Rob Kaplan on How the Fed Will Think about the Tariffs

On Wednesday, Trump pulled back from the brink on most of the reciprocal tariffs announced on April 2. The market surged. But we're still in an extraordinarily challenging moment. We have new across-the-board tariffs. We have gigantic tariffs on China. And there's a possibility that a recession has already begun. So what does the Fed do in this environment, with so much persistent uncertainty? On this episode, we speak with Rob Kaplan, former President of the Dallas Fed, and now the Vice Chairman of Goldman Sachs. We talk about the extreme uncertainty, the unusual behavior in the market, and what this all means for the energy sector. Read more:Fed Officials Worried Over Stagflation Risk Ahead of TariffsWall Street Chatter Grows That Fed May Act If Bond Rout Worsens Only http://Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 0:58Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:41Speaker 01

  Bloomberg Audio Studios. Podcasts, radio, news.

• 1:57Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 2:02Tracy Alloway?

  And I'm Tracy Alloway.

• 2:04Joe Weisenthal?

  Tracy, there are many dimensions of the ongoing market turbulence and trade tensions that we can't stop talking about. But a big one, and in a way, it's almost like people aren't talking about it that much right now because there's so many other things top of mind. A lot of questions about how the Fed is going to think about what's happening right here.

• 2:20Tracy Alloway?

  Right. And I know it's probably not very popular to sympathize with the central bank, but I gotta say, I would hate to be Jerome Powell right now because in my mind, 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. And that, to me, just seems like a nightmare scenario for a central bank, which constantly has to balance its twin mandate of price stability and low unemployment.

• 2:54Joe Weisenthal?

  It's really tricky, right? Because we've sort of been used to environments where it's really obvious, right? So in 2022, 2023, it was clear that they were missing on one specific side, which was the price. For much of, you know, post 2007 or 2008, the story was weak growth, disinflation, whatever. So poor employment. I mean, this is going to be tricky. And look, 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.

• 3:27Tracy Alloway?

  Oh, yeah.

• 3:27Joe Weisenthal?

  They can maybe, you know, maybe smooth things out a little bit. But at the end, these aren't really monetary policy questions we're talking about here.

• 3:33Tracy Alloway?

  Right. And I think we all internalized that lesson in the 2020 pandemic, right? We saw all these real world disruptions, supply chain issues, and that gave rise to the infamous transitory inflation, as the Fed called it. And

• 3:49Tracy Alloway?

  It seems very much like that's a possibility again, right?

• 3:53Joe Weisenthal?

  Totally. And like we've been saying, we've been going back to talking to all our old supply chain guests because, you know, the whole world may be redrawn. Anyway, we are recording this after the market closed. It's April 8th, 2025. It's 4:09 PM. We just had another crazy day in the market. S and P 500 ended down 1.57%. It had been up over 4% at one point. So we continue to whip saw. Anyway, I'm excited to say, we really do have the perfect guest, someone we've had actually on the show once before. We are going to be speaking with Rob Kaplan. He is a vice chairman at Goldman Sachs, member of the management committee. Prior to that, he was the president and CEO of the Federal Reserve Bank of Dallas. Prior to that, he had been Harvard. And prior to that, he had been at Goldman Sachs. Truly the perfect guest for right now. Rob Kaplan, thank you

• 4:38Joe Weisenthal?

  so much for coming back on Outlots.

• 4:40Speaker 04

  Thanks for having me. Good to talk with you.

• 4:42Joe Weisenthal?

  Tracy said she wouldn't want to be Jerome Powell. I would still take that job, but I'm just, let's start. You're on this, let's say, you know, this is all happening a few years ago, and you're still at the Fed. How stressful is this kind of environment for charting a course for monetary policy?

• 4:57Speaker 04

  Well, the last time we had a tariff issue.

• 5:00Joe Weisenthal?

  Yeah.

• 5:01Speaker 04

  You got to go back to 2019. I was at the Fed at the time. And you may recall, we preemptively cut the Fed funds rate three times. I think we called it a tactical recalibration or something like that. And the reason we were able to be preemptive is we didn't have an inflation issue. So we could afford to be preemptive. As we're sitting here today, the Fed goes into this already before the tariff situation with an inflation issue and that inflation sticky. Now, the irony going into this, the source of the sticky

• 5:41Speaker 04

  inflation has been services, not goods. Goods have been disinflating up to now, up until, say, two months ago or a month and a half ago, and China overcapacity has fed that disinflation. But despite that, you know, we're hanging around two and a half, two and three quarters on the PCE. And I would argue that the excess inflation has been more about excess demand due to outsized fiscal spending.

