mean, I take your point, but the report was still a huge surprise. So if you were in the newsroom when that number came out, just 22,000 jobs added, there was a sort of collected gas because it was way below basically the entire. range of expectations for that particular month. If you're at the Fed and you see a number like that, what does 22,000 actually tell you, or are you sitting there going, well, maybe I'll wait for the

revision until I really make up my mind? I don't know that the weakness in the jobs market was a big surprise to the Fed. They didn't know exactly what the number would be, but they expected to be anemic. The reason that the unemployment rate has stayed low is we, we are, we are, we, We have shut down undocumented immigration. We have not ramped up legal immigration. And as you well know, we are deporting some number of workers and chilling 10 to 15 million undocumented immigrants who are in the workforce. And some percentage of them are not going to work.

And so supply is anemic. We've thought for the last few months that hiring was kind of, we said, at stall speed. You should assume if GDP growth. is one a quarter, one and a half percent. Hiring is going to be anemic. So we could debate the number, but I don't think it was a big shock that it was weak, and I think it wouldn't surprise me to see

the next number also lethargic. So why aren't we falling off a cliff? We still are running a large deficit. We have tax incentives coming. We're in the middle of an AI data center, power boom, as you just heard about in the previous session. And I think that's still bolstering the economy. Well, then let me take the flip side of Tracy's question because, okay, maybe setting aside reasons for concern, the flip side, as you mentioned, inflation's still running above target by most measures.

The stock market, I haven't actually, I don't know what it's doing today, but it's very close to all-time highs, regardless of what it's doing today. All kinds of people are having a really nice time on the beach in Southern California. What is the evidence that as currently standing that Fed policy is actually restrictive? Clearly, the FOMC has come around to this view of cuts. It seems like cuts are locked in. But you don't have to have the FOMC view anymore. Like, is it obvious that cuts are needed at this point? Yeah, I think if it were not for the weakness that we've seen in the labor market,

the Fed would want to stand pat. Because it's one thing to be above your inflation target. We're not moving toward the inflation target. We're going sideways to backing up. But with this weak labor market, I think it brings the fact you need to cut into play. Now, what's the neutral rate? I think the neutral rate today, you've got a two and three quarters percent inflation rate, 75 basis point, real Fed funds rate, means the neutral rate to me is around three and a half percent.

We don't have a lot of space to cut to get to neutral, but I think you've got 75 to 100 base points. I think the goal of the Fed will be cut in September, stay restrictive, and if the labor market stays weak, keep going. If it stabilizes, then you have the option to hold off. And I think that's what they'll do. Just going back to financial conditions and stock markets at all-time highs, I mean, if the Fed cuts at this current juncture, you know, call it an insurance cut or whatever. But if the economy re-accelerates after that. Which it may. Yeah, which it may. Would you be worried about that side of the outcome, given that, as you said,

inflationary pressures seem to be going sideways to possibly up? Yeah, so a lot of people look at financial conditions and see it as a reason the Fed shouldn't act. I actually come at it from someplace different. The economic statistics are reflective of what's going on right now. In fact, even more than that, what has gone on, not even what's going on right now. the stock market and other financial markets are an assessment of what's going to happen for the next three to five years as we know we're in the middle and the early endings of an AI data center power boom i don't think it's showing up yet in a lot of productivity but i think a year or two from now it will the stock market rightly or wrongly i think is making that bet it's betting that productivity is going to improve

of corporate earnings are going to get better. You're not seeing it show up in the current economy. The Fed's job is to look at financial conditions, but adjust policy based on the current economy, not the bet the market's making for two or three years. I'm glad you brought that up about the AI boom, the data center boom and so forth, and that it's not showing up yet in productivity,

but it may be showing up in greater strain on the grid. It may be showing up in greater strain on, certain electrical gear that's necessary, that's been in shortage for all manufacturers for years now. That's right. As of right now, in September 2025, could we say that if anything, the AI boom is like sort of having a crowding out effect or slightly inflationary, where the costs right now, just on a static extent, setting aside the bet, are a bit of a drag? There are two big structural initiatives that are being pursued by this administration. One is regulatory review and regulatory relief because they want to ease the speeding to adoption of AI

and get more capital available. But the second thing is there's an extensive re-review of the power grid. We are behind China in having enough power to fund the AI explosion. We've got to invest more in geothermal, more modular nuclear. We need to make it easier to run a refinery, make it easier to do transmission. and I think you're going to find there's going to be enormous efforts because we are behind. And in some states, to your point, there is a crowding out.

