Robert Kaplan on Disinflationary Forces, Fed Policy, and Economic Outlook

Federal Reserve Meeting and Policy Outlook

• 📌 The Federal Reserve is widely expected to hold rates steady during its two-day FOMC meeting.
• ⚠️ Robert Kaplan anticipates that Fed Chair Powell will aim to remain balanced and keep options open, including potential action in September.
• 💡 There may be one or two dissents from governors arguing for a rate cut.

Disinflationary Forces and Economic Factors

• 📉 Kaplan identifies several disinflationary forces at play, including sluggish growth, regulatory review, an AI boom, and global goods overcapacity.
• 📈 Conversely, tariffs are expected to increase costs, but their impact on persistent price pressures in a disinflationary environment is uncertain.
• 📊 The Fed is likely focused on discerning whether cost increases from tariffs are one-time events.

Inflation, Employment, and the Fed's Mandate

• 🎯 While the economy is at or near full employment, businesses are not hiring aggressively, and workforce growth is decelerating.
• ⚖️ Kaplan believes the Fed has recently overbalanced towards inflation concerns due to tariffs, but will try to achieve a more balanced approach.
• 🏦 He suggests that a more balanced approach might lead to action, but likely not until September.

Control Over Interest Rates

• 🔗 The Fed directly controls the federal funds rate, while longer-term rates are more influenced by Treasury supply/demand and prospects for future growth.
• 📈 Cutting rates could potentially lead to a steepening of the yield curve, not necessarily lower long-term rates.
• 🤝 The decision to cut rates is a consensus among Fed members, not solely determined by the Chair.