• 6:17Speaker 04

  So we are now in a new administration where they are dialing down fiscal spending. So that excess demand is being pulled away. You would normally consider that disinflationary.

• 6:30Joe Weisenthal?

  Right.

• 6:31Speaker 04

  But now we've got a supply shock issue related to tariffs, which relates ironically to goods, not services. And so the most important thing the Fed is thinking right now is we don't have to have this figured out because we can't have it figured out. If anything they learned from the transitory episode, don't try to jump ahead to predict things that you can't know. And I think they're going to sit back, let the situation unfold, and try to understand it. And they're going to be more reactive, not proactive. And I think that will be the difference.

• 7:11Tracy Alloway?

  You know, I mentioned stagflation before, which seems to be becoming the consensus economic environment that everyone is talking about. What's the playbook, I guess, the traditional playbook for a central bank that's starting or trying to battle stagflation? You know, I'm thinking back to the 1970s, maybe Volcker, he raised rates really aggressively and ultimately he was willing to sacrifice employment in order to get inflation down. Is there like a normal playbook that central bankers can follow here?

• 7:45Speaker 04

  Not really in this case, in that you're right. In the 70s, we had a situation where we had slowing growth and an inflation issue. One of the things I would say about this situation, I think you have to assess it for what's driving it. What are the structural drivers? And I think that we have a lot of uncertainty. You have government spending cuts. You have a dramatic reduction in immigration and shutting down the border, which normally would slow growth and might actually create some stickiness in the labor force. And then you've got these tariff issues. But the issue with the tariff situation is it's in flux.

• 8:28Speaker 04

  You had the announcement last week on Wednesday, and it's still very unclear how much is the administration, our administration.

• 8:38Speaker 04

  Willing to negotiate, how much is this really about reciprocity? And I think honestly, how much of this is about the administration might want to create more revenue and tariff revenue? And actually, while countries may come back to us and say, we'll go down to zero and we'll remove non-trade barriers. I think we're going to find out how willing our administration is to in fact negotiate.

• 9:08Joe Weisenthal?

  Yeah.

• 9:08Speaker 04

  Or how much do they actually want higher tariffs?

• 9:11Joe Weisenthal?

  Right.

• 9:12Speaker 04

  To keep the revenue. And so all those things are going through the Fed's mind. And so we don't know. And so I think you just have to be patient. Don't be a prognosticator, be a risk manager. Allow this situation to clarify.

• 9:26Joe Weisenthal?

  Well, let me ask you a question. I mean, you must talk all the time to both investors and to real businesses of various sorts. Right now, when we're talking on April 8th, do you think there is still some belief that this can't be what the final tariff schedule looks like? Whatever it ends up being, maybe negotiations, et cetera, that the idea that, no, these numbers that were unveiled on that chart on April 2nd, they can't really be what the new trading relationship with the rest of the world is going to look like.

• 9:58Speaker 04

  Okay, so let's talk about both groups, businesses and then capital allocators, investors. I think there's a hope, there has been a hope by both that yes, this was more about reciprocity and there was going to be a negotiation. And so this isn't where we're going to end up. I think one of the reasons why the market is behaving in the way it is, I think businesses are still hopeful that this will be a negotiation, but they're not sure about that. And they're starting to make plans on how they're going to adjust. And there's a series of things they could do. They're already talking about pressuring suppliers to cut prices. They're talking about potentially taking some of this out of margin.

• 10:42Speaker 04

  There were hoping up to now that maybe the dollar would strengthen. And then the other thing they're talking about is pricing. But they're in the middle of trying to figure that out. They are not, as much as you would hope, actively talking about expanding capacity here because they're concerned that something they build here is globally competitive.

• 11:04Speaker 04

  You don't want to build a high cost facility that only is competitive because of the tariff mode. So that's where they are. They're treading water and trying to be receptive and figure this out and giving their views to the administration. Capital allocators, on the other hand, started the year wanting to be long the dollar, dollar-denominated assets. And what's happened is they have been moving on the margin away from the dollar. And you're even seeing in the last week that some dollar weakness, 10-year treasury backing up

• 11:42Joe Weisenthal?

  Yeah.

• 11:43Speaker 04

  as opposed to rallying, which you would normally expect to see. And you're seeing a move, I think, not between asset classes, you're seeing a move away from dollar-denominated assets. That is extremely unusual. And again, they're doing it to hedge their bets, depending on what the administration is trying to accomplish.