And I think people are afraid at some states, the leaders, are afraid to take more data centers for fear. It's going to crowd out individuals. So this is a big structural initiative that isn't getting in the press a lot, but it's a big initiative going on in this country that's a dramatic change and it's needed. What does that actually mean for Fed policy? because if I think about this crowding out idea and all the demand for databases

and the things that power them, we have seen electricity prices start to go up. I know the Fed, the Fed's preferred inflation measure is X energy and food prices, but on the other hand, electricity prices feed into the cost of pretty much everything. And also, this doesn't seem like a bottleneck that we're going to be solving, you know,

within the next two or three years or even 10 years, to be frank. If you're at the Fed right now and you see electricity prices going up, how are you thinking through that pressure? So let me put it in context. There are cross currents, I mean real cross currents. You just mentioned one. On the one hand, you've got the government is trying to reduce government-directed spending and replace it with more incentives, tax incentives.

Obviously, the tariffs have been put in place. those are slowing growth and they have a tendency to raise costs. They might be one time. And the labor force, as I just mentioned, we are actually decelerating and reducing

labor force growth because of immigration policy. That's actually helping us be at full employment and the Fed's been taken by that but also makes prices stickier, wages stickier. At the same time, you just said you've got these booms in

AI and the grid, and you've got, we need more labor, we need more power, and that actually stresses prices. So when you're at the Fed, when you've got this kind of confusion, I think that's one reason why they've done nothing so far this year, but I think the labor market is forcing their hand where if it gets even weaker, they really don't want that, and that's why they're acting. Let's talk about AI and China a little bit more. You mentioned the power element, and there are a lot of people anxious about the constraints on the U.S. grid, and all these big KappaX numbers, and can the grid even support that? What else is different besides the electricity component? Because some people we've talked to, talk about there's a very different attitude towards the tech diffusion, particularly out of China or supply chains that run through China.

So, and I just got back from Asia and I was in China last week. When we talk about AI, we tend to look at the hyperscalers, these big, giant companies that make up a disproportionate share of the S&P 500, and they're spending hundreds of billions of dollars, they're making a lot of money. When I'm in China, and we talk about AI, they talk about the word you use, diffusion. They talk about regular businesses, the McDonald's of China, Luke and coffee in China. We have them in New York City right now, and I tried one, and it's very good, actually. Yes, but those companies are actively using AI to lower costs. So why is that happening? I'd say we're further along.

China's further along than we are. Why? Their margins are lower. They're doing it out of necessity. Our margins in the U.S. our companies are higher, and so they're not as much pressure to lower costs and make AI experiments. In China, they don't have a choice. It's so competitive.

They need to lower costs. But the thing that struck me, there's a lot to learn from what they're doing in China. Normally, if we were a little more globally integrated, we would learn those things and bring those learnings back to the United States. And it reminded me that globalization is not dead. The United States is choosing to play a different role in it and stepping back. But I got to tell you, the other thing I saw there is there's more coupling going on between China and other countries that are aggressively. Canada is much more aggressive in trying to form new partnerships. So I think globalization and the AI story go together.

