What Trump’s policies could mean for the Fed

Episode Summary

Executive Summary: Rob Kaplan argues the Fed has achieved a decent soft landing, but only because unusually stimulative fiscal policy has supported growth while also making inflation stickier and forcing higher-for-longer rates. Looking ahead, he says Trump-era policy changes could reshape labor supply, regulation, tariffs, energy, and productivity in ways that are too structural for standard Fed models, so the Fed should act as a risk manager rather than forecast too confidently.

Main Topics: Fed soft landing and policy performance (Priority: 5/5): Kaplan says the Fed has done a good job so far, but acknowledges its early delay in raising rates and ending asset purchases hurt lower-income households who suffered real wage erosion and higher living costs. Fiscal policy as a key support and complication (Priority: 5/5): He argues post-COVID fiscal spending has been far more stimulative than normal, helping the economy withstand higher rates while also keeping inflation more persistent and delaying rate cuts. Trump administration and structural policy shifts (Priority: 5/5): Kaplan expects meaningful changes in regulation, immigration, tariffs, energy policy, and directed spending that could alter the inflation and growth outlook in ways that are not purely cyclical. Fed independence and governance (Priority: 4/5): He expresses confidence in Powell-led rate setting but expects more debate over supervision, regulation, and potentially the balance-sheet role and Treasury’s influence. Inflation outlook and labor market risks (Priority: 5/5): He says disinflation may come from regulation, productivity gains, and lower energy prices, but tighter labor supply could pressure service inflation and make the path uncertain. Market implications and investment framing (Priority: 4/5): Kaplan warns investors not to focus on one policy in isolation; the combined policy mix could lower headline GDP growth while supporting corporate earnings and a more reprivatized economy.

Key Arguments: The Fed has largely succeeded in engineering a soft landing, but that outcome was aided by unusually large fiscal deficits and spending. Lower-income workers have borne the brunt of inflation, losing substantial purchasing power even as markets and wealthier households benefited. A Trump administration could change the economic environment through structural shifts rather than typical cyclical moves, making standard Fed models less reliable. Immigration policy is the biggest uncertainty because labor-force changes could materially affect wage pressures and service inflation. Tariffs may not be as inflationary as feared because consumers can substitute away from imported goods, but the net effect depends on labor supply and implementation. The Fed should delay rigid conclusions and make decisions as a risk manager, not a prognosticator, especially ahead of unclear policy changes. Investors may need to rethink growth assumptions: GDP growth could slow modestly, but corporate earnings might improve if productivity and tax policy become more favorable.

Data Points: Fed funds rate cut: 25 basis points - The Fed cut rates again last week before the discussion. U.S. government debt to GDP: from 70% pre-COVID to over 100% - Kaplan cited this as evidence of much more accommodative fiscal policy. Fed peak policy rate: 5.25%-5.5% - He said fiscal stimulus helped push the Fed to a higher peak and keep rates elevated longer. Households affected by inflation: 65-70 million workers - Kaplan described paycheck-to-paycheck workers as most hurt by cumulative inflation. Purchasing power loss: 20%-25% - He said lower-income workers have lost this much purchasing power. Typical annual wages cited: $50,000-$55,000 or less - Kaplan used this income range to describe workers under the most pressure. Projected Fed landing zone pre-election: 4.25%-4.5% - He thought the Fed could get the funds rate down to this range if inflation ran around 2.5%. Deficit level: 7% of GDP - He referenced open-ended fiscal spending alongside large deficits as a reason services inflation could stay sticky. GDP growth this year: 3% - Kaplan said immigration growth has helped the economy grow at this pace. Potential GDP growth under new policy mix: 2%-2.5% - He suggested growth might slow from 3% as government-directed spending recedes.

Pivotal Quotes: "The Fed has done a good job in orchestrating a soft landing." — Rob Kaplan: His overall assessment of current monetary policy performance. "Let's be risk managers, not prognosticators." — Rob Kaplan: His advice for the Fed as it evaluates uncertain post-election policy changes. "This is a puzzle that will have to fit together." — Rob Kaplan: He described the mixed inflationary and disinflationary effects of the incoming policy mix.

Implications: Listeners should expect a more uncertain 2025 policy path: the Fed may pause to assess structural changes, labor supply is the key variable, and markets should weigh slower GDP growth against potentially stronger earnings and productivity gains.