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Dallas Fed president weighs in on recession fears, the yield curve and why having a thick skin is part of the job

Kai Ryssdal Aug 28, 2019
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Robert Steven Kaplan has been CEO and president of the Federal Reserve Bank of Dallas since 2015.
Ben Hethcoat/Marketplace

These are strange times indeed for the central bank. While labor and consumer sentiment remain pretty strong, other economic indicators suggest that the global slowdown is starting to make some people worried about the future of the economy. On top of that, the Federal Reserve has received scathing criticism from the president, and recently, an op-ed from former New York Fed President Bill Dudley urged the central bank to help the president lose the 2020 election. In the midst of all this, Robert Kaplan, president and CEO of the Dallas Fed, sat down with “Marketplace” host Kai Ryssdal to talk about the issues facing monetary policymakers at this point, as well as the problems facing his own district. The following is a transcript of their conversation.

Kai Ryssdal: Obviously, I can’t have you in here the day after Bill Dudley drops that op-ed, in which he says not only should the Fed not enable Mr. Trump’s trade war, but you ought to think about the 2020 campaign when you’re thinking about your economic policy stance. With the understanding that you don’t speak for the Fed and the Fed has come out with a statement that says we’re only focused on two things — dual mandate and full employment — what did you make of what Mr. Dudley said?

Robert Kaplan: The only comment I would make is consistent with the statement that Michelle Smith put out on behalf of the Fed. Our work and our decisions are based on our analysis of the economy and the best decisions for the country without regard to political considerations, political influence. I’ve been at the Fed now close to four years. That’s been true every day that I’ve been here, and I see no evidence of any behavior to the contrary. So I don’t want to comment on any particular piece from someone now on the outside. But I am quite confident that we will behave in a way that meets our dual mandate objectives without regard to any political considerations or political influence at all.

Ryssdal: Fair enough. And I expected as much, but the following goes like this: You’ve been there for years, you’ve seen a lot. Are we through the looking glass now with the president beating up on the Fed, and Bill Dudley saying what he said, and you all hunkering down and saying, “You know what, we got two jobs, and we’re doing them, by God.”

Kaplan: Listen, I think we’ve got a very high-quality group of people around the table. Most of us have been around for a long time. We’re somewhat of a quote unquote older group, thick skin. I think that’s part of the job, criticism is part of this job. I think it should be expected. People outside the Fed are free to say whatever they believe. We’re going to be criticized, we want it, we want to act independently. But we have to earn that independence. And by demonstrating it every day and every week and every month. And I think that’s the challenge. And it’s never been truer than today, and I’m quite confident will fulfill that challenge.

Ryssdal: Speaking of challenges, you’ve got one in the global economy and what it’s doing here. Give me, with the caveat that you’re not an economist, give me your analysis of where things sit.

Kaplan: So here’s the way I see the economy: On the bright side, the consumer is strong. And the consumer’s approximately 70% of the economy, and if the consumer stays strong, and if I knew that was going to be the case, it gives me a lot of confidence the economy is going to be solid. The issue is manufacturing is weak, and it’s been sluggish, probably weaker than it’s been in 10 years. And global growth is decelerating. And the trade tensions and trade uncertainties are part of the weakness in both. And what I’m concerned about is does that weakness intensify where it spreads into other parts of the economy? And what will happen is the consumer is a lagging indicator, meaning it’ll be the last to go. What I’m worried about is if you have continued weakness, maybe X number of months from now you’ll see a weak jobs report, or one or two, and all of a sudden, consumer will weaken. In my view, if we wait for that to happen, we’ve waited too long. So I’m on heightened alert to see whether this weakness continues and intensifies. And that’s where we are right now.

Ryssdal: Let me read between the lines on that whole waiting too long thing. The Fed meets next month, obviously the [Federal Open Market Committee] does, talking about interest rates. Do I hear you saying you’d support another interest rate cut?