And I got to tell you, globalization, not going away, and the U.S. is going to have a choice in the years to come how much of a role we want to play in participating, but it's going to happen with us or without us. So we can sit here and ask you what you saw in China and what your thoughts were about China, but I am very aware that when you go on that type of trip, you have Chinese clients who are asking you your thoughts on the U.S. and what's going on here? What are the type of questions that you're getting from Chinese clients at the moment? What are they interested in? So the biggest item I'd say of discussion is, and I used to be in Asia for the first part of my career,

and what I found in Korea, Taiwan, China to a large extent, their whole effort was to go from low-value-added manufacturing to high-value-added manufacturing. And they tried to wean off of lower-value-added manufacturing. So what's an example? T-shirts and sneakers used to be made in China. Today they're made in Vietnam. Why China wants to move up the value chain because their feeling is they're going to raise the standard of living to higher value-added manufacturing. The question sometimes I get when I'm over there

is if you're going to resure to the United States, are you going to really resure lumber, aluminum, some of these other lower-value-added manufacturing wouldn't solidifying the relationship with Canada and Mexico makes sense where you can get cheap natural resources from Canada, cheap labor from Mexico, and solidify North America. And so I'd say they're not critical of us, but they're scratching their heads a little bit to say,

what's the strategic rationale? Because you're tied on labor, you normally want to move up the value chain, and I think they realize that some of these, tariffs are also intended to help generate revenue and reduce the deficit. They understand that. They're just questioning how strategic it is. Well, let me ask you a question of the, on the question of what are we going to bring back in the United States, if anything. Just from your perch at Goldman, do you see any private money that's come into the U.S. for fresh sort of, I don't

know, greenfield capital investment, either in something low margin or high margin, because the Harris have changed the math and made that investment economical? So I will say yes is the answer. I think there are U.S. companies that will do more on the margin manufacturing here. I've talked to overseas companies, including, I won't mention the name of one contract manufacturer in China. They are building more in the United States. And so the thing is, I don't know how long it will take, what the magnitude will be. but yes, it is happening.

The flip side of that is there are many companies in the U.S. that benefited from access to lower-cost goods. Yeah. And I won't mention their name, but you know some of them, and their margins are being squeezed. And then I talk to a number of small businesses that don't have the leverage to manage these tariffs, and some of them will actually go out of business

or considering it by the end of the year. This is a little bit of an unfair question, but I'm going to ask it anyway. If you had to choose one right now, would you say that tariffs are more effective at bringing back manufacturing to the U.S.? Or more effective at raising income for the U.S. government at a time when people are worried about the deficit? I think we'll start with the second part. Tariffs raise revenue, but they slow growth. and so for every dollar of tariff revenue, you have to accept you may give some back

and a little bit lower growth. I think that trade is very much worth it if you're bringing back high value-added manufacturing. I don't know if it's such a good trade if you are pushing to bring back lower value at it. I think this administration knows that, and I think they'll be more strategic. I think you can do both.

I think you could, level the playing field, get more tariff revenue, some level of tariff revenue. I think we were thinking they were going to be closer to 10% than 20%. You mean the high teens is a little higher than we expected.

And you can also, yes, on semiconductors and other strategic areas, you can redomicile those. I think the question is, you sure you want to go down the road of lumber and aluminum, or do you want to let Canada do it? Is that a good strategic trade, I'm not sure.

Since you mentioned it, why is the neutral rate of interest to the extent that we can form some educated guess as to what it is? Why is it so much higher than it was, say, 2019, in your view? So the fact of the matter is, I think if you go way back in the Stone Age to 2019... It does seem like forever ago. It does. I think if we had not had COVID, I think right before COVID hit, the 10-year treasury, I think it was in the neighborhood of maybe one and three-quarters to two.

The Fed funds rate was in the mid-ones. I think we would have inched our way up a little higher. We didn't know how good we had it. All those people were complaining, oh, yields are so low. And then now they all wish they could go back there. Yeah. Listen, the inflation rate today is stickier. Back in 19, it was probably one and a half, one and three quarters.

I still think even then the neutral rate, real rate was three quarters of one percent. So the neutral Fed funds rate back then, I think, was two and a half-ish. Today it's closer to three and a half, but there's only one reason for that. The inflation rate's higher. If inflation got back down to two, I think you'd see the neutral rate back down to two and three-quarters. Since you mentioned sticky inflation, there's one other thing that seems to be top of mind at the moment, which is Federal Reserve Independence. And we should talk about that.

