Goldman Sachs Vice Chair Robert Kaplan Talks Fed Meeting

Robert Kaplan · Goldman Sachs

US economy is split: AI and defense strong, while housing, autos and low-income consumers are sluggish.

Kaplan characterises the economy by sector. Anything related to AI or defense spending is super strong, while housing, autos, and serving low- to moderate-income consumers are sluggish. He frames the strength as concentrated rather than broad-based, which he links to the shift away from a consumer-led economy.

“this economy is... If it's anything AI related or defense spending related, super strong. If it's related to housing, autos, serving low moderate income consumers, sluggish.”at 3:45

Robert Kaplan · Goldman Sachs

The AI infrastructure boom's huge capital demand is pushing up interest rates.

Kaplan describes the current economy as having a historic demand for capital to fund the AI infrastructure boom, which covers data centers, power, and chips. He says this demand is showing up in rates. He describes this build-out as narrow compared with the broad consumer-led economy of past decades, so its effects on rates are concentrated rather than broad.

“While that's going on, you got a historic demand for capital to fund this AI infrastructure boom. And we're seeing that play out in rates.”at 4:00

Robert Kaplan · Goldman Sachs

Most US inflation is structural rather than cyclical, and the economy is not overheating.

Kaplan argues that the bulk of current inflation may be structural rather than cyclical. Because of this, he does not believe the economy is overheating. This matters for policy because a cyclical overheating would justify faster rate increases, which he says he would support in that case.

“And on the inflation side, you got to say some of this inflation and maybe the bulk of it is structural, not necessarily cyclical. I don't know that there's an overheating of this economy.”at 4:12

Robert Kaplan · Goldman Sachs

Elevated diesel prices feed into broad inflation because diesel is embedded in about 50 other items.

Kaplan explains that when diesel goes up, it is embedded in around 50 other items, so broad-based inflation is not a surprise while diesel is this elevated. He concludes that the inflation pressure from diesel is a supply-side cost pass-through rather than evidence of overheating demand.

“When diesel goes up, turns out it's embedded in 50 other items. And so a broad [-based] inflation is not a surprise when diesel is this elevated.”at 5:29

Robert Kaplan · Goldman Sachs

Raising rates now could slow sluggish sectors without curbing diesel-driven inflation, so hikes should be deliberate.

Kaplan argues the Fed faces a trade-off. If diesel prices do not come down, raising the fed funds rate too far and too fast could slow parts of the economy that are already sluggish, such as housing and autos, while making no dent in inflation that is driven by diesel. His preference is to skip the hike at this meeting and raise rates deliberately later, rather than moving fast. He would move faster only if the inflation were cyclical overheating.

“But the issue is I could raise the fed funds rate. If diesel does not come down, the impact of raising too far too fast may be to slow already sluggish parts of the economy, and it may not make a dent in inflation.”at 5:40

Robert Kaplan · Goldman Sachs

AI adoption is early; he is optimistic many use cases will work, with lessons coming over the next year.

Kaplan separates the AI build-out, which is already under way, from the adoption wave, which he describes as early. He says he is very optimistic about how many adoption use cases will work, but expects to learn a lot over the next year about which ones succeed.

“And then you've got the adoption wave, but we're early in the adoption wave. I'm very optimistic about how many of these adoption use cases are gonna work, but we're gonna learn a lot over the next year.”at 6:56

Robert Kaplan · Goldman Sachs

AI adoption will shift job mix: fewer programmers, more client-facing roles; narrowly defined jobs are at risk.

Kaplan says that he sees this among clients, in Goldman's own business, and among small businesses. He declined to comment on any single company. He expects fewer programmers, with more people covering clients, building relationships, and focusing externally. He argues that individual workers who define their jobs narrowly will find it tough, and that they will need to be flexible and able to read, write, communicate, debate, and build relationships.

“I think the AI adoption phase will change the mix of businesses... There are going [to] be fewer programmers, but I think you're going to have more and more people covering clients, building relationships, externally focused.”at 8:11

Robert Kaplan · Goldman Sachs

Midterm results are largely priced in; expects balanced, not absent, regulation over the next couple of years.

Kaplan says most business people and the markets have already priced in the midterm outcome. The part they do not know is whether regulation will change. He does not think a change in Congress will alter tariffs or immigration policy, but he expects a couple more years of balanced regulation. He argues that an economy needing more growth and highly leveraged to debt needs balanced regulation to help raise productivity.

“most business people and certainly the markets have already priced in the outcome... we're gonna have not no regulation, but balanced regulation.”at 9:20

Robert Kaplan · Goldman Sachs

Government leverage is the biggest tail risk; debt-to-GDP levels demand a credible fiscal plan to bend deficits.

Kaplan names government leverage as his biggest tail risk, starting with governments around the world and citing France. Governments are historically highly leveraged, and COVID added a lot more leverage. With little workforce growth, the economy is putting all its chips on productivity growth. He worries that policymakers need a fiscal approach that shows how deficits as a share of GDP will be bent, because the long end of the curve keeps backing up and squeezing housing.

“the biggest tail risk I see still starts with governments around the world... Government's historically highly leveraged. And in the aftermath of COVID, we got a lot more leverage, and we don't have workforce growth.”at 11:16

Robert Kaplan · Goldman Sachs

US needs roughly 1 to 2 million immigrants a year; unfilled jobs are slowing growth.

Kaplan argues the US needs to revisit immigration and needs [one to two million] immigrants a year. He points to many open jobs that are not being filled, which he says is slowing growth in an economy that needs more growth. He ties this to the broader need for productivity and labour-force growth.

“I would argue we need to relook at immigration. We need [one to two million] a year in immigration. There are a lot of open jobs that are not getting filled, and we're... It's slowing growth.”at 12:28

Robert Kaplan · Goldman Sachs

Entitlement reform must be on the menu; entitlement overspending drove most of the 2026 deficit miss.

Kaplan argues that entitlement reform has to be on the menu because entitlements are such a big part of the budget. He cites the big miss on the 2026 budget deficit, where he believes about $250 billion came from an entitlement surprise and roughly another $100 billion from higher interest expense. He concludes the government needs a menu of fiscal options and has to start.

“entitlement reform is gonna be on the menu also has to be because it's such a big part of the budget. And you notice the big miss on the budget deficit in 2026, I think 250,000,000,000 of it was entitlement surprise.”at 12:56

Robert Kaplan · Goldman Sachs

Treasuries no longer act as a cyclical diversifier; rising debt makes investors reluctant to own them, a warning sign.

Historically, when the economy slowed, stocks fell and Treasuries rallied. Kaplan says that has not happened for the last two years, although there was a brief flight to quality in the last two weeks. He attributes this to debt levels, which make people more reluctant to own Treasuries. He also worries that the long end of the curve keeps backing up, which is squeezing housing. He calls this a dangerous development and a red warning light that should prompt action on fiscal policy.

“where I think the treasury curve is not acting right now like a cyclical diversifier... We're not seeing that. I think we're getting to a level of debt where people are more reluctant now to own treasuries. That's a dangerous thing.”at 13:52