Kaplan: I’ve said, I’ll say today, and I’ve said publicly, I won’t make a decision until I get to the meeting. But I’m very constructive on the thought that we may need to make an adjustment and be open to making an adjustment in our policy rate. And for me, the reality check on that — and again, the part of this job, you’ve got to be forward looking, just because the economy’s been strong, our job’s to look forward and is to risk manage. And one of the reality checks for me on that risk management, there’s been a lot of talk about the yield curve and the shape of it. For me, the bigger message from the yield curve is it’s come down, the whole curve has moved down dramatically to the point where now the Fed Funds Rate, the rate we set, is even above the 30-year rate. That’s a reality check. And part of it is global liquidity and but part of it is expectations of future growth have gotten a lot more pessimistic. That’s part of what you’re seeing. And for me, that’s a reality check that I ought to be open minded and constructive about needing to adjust the policy rate.

Ryssdal: So this is kind of a touchy-feely question, but I’m going to ask it anyway and see what you say. When you’re sitting around that giant table in the conference room on Constitution Avenue in the Fed building, do you think about the fact that almost literally every word you guys say affects somebody in the global economy?

Kaplan: You learn in this job that yes, your words, particularly in discussions like this, and also there’s a transcript that come out for five years. But yeah, everything you say matters. So how do I deal with that? You do a lot of preparation. And I spend an enormous amount of my time — I have a superb team, also not only use that team, I talk to probably 30 CEOs a month, we do surveys, I talk to economists around the country. If I see somebody on TV or radio disagrees with me, I’ll call them and get their view, might change my mind. So I spent an enormous amount of time preparing, because I’m quite conscious of the fact that what I say matters, and I better be well prepared.

Ryssdal: Let me take you through a couple of issues specific to you as the person running the Dallas Fed. And there’s three or four. First is immigration, obviously a key issue in the state of Texas and the entire region for you. The president wants to not only cut illegal immigration, but also legal immigration to this country. What’s that gonna mean for you in Texas and for the rest of us?

Kaplan: The key — and we do a lot of research on immigration, as you know, at the Dallas Fed. GDP growth is made up of growth in the workforce and growth and productivity. We’re aging as a population. Immigrants and their children have made up over half the workforce growth over the last 20 years. And in the next 20 years, we think that’s going to be closer to 100%, because native-born workforce is going to shrink. If we’re going to grow GDP, we need to grow the workforce. Now, this is a sensitive topic, we’ve come out at the Dallas Fed with research that suggests our immigration system probably should be restructured to be more skill-based, to be more employee-based, a little bit more like Canada’s, but the thought that you’re going to cut or reduce the number of immigrants and grow GDP, those two things don’t go together. One of the key distinctive advantages, the United States, we’ve been a magnet for talent for decades. My grandparents were not born here. We’ve got a great ability to take people from around the world, and they become important members of our society at all levels. And I think if we’re going to continue to grow, that’s something we’re going to have to talk about.

Ryssdal: I gotta point out here, we’re not doing that anymore. I mean, you know, Chinese students aren’t coming, people are just aren’t coming.

Kaplan: And so our analysis without regard to political aspects that we know it’s a sensitive topic, if we’re going to grow, you can’t rely completely on productivity growth. And oh, by the way, on productivity growth, we need to improve our education, we need to improve skills training, we are 25th out of 35 industrialized nations in math, science and reading. We need to invest a lot more in our human capital. But we need to grow and make policies that grow our workforce or we’re going to grow more slowly. And by the way, wouldn’t matter so much if we weren’t so highly leveraged. But government debt to GDP is historically high and getting worse every day. We need to find ways to grow. And workforce growth is a key part of it.

Ryssdal: Item No. 2: Trade. Last time you were here a year and a half or so ago, talked a lot about trade, specifically with state of Texas and your Fed region and Mexico. There’s the U.S.-Mexico-Canada Agreement, which is, I don’t know where it is in Congress. How you feeling?