But I guess we can get your thoughts on, you know, that specific idea in a second. But one thing that seems surprising so far is that we're having this debate about what happens to the Federal Reserve with what seems to be a more activist Trump administration that seems to want to have a heavier hand in monetary policy. We haven't really seen much response from the market. If you look at the long end, it doesn't seem like there's a big risk premium building there. What's going on? So let's make two comments.

So regarding political independence, let me just make sure I frame this. Regulatory policy at the Fed is not underlying not politically independent, and it hasn't been for a number of years. What do I mean by that? You get a new president. They pick a new head of supervision, and it's very much has been influenced for the last many years by whoever's in office. The balance sheet, I would argue, is maybe a little bit in the gray air. On setting the Fed funds rate, though, the Fed has been politically independent. Why is the market, you said, will not reacting more to this? I mean, the reality is the stock market likes the idea of lower rates. I think the thing, it's not that the markets aren't reacting. The stock market likes it,

so it's starting now to take into account, makes the real acceleration you talked about more likely. The gold market is very much taken note of it, and gold is up more than 35% year to date. I see it's up another 1% today. So it has. And I actually think duration on the long bond while the tenure is rallied because of slow growth. I still think we have an issue. We've got 37 trillion of debt to sell on our way to 40 trillion. I think that the bond market may pay at the long end will pay attention to how this current situation works out. How much more gold talk is there these days than there were a few years ago? Well, I actually, I've looked back over the last 50 years.

When's the last time we got a rally in gold like this? Yeah. I think in the aftermath of the Great Recession, remember the Great Recession, the Fed took its balance sheet from $800 billion to $4 trillion, okay, and stopped. And we started to run it down a little bit. In response to COVID, we went from $4 trillion to $9 trillion, and we authorized $6 trillion of extraordinary spending in a $27 trillion economy, and the net debt to GDP went from mid-70s to over 100%.

When you've got leverage in the United States and to some extent in the developed world, getting much higher in response to COVID, that's where people start to look at gold, Bitcoin, other alternatives to paper currency, because they're worried that this leveraging is just keeping going on and on and on. And so it's understandable. Wait, is it, though, because one of the weird tensions

of our current market situation is we have U.S. stocks at all-time highs, but also gold making new records almost every week. It feels like those two things are, incompatible, at least in the long run. Maybe we could do it for a few weeks or a few months, but someone's got to be wrong here. I spent a lot of time talking to big institutions and about asset allocation.

I think, and this is our view also, we think there could be a reacceloration into 26. We think the AI boom is for real. We think we're going to get a lot of productivity out of AI. Okay, that is a good environment for corporate earnings and for stocks. What we don't know is how successful we're going to be on bending the curve of debt to GDP. Are we going to run another $2 trillion deficit even with tariffs? Is it going to be higher? And in that regard, I think people can buy stocks and buy gold and be very careful about buying the

10-year and the 30-year treasury. And I think that's kind of what we're seeing. Actually, I want to go back to your point about sort of globalization is happening with us or without us. There's a different approach to AI diffusion out of China than there is in U.S. But when you go around the world, are the American providers of tech, whether it's cloud tech or whether it's Microsoft, et cetera, are they still, are they going to win, even if the U.S. isn't part of that globalization wave, will U.S. tech still be part of the story? because so much is rioting on the ongoing earnings power of seven companies. So I'll make a general comment about U.S. companies generally. A typical CEO in the United States that runs a global company has probably been to Europe in their careers, 75 times or more, and has been to Asia, 75 times, has been to China, multiple times, has built relationships and has been doing it for years. and I think that's true of tech, no doubt.