• 12:04Tracy Alloway?

  I wanted to ask you about exactly this. You mentioned earlier, don't be a prognosticator, be a risk manager. And that sounds like we should make like inspirational

• 12:14Joe Weisenthal?

  Yeah.

• 12:14Tracy Alloway?

  posters with like little kittens hanging from trees with that text below. But on this note, one of the reasons this market move is particularly painful is not just because it's very, very big, a big downward shift, but also we're seeing bonds sell off at the same time. And I think we've moved from like just under 4% on the 10-year to something like almost 4.3% now. Again, that's happening while stocks are selling off, which is something you wouldn't expect to see normally. I have seen all sorts of explanations for why this might be happening. I've seen people talk about, well, maybe investors are liquidating what they can sell in the current environment, not necessarily what they want. And then,

• 12:57Tracy Alloway?

  secondly, maybe it's the basis trade being unwound. Thirdly, maybe it's investors shifting away from US assets altogether. Where do you sort of lie on that spectrum of reasons? Like, what is the mix for why exactly yields are going up right now?

• 13:15Speaker 04

  So we're seeing all those potential explanations. I think the truth is, we're not sure. There's certainly been comments in the market and we've seen them flows about the unwind of the basis trade you referred to. We're seeing among some asset allocators, a desire to reallocate and rebalance their dollar exposures to other markets. And I think the most insightful thing I can say, certainly if I'm at the Fed and sitting here at Goldman Sachs, the only thing we can all agree on is something we are watching very carefully because it's a concern for a country that has a, let's say, 36, 37 trillion

• 13:59Speaker 04

  dollars of treasury debt outstanding and growing by at least 2 trillion a year. It's very critical that we are able to market our debt. We've struggled over the last few years to sell duration and that we've tried to front-end load it, but it's critical for a country with debt to GDP 100% plus, you want to be able to market your debt. You want confidence in what we're doing here and I think it bears watching and certainly if I were at the Fed, I'd be watching that very carefully.

• 14:50Speaker 00

  What's next for virtual assets? I'm Jacob Greaves, host of Economy Scale, a series exploring growth in key global sectors. And this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 15:06Speaker 05

  We're seeing a lot of insocial players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service insocial clients.

• 15:15Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Rhys Merrick of Ripple says.

• 15:23Speaker 06

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 15:42Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 15:52Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 16:36Speaker 01

  But according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 17:15Tracy Alloway?

  You've had a very long career and Joe, his intro for you included many titles, many hats. Over your, your history as a financial market veteran, have you ever seen anything like this?

• 17:27Speaker 04

  I think that normally what you're accustomed to in a week like this last week, you would normally see a flight to quality. You would see treasuries rally and you would eventually start to get a better grip on what's going on. Obviously COVID was a good example of enormous uncertainty that took a while to resolve. It's been unusual in my career to see a government-led action as opposed to an external shock, a government-led action, i.e. man-made.

• 18:00Joe Weisenthal?

  Right.

• 18:01Speaker 04

  That has in turn created this kind of uncertainty. The good thing about this kind of situation, if it's man-made that created the uncertainty, it can also be susceptible to man-made actions that will address the uncertainty. And I think that's what people in the market are hoping for.

• 18:19Joe Weisenthal?

  Do you worry that they, I mean, this is, this has come up and it's certainly true, right? Because at any given moment, Trump could say, no, we're taking this back, but this is his life's mission. Or we're doing some pause and we saw these sort of incredible rally up Monday on a fake headline about the pause, tells you something about the environment. But what the president can't do is unring the bell because he can't really credibly say he'll never do this again, right? Like, do you worry that like this is going to permanently change America's economic relationship with every country in the world?

• 18:52Speaker 04

  Yeah, I just got back from Europe.

• 18:53Joe Weisenthal?

  Yeah.

• 18:54Speaker 04

  There are certainly, yes, are strains around the world.

• 18:57Joe Weisenthal?

  Yeah.

• 18:57Speaker 04

  And yes, those bear watching. Having said that, I do believe that there's a great opportunity to get this puzzle right and make this work. But yes, there is some cost to what's happened up to now, but I still think this can get resolved, but it's going to require some action on our part in order to do that. And I think the markets in their, in their up and down reaction today, they're, Just not sure how imminent that is and whether that's going to happen. And so you're seeing this uncertainty prevail in the markets. The problem with uncertainty going on for too long is it slows activity.

