The Fed should pause at the next meeting, says Goldman Sachs' Robert Kaplan

What is the most important thing to markets right now? Is it this week's jobs report? Maybe the Fed's rate cut potential. Well, what if it's neither? That's the take today from former Dallas Fed President Robert Kaplan, now vice chairman at Goldman Sachs. And he joins us live. Happy New Year. Welcome back. Happy New Year, Scott. So you make that case, right? That that is singularly the most important thing right now, the Trump administration and its policies. Why? I think monetary policy, it will take a little bit of a seed offstage and fiscal policy and other structural shifts are now center stage. That includes what we do on fiscal policy, what we do on tariffs, immigration, regulatory review, energy transition. And the rate, ironically, as we head in approaching January 20th, I'm much more interested in where the 10 year treasury rate is than I am the Fed funds rate and that people haven't focused as much on this. The 10 year treasury since mid-December has backed up from about 415 to now 462, 463. And I think that has a lot more to do with concerns about fiscal policy and supply demand of treasuries than it does about inflation or what the Fed's going to do. And so I think we just have to be aware of that. How much more do you think the 10 year could back up? I don't know. I think what we're what the 10 year backup says to me is the bond market and bond buyers are taking a wait and see approach and are showing reluctance to buy duration. And so you could have a sequence of actions after January 20th that could show that the new administration is going to very seriously address these dramatic fiscal deficits and try to take real action that bend the curve, in which case I think the duration might react favorably. But I think right now the jury's out and there's a whole sequence of decisions that will be made in the first 90 days. And and the truth is, we don't know yet exactly what's going to be decided. But I think bending this fiscal curve, we've gone from 70 percent debt to GDP to over 100 percent and deficits last year, six and a half percent plus. I think I think the bond market is showing reluctance to go along with that and particularly showing reluctance to buy duration. People will buy the short end of the curve, but are reluctant to buy duration. Sure. You make the case that because of the structural changes that we're about to undergo, deregulation, fiscal policy, immigration, the cuts that you mentioned, that it's going to force the Fed to be much more reactive, perhaps than it traditionally has been. Can you elaborate on that before I ask you a question related to it? Yes. So the Fed is, by its nature, very focused on cyclical developments. And when the structural underpinning is clear, when fiscal policy is clear, when other elements regarding the job market, immigration and so on is clear, it's easier to judge data and judge cyclical developments. We're about to get a total reshuffling, significant reshuffling of these underlying structural elements. And in that kind of situation, the Fed, I think, really needs to wait and let some of these developments clarify before it has a better grip on what the outlook is. And I think that's why one of the reasons, among others, why they'll pause in January and take some time to let this clarify. Aren't there risks, though, that are inherent with doing that, that, you know, while they're waiting, maybe the economy starts to show softening, but they can't do anything about it initially because they're unsure how all of this is going to play out. I guess in some respects, it goes towards at least some criticism of the Fed in general, that they're more reactive to situations rather than being proactive and, you know, expecting certain outcomes. Well, let me reframe that. And, you know, from talking to me in the past, I was critical that the Fed waited a year plus too long in slowing its bond buying and beginning to raise rates. Having said that, once it shifted, I think it was very proactive and very deliberate for a couple of years in raising rates, getting the Fed funds rate to five and a quarter, five and a half. At these transition points, though, where structural decisions are changing key elements of the economy, it's the right thing for the Fed to slow down, be more deliberate, let things develop. Yes, if you saw in the near term a severe weakening, the Fed would react to that. But I would guess it's far more likely that you're going to see solid job numbers, maybe not great job numbers, but solid numbers. And we've been seeing over the last number of months inflation going a little bit sideways. So I think the Fed would be pausing even if we weren't about to do this reshuffling of structural factors. But with the structural changes, I think it adds to the reasoning for them to take their time, slow down at a minimum, skip January. Fed's not handcuffed. It'll act if you see severe weakness. But I think it would be prudent of them to let the situation clarify. And I think they would.