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

Episode Summary

Executive Summary: In a live Odd Lots conversation, former Dallas Fed President Robert Kaplan argued the Fed is likely to cut 25 bps in September because of labor-market weakness, but not 50 bps given still-sticky inflation. He emphasized conflicting forces—tariffs, immigration-driven labor supply shifts, AI/data-center and power demands, and high debt—that complicate policy and could keep cuts halting rather than aggressive.

Main Topics: Fed rate cuts and labor-market weakness (Priority: 5/5): Kaplan said the weak jobs market makes a 25 bp cut likely, while a 50 bp move remains unlikely because inflation is still above target and the economy is not collapsing. Inflation, neutral rate, and policy stance (Priority: 5/5): He argued the Fed is still restrictive and that the neutral rate is now around 3.5%, mainly because inflation is higher than in 2019; cuts should stop well before policy becomes stimulative. AI boom, power-grid constraints, and inflation pressures (Priority: 4/5): The AI/data-center buildout is boosting long-run productivity expectations but is also straining electricity supply, equipment availability, and regional capacity, adding near-term price pressure. Tariffs, reshoring, and supply-chain realignment (Priority: 4/5): Kaplan said tariffs can raise revenue and encourage some manufacturing to return, but they also slow growth and squeeze margins, especially for small businesses and low-value-added production. China, globalization, and AI diffusion (Priority: 4/5): He contrasted China’s more aggressive, cost-driven AI adoption with the U.S. emphasis on hyperscalers, arguing globalization is not dead and U.S. firms will continue operating globally even as the government de-globalizes. Fed independence and market signals (Priority: 3/5): Kaplan said the market is partly reacting—stocks like lower rates, gold is rallying, and duration could be vulnerable—but long-end Treasurys still face debt-supply and policy-risk concerns. Two-tier consumer economy and stock-market dependence (Priority: 3/5): He described a split U.S. consumer base: one group financially strained and another benefiting from asset gains, making the economy heavily reliant on market wealth effects.

Key Arguments: A 50 bp cut is still unlikely because the labor market is weak but not collapsing, while inflation remains around 2.75%-3%, above target. The Fed is already restrictive; the neutral policy rate is around 3.5% today, with only about 75-100 bps of room to cut before hitting neutral. The current labor weakness is partly supply-driven because immigration policy has reduced labor-force growth, helping keep unemployment low despite softer hiring. AI investment is bullish for future productivity and corporate earnings, but today it can crowd out other activity and add to electricity and equipment bottlenecks. Tariffs bring in revenue and may support strategic reshoring, but they also raise costs, slow growth, and can hurt small businesses without pricing power. China is using AI more broadly for cost reduction and operational diffusion, while the U.S. is still early in experimentation and use-case validation. Gold’s rally and caution around long-duration Treasurys reflect concern about leverage, deficits, and the possibility that debt burdens continue to rise. The U.S. economy is unusually dependent on a wealthier consumer cohort supported by asset prices, while lower-income households are under severe strain.

Data Points: Jobs added in latest report: 22,000 - Kaplan referenced the weak monthly payroll report as evidence of labor-market softness. Likely September Fed cut: 25 basis points - He said this is the most probable move at the next meeting. Large cut scenario: 50 basis points unlikely - Kaplan argued inflation and the lack of an economic cliff make a larger cut improbable. Inflation rate: 2.4% - Used in Kaplan’s calculation of the current neutral rate. Real Fed funds rate: 75 basis points - Part of his estimate that neutral policy is around 3.5%. Neutral rate estimate: Around 3.5% - His estimate for the current neutral nominal policy rate. Estimated room to cut: 75 to 100 basis points - Kaplan said the Fed likely has limited room before reaching neutral. Gold price change YTD: More than 35% - He cited gold’s rise as a market response to debt and policy uncertainty. Fed balance sheet after Great Recession: $800 billion to $4 trillion - He described the post-2008 expansion as a precursor to later balance-sheet growth. Fed balance sheet after COVID: $4 trillion to $9 trillion - Kaplan used this to illustrate how monetary support expanded during the pandemic. Extraordinary spending during COVID: $6 trillion - He linked this to higher leverage and debt concerns. U.S. economy size during COVID: $27 trillion - Used to contextualize the scale of fiscal intervention. Net debt-to-GDP ratio: Mid-70s to over 100% - Kaplan said leverage rose sharply after COVID. Public debt outstanding: $37 trillion on the way to $40 trillion - He cited this as a reason the long end of the bond market may eventually demand attention. Inflation target gap: Above target - He repeatedly noted inflation is still running above the Fed’s goal. AI adoption horizon: 1-2 years - He expects productivity effects from AI to show up more clearly over the next year or two.

Pivotal Quotes: "I think 50 basis points is still unlikely." — Robert Kaplan: His direct answer on whether the next Fed meeting could deliver a larger-than-usual cut. "The stock market and other financial markets are an assessment of what's going to happen for the next three to five years." — Robert Kaplan: He explained why markets can diverge from current economic data. "Globalization is not dead. The United States is choosing to play a different role in it." — Robert Kaplan: He contrasted corporate cross-border engagement with U.S. policy reorientation.

Implications: Listeners should expect a cautious Fed easing cycle, not an aggressive one, while investors weigh AI-driven growth against tariffs, debt, and inflation. The conversation suggests stocks and gold can both stay strong even as long-duration bonds face greater risk.