• 19:40Speaker 04

  If I'm a consumer thinking about taking an action, I might pause it. If I'm a, I can tell you, talking to companies, they're not saying no, but they're saying not now. They have already had other uncertainties they're dealing with in their business. How to approach AI, which use cases for AI spending will work. They have other issues that they're, they're always wrestling with. And I think all this does is cause them to be more careful, pause actions they might have otherwise taken. And I don't think you want that to go on indefinitely.

• 20:14Tracy Alloway?

  Just going back to the Fed for a second. 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 to try to calm things down?

• 20:31Speaker 04

  All right, so at the Fed, back to the headline, what I'm worried about is full employment and price stability. Stock market going down substantially does not by itself necessarily cause me to do anything other than I'm, I'm aware of it. Credit spreads beginning to gap out gets my attention more because I'm concerned that that in fact would be an amplifier of a potential slowdown, i.e. businesses might not fire people because their stock is down, but they might start to if they see their business slowing and credit spreads widening and they're worried about financeability. So I'm watching that, still not acting.

• 21:13Speaker 04

  Normally, if you see a potential demand shock and the soft data, which is what we're seeing, weaken, but the hard data is still hanging in there. You might start thinking if you didn't have an inflation issue, you might think about taking some action. But the Fed does have an inflation issue. And so I think you'll see the Fed, as we said, be more reactive until you're clearly seeing evidence.

• 21:42Speaker 04

  That there is a slowing and you're going to want to see it the Fed to act more than just an inching up in the unemployment rate, you start seeing a much more dramatic move up. And then you're going to realize that we could be entering into a demand shock, which would actually be disinflationary, which might offset part of this supply shock. And that's where you'd see the Fed be more willing to act, but it's going to be at least a period of time. It's not the May meeting. I think they're going to watch it very carefully, and I think the soonest you might see that materialize would be into June and over the summer. The only other thing I'll mention that I'd be watching for very carefully at the Fed

• 22:26Speaker 04

  is you want to make sure there's orderly market function and particularly orderly treasury market function. And again, as long as that's the case, I think the Fed will watch all these things I just said, but be patient and they're going to want to see real hard evidence

• 22:41Joe Weisenthal?

  Right.

• 22:42Speaker 04

  of the slowing before they took an action. And the reason is they don't want to jump. The tariff situation gets resolved and at the aftermath, we still have an inflation issue and they regret that they've jumped into it and cut the rate. I think they're going to need to be more reactive, which does mean that by the time they move, you know, normally say they're going to be on, maybe that you could be accused of being late, but I think they're willing to take that risk.

• 23:09Joe Weisenthal?

  Let's pivot a little bit. Tracy wrote about something last week, or maybe it was two weeks ago. My brain is getting fried, so I don't have any concept of time anymore. Time is a flat circle for Joe. The Dallas Fed's energy survey, which I think comes out quarterly, unlike the manufacturing and service.

• 23:27Speaker 04

  Right.

• 23:28Joe Weisenthal?

  It's just unbelievable stuff in there. And this is from an industry which we all know tends to be, you know, probably pretty sympathetic to the current administration politically. They're talking about uncertainty like they've never seen. They've talked about the increased cost of all of their parts for drilling.

• 23:44Speaker 04

  Right.

• 23:45Joe Weisenthal?

  I mean, it was like kind of apocalyptic, and that was actually before the last week and a half. One of the things in Bessein's 333 plan was getting 3 million more barrels of oil drilled and expanding energy dominance. Meanwhile, WTI just falling to its lowest level in four years, in part because OPEC is turning on the gushers, in part because of these recession firms. Tell us what's going on down there in the energy patch.

• 24:09Speaker 04

  So, we started the Dallas Fed Energy Survey when I was running the Dallas Fed. We did it particularly for this reason. We wanted to get a grip on what were break even levels. At what levels are you profitable? At what prices are you more likely to drill? And what we're seeing is the following. Four years ago, when the industry heard, "Drill, baby, drill," they were very excited about that. I think over the last three or four years, they have been drilling, subject to cash flow. They've been pressured by shareholders to return more capital. And costs to drill have gone up, and tariffs will increase costs

• 24:51Speaker 04

  to drill more. And so, the industry will drill at one level if the price is $80, but it's going to drill at a lower level, all things being equal, if prices get into 50s or 60s. And so, I think we may well find, over this next year, that actually the level of drilling activity doesn't increase. And I think people who are drilling are going to be more careful, particularly as the prices come down. You see OPEC, I think the US may have more success pressuring OPEC and Saudi Arabia to produce more. And we will, in this country, make it easier to permit a refiner, we'll make it easier to build transmission.