Kaplan: So the reason we do so much work out, as you know, in Texas, we’re the largest exporting state in the country. So we’re very sensitive to this. And what I’ve been saying, I think I may have said to you a year and a half ago, we should be segmenting our trade relationships in the United States. What I mean by that, North America is a competitive hemisphere. That includes Canada and Mexico. And our analysis suggests that all the trade relation with Mexico has been critical to logistics and supply chains, which have allowed U.S. companies to be globally competitive, and we’ve been taking share from Asia. So we, and I understand, and I think there’s a lot of merit to going at issues with China intellectual property rights, technology transfer, other level playing field. But while we’re doing that, we would be wise, which we’ve now made progress to do, shore up relationships in North America, because they allow the United States to be globally competitive and take share. It’s not enough to add a job in the U.S. if it’s not globally competitive. And we’ve been at the forefront of doing that, and the trade relationship with Mexico, and to a lesser extent Canada, have been critical to our ability to do that. So we’re hopeful that USMCA, whatever form it’s in, will get ratified. And we think those relationships are critical to the United States.

Ryssdal: Item No. 3: You’ve been writing a lot lately about climate change and the economic security threat that it poses. Tell me about that.

Kaplan: So it may surprise some people that I was one of the first to write about this in the Fed. The reason is, if you live in the 11th District, particularly in Texas, it’s a subject comes up every day. Why? Even though we’re the largest energy-producing state and oil- and gas-producing state, we have hurricanes, Harvey — and we will have more — we have droughts, we have floods, and we house along the Gulf a big percentage of the nation’s infrastructure for chemicals and refineries. And also the shipping through the port is critical. And so the reason we flag it, there’s not a day that goes by that I’m not talking to a government official, city official or a company that isn’t trying to figure out where they should make investments. If it’s a city like Houston, to mitigate this, it affects migration patterns, which has been a big tailwind for Texas. So reason we wrote about it is we’re trying to open a window to people to realize it’s a big part of what we talk about. And the bottom line is, if something that’s currently a tail event starts happening with regularity, which the National Climate Assessment suggests it is likely to in the next 50 years, then it’s going to affect economic results. And it’s going to affect the whole number of things which have been critical to the future of Texas. That’s why I talked about it.

Ryssdal: Last thing and I’ll let you go, and I guess I’ll preface this by saying I don’t know you from Adam, other than these two interviews and the reading I’ve done about you. You strike me as a generally positive, upbeat, “yeah, we can do this” kind of guy. Fair?

Kaplan: Yes. That’s why I’m doing this job.

Ryssdal: Well, that kind of goes to it. And let me circle back to where we started without getting into the politics and the president and Bill Dudley and all of that. Do you believe you at the Fed are equipped to deal with what pretty much everybody believes is coming?

Kaplan: Yeah. And so I’ve been, as I think you know, been pretty vocal about this now for a few years. Monetary policy has a key role to play. And there is a key role to play over the last number of years and a key role to play going forward. But we’ve got a little bit used to in this country thinking that the bulk of our economic policy is monetary policy. We had a fiscal stimulus late in ’17. But by and large, it’s been mainly monetary policy, and part of my job is to flag for people well, no, it’s not supposed to be that way. We have a critical role to play. We need immigration reform and policies that grow the workforce. We need to improve education, skill training, we need infrastructure spending in the United States. One of the benefits of these low interest rates, were probably $3 trillion underinvested. We are less than 5% of the world’s economy. We need trade if we’re going to grow. And all those things are away from the remit of the Fed. The Fed is going to have a critical role to play to do our best to make sure as we go through this adjustment period that we smooth and ease that adjustment. But I think we, part of my job, I believe strongly, is to call out our analysis broadly on the economy, share it with elected and appointed officials, because we’re going to need broader economic policy than just monetary policy if we’re going to reach our growth potential.

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