Robert Kaplan on the Fed's New Framework, Inflation, and the Post-COVID Economy

Episode Summary

Executive Summary: Robert Kaplan discusses how the pandemic accelerated remote work and technology adoption at the Fed and across the economy, likely causing lasting productivity and labor-market changes. He argues inflation has been suppressed by structural forces like technology, globalization, and aging, while the Fed’s new average-inflation framework is meant to support a tighter, more inclusive labor market. He is skeptical of negative rates, yield curve control, and other market-distorting tools, and expects the Fed to remain in an ample-reserves regime for the foreseeable future.

Main Topics: Pandemic-driven operational changes at the Fed (Priority: 4/5): Kaplan explains how the Fed adapted to remote work and remote FOMC meetings, noting that formal meetings function similarly online but informal interactions and relationship-building suffer. Technology, productivity, and long-run economic change (Priority: 5/5): He argues the pandemic accelerated technology adoption, remote learning, e-commerce, and business travel substitution, likely producing enduring productivity and workflow changes. Labor force, education, and uneven gains from technology (Priority: 5/5): Kaplan says technology raises productivity for college-educated workers but can displace workers with less education unless retraining and education improve, making human capital adaptation essential. R-star, demographics, and the outlook for interest rates (Priority: 5/5): He links low interest rates and low r-star mainly to population aging and slower workforce growth, with productivity gains potentially offsetting but not eliminating that drag. Fed’s new average inflation targeting framework (Priority: 5/5): Kaplan says the framework allows the economy to run hotter, tolerate moderately above-2% inflation, and support a more inclusive labor force; he emphasizes judgment and forward-looking policy. Inflation dynamics, globalization, and policy limits (Priority: 4/5): He argues inflation has been muted by technology, globalization, and aging, which reduce pricing power and are only partly addressable by monetary policy. Balance sheet, reserves, and unconventional tools (Priority: 4/5): Kaplan favors using current tools aggressively during the pandemic but is wary of negative rates, yield curve control, and any measures that distort market functioning or are hard to unwind.

Key Arguments: The pandemic accelerated technology-enabled disruption and remote work, making many activities permanently more viable online than previously believed. FOMC meetings can be conducted effectively remotely, but the informal interactions before and after meetings are valuable and are lost online. Technology boosts productivity for higher-skilled workers, but for many low-education workers it can eliminate jobs or lower job quality unless they are retrained. There are plenty of jobs, but the U.S. has a skills gap; better education, literacy, pre-K, and skills training are needed to make workers more adaptable. Aging and slowing workforce growth are the main drivers of low r-star and low interest rates; productivity gains may help but likely won’t fully reverse the trend. Average inflation targeting is intended to permit moderately above-2% inflation for a time, strengthening the labor market and making growth more inclusive. Kaplan rejects a strict makeup-policy framing, preferring a forward-looking approach while acknowledging some averaging is already embedded in inflation measurement. Inflation has been restrained by technology, globalization, and platform competition, which weaken firms’ pricing power and are largely outside central-bank control. Negative rates and yield curve control could damage financial intermediation and distort market signals, especially in the U.S. financial system. The Fed should use extraordinary balance-sheet measures during crisis periods but should wean off them once the pandemic is clearly in the rearview mirror. The Fed is likely to remain in an ample-reserves/floor system for the foreseeable future due to current operating realities and post-crisis regulations.

Data Points: Dallas Fed presence during pandemic: President Kaplan said he has been coming in every day - Describing Fed operations during COVID-19 Remote-capable staff: Most of the Fed’s people are working remotely - Pandemic operational adaptation Workers with high school education or less: 46 million - Kaplan’s estimate of the workforce most exposed to technology-driven disruption Inflation threshold for “moderately above 2%”: Two and a quarter to two and a half percent - Kaplan’s personal interpretation of moderate overshoot Fed asset purchases cited: $80 billion and $40 billion per month - Outcome-based asset purchase program discussed during the pandemic Fed balance sheet size before pandemic: Roughly $3.5 trillion - Pre-pandemic balance sheet level Fed balance sheet size during discussion: Over $7 trillion - Pandemic-era expansion of the balance sheet FOMC review cadence: Approximately every five years - Kaplan’s description of framework review frequency Weak population trend: Lowest U.S. population growth ever recorded in 2020 - Used to illustrate demographic drag on r-star Educational comparison: College educated or greater vs. high school or less - Kaplan’s distinction in how technology affects productivity

Pivotal Quotes: "the pandemic has increased the level of acceleration" — Robert Kaplan: On how COVID-19 sped up technology adoption and disruption "we can run the economy hotter and have a more inclusive labor force and get in underrepresented groups back into the labor force" — Robert Kaplan: Explaining the purpose of average inflation targeting "the number one driver of lower interest rates overall and therefore lower R start, all things being equal, is aging of the population and slowing workforce growth" — Robert Kaplan: On demographics as the main force keeping r-star low

Implications: Listeners should expect more lasting remote work, digital adoption, and labor-market churn. Policy will likely stay accommodative but cautious, with the Fed balancing inclusiveness and inflation control while avoiding tools that could distort markets or financial intermediation.