• 25:31Speaker 04

  So, I think the price will come down, is coming down, and may stay down, but it may not be because of more US drilling. It may be because of demand falling off because of concern about tariffs, and also because OPEC actually producing more, probably under some influence from the Trump administration.

• 25:53Tracy Alloway?

  I'm looking at a chart of the Baker Hughes oil and gas rig count right now. And it's kind of funny, I guess we'll take what we can get nowadays, but it went up in 2021 and 2022 quite a lot under the Biden administration. And since, I guess, for most of 2024, it's kind of been flatlining. And in fact, Joe, the energy survey that I wrote up, I think the headline on our newsletter was instead of drill, baby drill, it was nil, baby nil, right? Because there's no new oil and gas rigs actually getting built and not much more production coming on stream.

• 26:29Speaker 04

  That's right. And you've seen the reason for that trend you just described is prices were higher in 21 and 22, that led to more drilling. As prices moderate and they're actually lowering now, I think you'll see more tepid activity as you just described.

• 26:48Tracy Alloway?

  And in terms of your experience at the Dallas Fed, I wanted to ask you because you were there, I think it was

• 26:53Speaker 04

  15 through 21.

• 26:55Tracy Alloway?

  Thank you. Thank you for doing my research for me. But that that included 2018 when we saw the tariffs under the first Trump presidency.

• 27:04Speaker 04

  That's right.

• 27:05Tracy Alloway?

  What was your experience like then? And what lessons or surprises did you encounter at that time?

• 27:12Speaker 04

  So Texas is a very large exporting state, and we did an enormous amount of work at the Dallas Fed on the impact of tariffs. And I probably in those years read every tariff paper that I could get my hands on. And what I what we concluded, me and my team concluded is tariffs could have some price impact, but the biggest impact we saw of tariffs is of the potential of they had to slow growth. And so as a result of it, you may remember back in 18 and 19, I said, I think we should be more proactive here, lower rates, and that if you wait to see the weakness

• 27:53Speaker 04

  in GDP and employment, you've waited too late. And the thing is, I had the luxury of being able to argue that in those years because we did not have an inflation issue.

• 28:04Tracy Alloway?

  All right. So clearly, there is a lot going on. Some of it, in many ways, very unprecedented. What are you looking out for next in terms of not just the impact on the Fed and how this might influence their immediate monetary policy path, but also in terms of the sort of big structural trends of the global macro economy of geopolitics, you name it?

• 28:28Speaker 04

  Yes, so there including tariffs, there are five big structural changes going on right now. We've already hit on on the number one is we are attempting to reduce fiscal spending with the desire and obviously it's been somewhat the risk of stating the obvious been jarring, but with the desire to try to reduce the current six and a half, seven percent of GDP deficit to something lower than that. We've gone from 2019 to today debt to GDP in the United States net approximately in the mid seventies to over 100%. And so first structural change is try to have a an economy that is less fiscal spending

• 29:12Speaker 04

  led and more private sector led. That's number one. Fiscal spending reductions, though, slow growth, might in fact be disinflationary, but that's the first one. Second one is regulatory review in every industry with the ambition of improving productivity growth. In an aging country that is highly leveraged, the X factor that can help you deleverage is productivity growth. The issue with regulatory review is they'll take some time for that to translate into greater growth. And that's the issue. It'll be a time lag. Third big change, which we've talked about is I would say a restructure of the energy

• 29:54Speaker 04

  ecosystem, encouraging drillers here, we just talked about to drill, although they're going to be more reluctant, but then encouraging Saudi Arabia and others to produce more. And additional be easier to permit a refinery, easier to create transmission, and the idea is to help low, moderate income families here visibly who've lost 25% plus purchasing power to allow them to pay a lower price at the pump and for power. The fourth big one is Two big drivers of US excess GDP over the last three or four years. One, I would argue, was excess fiscal spending. And then the second was immigration and labor force surges due to some percentage

• 30:39Speaker 04

  of undocumented immigrants entering the workforce. That obviously has ended. Workforce growth will decline this year from previous years. And there are millions of undocumented immigrants in the country who are uncertain of their status. And they make up half the construction workforce in a state like Texas. They make up a chunk of the agricultural workforce and other workers in the service sector. And what I'm hearing from employers is some number of those workers are not showing up at work because they're concerned about an ICE raid and they're concerned about their status. They're certainly not spending. And I think there's going to be a question as we go here.

