128 – Robert Kaplan on the FOMC, the Dallas Fed, and Lessons from the Great Recession

Episode Summary

Executive Summary: Dallas Fed President Rob Kaplan discusses his unconventional path from Goldman Sachs and Harvard to the Fed, how his business background shapes his leadership style, and his views on monetary policy. He argues the Fed is near both full employment and price stability, sees rates moving toward neutral, stresses uncertainty around r-star, and favors ongoing review of the Fed’s operating framework and monetary regime, with nominal GDP targeting worth serious consideration.

Main Topics: Kaplan’s career path and public service motivation (Priority: 4/5): Kaplan explains his move from investment banking to academia and then to the Dallas Fed after being recruited in 2015, framing the job as a way to pursue public service. How business experience informs Fed leadership (Priority: 5/5): He argues the Fed benefits from a mix of economists and private-sector leaders, and says his management background helps with prioritization, alignment, and stewardship across the Fed’s many functions. Day-to-day role of a regional Fed president (Priority: 4/5): Kaplan describes monitoring regional, national, and global economic conditions, speaking frequently with CEOs and community leaders, and managing budgeting, supervision, and staff leadership. FOMC preparation, disagreement, and transparency (Priority: 5/5): He outlines the extensive pre-FOMC process, including staff briefings and outreach, and emphasizes that disagreement is welcomed and should be aired before meetings rather than withheld. Monetary policy stance and the neutral rate (Priority: 5/5): Kaplan says the economy is near full employment and price stability, supports moving rates toward neutral, and views the neutral rate as uncertain but still useful as a guide. Yield curve, balance sheet runoff, and operating framework (Priority: 4/5): He warns against knowingly inverting the Treasury curve, sees it as potentially tightening financial conditions, and keeps an open mind about whether the Fed ultimately remains on a floor system or shifts back toward a corridor-style framework. Monetary regime review and financial-crisis lessons (Priority: 5/5): Kaplan favors periodic review of the Fed’s framework, is open to alternatives such as nominal GDP targeting, and highlights stress testing and monitoring nonbanks as key lessons from the crisis.

Key Arguments: A strong institutional framework is essential because it allows innovation and economic activity to proceed with confidence. The Fed benefits from diverse leadership; private-sector and management experience can improve decision-making alongside PhD economists. FOMC effectiveness depends on thorough preparation and candid disagreement before meetings, not on surprise dissent afterward. The U.S. economy was, in Kaplan’s view, at or near both full employment and the Fed’s 2% inflation objective, justifying a move toward neutral policy. Neutral rate estimates are inherently imprecise, so the Fed should avoid overconfidence while still making a policy judgment. An inverted yield curve can become more than a signal; if persistent, it may directly impair financial intermediation and tighten conditions. The Fed should let the required reserve level determine the operating system rather than forcing the balance sheet to fit a preselected regime. Nominal GDP targeting has appeal because it combines inflation and growth, and debt service is tied to nominal income. The 2008 crisis showed the importance of stress testing large banks and monitoring shadow financial institutions where leverage can build invisibly. Persistent below-target inflation likely reflected deflationary headwinds from household deleveraging, automation, and globalization. A formal periodic review of the Fed’s framework would strengthen institutional credibility even if no changes are ultimately made.

Data Points: Fed funds rate range: 2 to 2.25 percent - Kaplan describes the policy rate level at the time of the interview. Estimated neutral rate: 2.5 to 2.75 percent - Kaplan’s best guess for the neutral policy rate. Potential terminal range he supports: 2.75 to 3 percent - His projected destination after one more hike and a couple more increases next year. Potential future hikes: One additional raise in December, plus at least a couple next year - Kaplan says he is comfortable with this path if conditions evolve as expected. Inflation objective: 2 percent medium-term PCE - He says the Dallas Fed believes the economy is currently meeting this objective. Regional staff size: 1,300 people - Kaplan references managing the Dallas Fed workforce. CEOs he speaks with: About 30 per month - He uses business outreach as part of his information gathering. Formal FOMC preparation window: About 2 to 2.5 weeks - He begins structured preparation before each meeting in this period. Years at Goldman Sachs: 23 years - Kaplan’s pre-academic career in investment banking. Years at Harvard Business School: Close to 10 years - He taught and served as a senior associate dean before joining the Fed. Dallas Fed tenure at time of interview: 3 years - He says he has been at the Fed only three years when discussing crisis lessons. Length of accommodative policy period: 8 to 9 years - Kaplan says the Fed had been accommodative for a long period and was now nearing neutral.

Pivotal Quotes: "I think the Fed is one of those important institutions in the United States." — Rob Kaplan: On why strong institutional frameworks matter and how he views the Fed’s role. "I think it's very important. And I think we have a culture at the FOMC where a disagreement is welcome and encouraged." — Rob Kaplan: On how FOMC disagreements are handled and why debate improves policy. "I would say neutral and there's disagreement. And I think that's appropriate around the table." — Rob Kaplan: On his view that policy should move toward neutrality while acknowledging uncertainty.

Implications: Listeners should expect the Fed to remain data-driven, transparent, and open to framework debates. Kaplan signals gradual tightening, strong bank supervision, and continued scrutiny of reserves, the yield curve, and long-run monetary regime design.