Many of the tech leaders you see are overseas regularly. Our political leaders and some of our leaders in certain governmental positions maybe have not been to China or overseas quite as much, and that's why you see during periods like this, the corporate world is continuing to chug along and build relationships, even though at national level we're sort of reorienting and trying to bring more to the United States and in effect de-globalize. So we've got a kind of a dichotomy and it stands in sharp relief. This is the same way even eight years ago where we withdrew from the Paris Climate Accord. And yet companies in the United States to my eye did not slow down at all in trying to build a leaf.

lead-certified buildings and focus on greenhouse gas emissions and sustainability. You talked earlier about the difference between how China and the U.S., the corporate sphere, is actually using AI. When you're looking at the U.S. and you're looking for signs that AI is actually having a definitive, you know, needle-moving impact on U.S. productivity, what are you looking for here? What are the signs? I'm looking for adoption in a broad set of industries because here's how the, you know,

this works. First, your company gets you to try it, okay, and you adopt it. Second thing you try is various use cases based on that adoption, and then third thing, you figure out which use cases work and which use cases don't work. We're kind of in that phase right now in the United States. When I say China's a little farther ahead, I think they've already tried and proven some of the use cases in more industry. We'll get there too, but you'll know when we look back 10 years, from now, my guess is, maybe not as fast as other parts of the world. We will have gone through all that. We'll know which use cases work, which don't, we'll adopt them. We're going to get a lot more efficiencies. There may be as many or more jobs, but they're going to shift, and we're going to

have to redeploy people to where the open jobs are. But we have to go through that whole cycle, and I would say we're early in that. We just have a couple minutes left. Here's something that's been on my mind a little bit lately that I would like your take on. How leverage, to the stock market is the real U.S. economy. How much when you look around does it feel like things are dependent on these companies continuing to deliver year after year and positive asset returns? So it's a great question. So I would say the U.S. is 75% of service economy.

It is a very heavily consumer-driven economy. This is what makes our economy different from many in the world. And if you break down the consumer here, half the workers in this country, let's take it 80, 85 million, make $50,000 a year, are unlikely to have financial assets, have lost 25% plus purchasing power, and they're struggling to make ends meet. They're spending every dollar they make,

but if you're a business that serves them, you're seeing they're being very careful. Yeah. There's another 80, 85 million consumers, tend to be, I'm exaggerating, I'm generalizing, 55 and older, own their home, have financial assets, and they've made a lot of money in the markets, to your point, and they're spending because they're getting wealthier, and we've got a tale of two consumer groups. I think part of

what this administration, I believe, is trying to do is help lift up this first group so that they can be more affluent and do better, because right now we're very heavily dependent on this second engine based on the stock market. All right. I'm going to sneak in one more question, and go back to where we started this conversation, which is on rate cuts. I know you said a 50 basis point, probably not on the table, but your gut instinct, is this going to be the start of a rate cycle, a rate cut cycle that goes into the next year, 2026? Or is this something that, you know, maybe you get one rate cut, maybe you get two rate cuts, but it's not going to go on for much longer than that?

I think it will be, if it's a cycle, it's going to be a halting cycle. What do I mean by that? Cut 25 in September, I think that's going to happen. Wipe the slate clean for the next six weeks. Fed meets every six weeks. Wipe the slate clean. Make sure that you're convinced still the labor market is weak. Check inflation.

If it's continued to be weak, and inflation is least moderate, you may do another one. The issue I'm pointing out is, I don't think we have more room to get to neutral than 75 to 100 basis points. So might we wind up doing two or three this year? Maybe. Are we going to wind up doing 150, 200 base points? It means you would have to decide, which I don't see a justification for running a very stimulative monetary policy. And I think the Fed, as it's currently configured, will be enormously reluctant to be below

restrictive or modestly restrictive as long as inflation is running above target. Rob Kaplan, thank you so much for doing this live, odd lots of future proof. Thank you. So that was our episode with Robert Kaplan recorded live on stage at the Future Proof Conference. I'm Tracy Alloway, and you can follow me at Tracy Alloway. And I'm Joe Wisenthall. You can follow me at the stalwart. Follow our producers, Kerman Rodriguez, at Kermann, Dashel Bennett at Dashpot and Kale Brooks at Kail Brooks.

For more odd lots content, go to Bloomberg.com slash oddlots. We have the daily newsletter and all of our episodes. and you can chat about all of these topics 24-7 in our Discord, discord.g slash oddlots. And if you enjoy Oddlots, if you like it when we do these live episodes, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes, absolutely add free.

All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.