• 31:23Speaker 04

  Do we want to clarify, does the government want to clarify how far they want to go here so those people can get back to their lives? But the jury's out on that. And then the last one we just talked about is tariffs, which has created all the impacts of potentially stickier prices, which is a supply-side shock, but also is likely, based on our work, is likely to slow growth. So that's the package of things going on. And so the question then with all that, it's one thing if growth slips from what it might have been two and a quarter, two and a half percent, we thought some number of weeks ago, to say one and a half, one and three quarters.

• 32:05Speaker 04

  But you now have our own economists and other economists are now suggesting that growth is going to slip well below that, approaching zero or half of 1%. And if these tariffs continue, those estimates may even get revised down. You've got a risk of a meaningful slowdown in growth. Again, it doesn't have to unfold this way, but a lot of it is going to be a function of what actions are taken here over the next days and weeks.

• 32:34Joe Weisenthal?

  Robert Kaplan, you know, when we scheduled this episode several weeks ago, I didn't think we realized it would be quite such interesting times. But this was the perfect timing, perfect guest. Thank you so much for coming back on Odd Lots. That was great.

• 32:47Speaker 04

  Great to talk with you.

• 33:01Joe Weisenthal?

  Tracy, that was great. I like the end, didn't quite realize how much there would be to talk about. You know what I think?

• 33:07Tracy Alloway?

  You shouldn't have said that. You should have just been like, yeah, we were thinking about what's going on in markets and we had Rob Kaplan on speed dial and he was, we knew he was the perfect person.

• 33:16Joe Weisenthal?

  We knew who, you know what Tracy, that 10 year yield, 4.28, it was at four on the fourth, so on Friday.

• 33:24Tracy Alloway?

  Yep.

• 33:25Joe Weisenthal?

  That's a crazy chart. That's an ominous chart. That's an ominous chart.

• 33:28Tracy Alloway?

  You know what worries me more?

• 33:30Joe Weisenthal?

  Yeah.

• 33:30Tracy Alloway?

  I'm looking at swap spreads right now.

• 33:31Joe Weisenthal?

  Oh, yeah.

• 33:32Tracy Alloway?

  It's never a good sign when you start seeing headlines about swap spreads. Like, these are supposed to be relatively boring and they're not boring right now.

• 33:41Joe Weisenthal?

  So what's going on in swap spreads?

• 33:43Tracy Alloway?

  So they're dropping quite a lot. And I guess the speculation is whether or not that has to do with hedge funds unwinding that basis trade that we mentioned.

• 33:52Joe Weisenthal?

  It's really funny. It's really funny also thinking that, you know, I had totally forgotten basically until right during that conversation, that 333 Bessein thing, which just seems like such old news. The idea is like, okay, we're going to modestly decrease the deficit over time.

• 34:09Tracy Alloway?

  It doesn't come up that much anymore.

• 34:10Joe Weisenthal?

  We're going to have 3% GDP growth. It's like, man, they really just took a, they really did not go with that approach, did they? To say the least.

• 34:19Tracy Alloway?

  No, no, they did not, Joe. Here's a question. Do you still want to be Fed Chairman?

• 34:24Joe Weisenthal?

  I would take it.

• 34:26Tracy Alloway?

  If you become Fed Chairman, will you come on my solo all thought show and talk to me?

• 34:33Joe Weisenthal?

  It'll be fun. It'll be, oh, it's so great to reunite with you, Tracy. I got a new job. But it's always fun to come back and check out. Yes, I'll do that. I'll even, I would even be a regional Fed president. Can, can listeners tell that we're totally fried? I wonder like.

• 34:47Tracy Alloway?

  Yeah, our, our banter is, is not great at the moment, but okay, shall we leave it there?

• 34:54Joe Weisenthal?

  Let's leave it there.

• 34:55Tracy Alloway?

  On the note that we cannot banter any longer. All right. This has been another episode of the Odd Lots Podcast. I'm Tracy Alockway. You can follow me at Tracy Alockway.

• 35:04Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at TheStalwart. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashell Bennett at Dashbot, and Kale Brooks at KaleBrooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 35:26Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we tap former Fed presidents to talk about what the central bank is going to do right now, 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 ad-free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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• 36:57Speaker 05

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