10 questions for Dallas Fed President Robert Kaplan

Complimentary Access Pill
Enjoy complimentary access to top ideas and insights — selected by our editors.

DALLAS — The breadth and pace of change across banking and the rest of the business world is rapidly escalating, posing challenges for financial institutions and the economy alike, according to Robert Kaplan, the president of the Federal Reserve Bank of Dallas.

During a sit-down interview here, Kaplan, a former investment banker, academic and philanthropist who has written several books, said bankers are increasingly threatened by automation and consolidation.

“Technology-enabled disruption, in my view, is accelerating and more pronounced and stronger than in any time in my life,” said Kaplan, who took the Fed job in 2015. “I've worked with businesses my entire career. Businesses or business models are being disrupted at a rate I haven't seen before, and business functions are increasingly being disrupted or were technology or technology-enabled approaches are replacing people.”

Kaplan also touched on banking regulation, the structure of the Federal Reserve, the role of philanthropic organizations, and his outlook on monetary policy. Following is an edited transcript of the interview:

The banking industry, not unlike many other industries, has been trending toward consolidation and automation for some time. How can the workforce get more productive if more jobs are getting automated?

ROBERT KAPLAN: Let me frame the issue a little more broadly. When you think about technology-enabled disruption, we can always look at certain function or a certain job that no longer exists. If you go systematically — and I've spent my career working with companies and looking at industries, and I still do — you can go industry by industry, and you're going to have a hard time finding an industry or a company that is not facing a model threat, probably enabled by technology, where there's a new, cheaper, better model to serve customers.

Functions within that also are being threatened, but it's much broader — whole industries, including yours — anything in press, print, any media at all. It's not so black-and-white, where automation is replacing people. Pricing power is lower. New models are limiting pricing power; globalization is, too. The way businesses are dealing with it is either to invest in technology, to lower their costs or making investments in brand-new models to try to disrupt old models.

So what's the moral of the story? If you've got a college education, studies and research have shown you've got a pretty good chance to adapt to these changes. You might be on the receiving end, but you've got a pretty good chance probably to adapt. If you've got high school or less education, you're likely to have a much harder time to adapt, which means the employment rate and the participation rate of those groups is much lower.

So what I try to look at is, if [participation] is highly correlated to educational attainment, what do we do about it? We have millions and millions of workers who are critical to the labor force who are either high school or less and a population that's aging and a workforce growth that's slowing, every open job is just less prosperity for the families and for our country. So that's what we've got to address.

What are the biggest complaints that you hear from your member banks? What does an ideal regulatory regime look like?

Certainly it depends on their size, but small and midsized banks certainly would like to see some tailoring, regulatory relief. They spend a lot more time on compliance today than they did five or 10 years ago. They're worried about succession. They're worried about loan growth. I actually have a lot of sympathy with their concerns, and I do believe that we would be well served in the United States to segment regulatory regimes and do greater tailoring for small and midsized banks, who I don't think pose a systemic risk, are very critical to lending in their communities and to business formation.

I still believe that for the big banks, while we can relook at the regulatory framework, I think we still need strong regulation, regular stress testing, and I think that's still very critical. That's the No. 1 thing I hear from talking to local bankers.

I think on some of the compliance reporting issues, I think you could waive some requirements, make it more limited, make a little greater ability for these local banks to build some of their businesses. You still have to watch debt-to-capital by area, but if they meet other capital requirements, you might be willing to be more flexible in how they can prosecute some of these business areas. You might, as a result, have more small-bank failures ... because that's what happens if you have weaker regulation, and we've seen it before.

Robert Kaplan, president of the Federal Reserve Bank of Dallas, speaks during the American Economic Association annual conference in Chicago.
Robert Kaplan, president of the U.S. Federal Reserve Bank of Dallas, speaks during the American Economic Association (AEA) annual conference in Chicago, Illinois, U.S., on Friday, Jan. 6, 2017. Kaplan said he's expecting U.S. economy to be strong in the first half of the year and "additional fiscal action or structural reforms provide upside to that forecast." Photographer: Daniel Acker/Bloomberg

You could certainly have some banks get undercapitalized and could fail, and no bank regulator wants to see that. But it doesn't pose a systemic risk, and that's my point. I think we should have system where we have very tough regulation for the big banks, and some tailoring and relief for small and midsized banks.

The Fed as an institution gets a lot of criticism — members of Congress complain the system is too removed from oversight, activists complain it over-represents moneyed interests, libertarians say it distorts markets, and so on. Should the Fed be reformed?

I'll say two things, without getting into the views of those different groups you cited, or agreeing or disagreeing. First of all, I think any institution in this country needs to have a process of self-review and oversight. So not only do you need to improve your own practices, but oversight and accountability is very critical. I think that's healthy.

I think it's not surprising that in the last eight years, most of the economic policy in this country has been monetary policy — there's been very little fiscal policy. And because of that, and the crisis and the aftermath, the Fed took on extraordinary actions to try to deal with the economic crisis, the financial crisis, including building the balance sheet from $800 billion to $4.5 trillion and taking extraordinary moves with interest rate policy. Now that we're eight years later, I think it's a healthy thing to be relooking at where are we now ... can we let the balance sheet begin to roll off.

I also think it's a healthy thing to re-review our practices, the way we manage ourselves, and I don't think it's an unreasonable thing to look at [whether] we have enough diversity, looking at governance, looking at our frameworks. I think all those things are healthy. So I think this criticism from all sides is not necessarily a bad thing. I think it's a healthy thing, and viable, vibrant institutions should be accountable. An appropriate amount of scrutiny makes sense, and we should be thinking about how we do things better.

You mentioned in a recent speech that you thought the global energy market would reach equilibrium sometime next year. Why has balance been so elusive in that market?

I actually said, later this year or early next year. And the inventories globally are starting to run down now — the issue is is it a sustainable balance. We're in the neighborhood, we're either at balance or we're moving toward balance I think in the next number of months.

This is a market. I've lived my whole life in markets — it's not an exact science, it's dynamic. When prices go up, people produce more; when prices go down they might tend to produce a little less. So I don't think it's as critical whether we're in balance now or at the end of the year, or in the first half of next year. For me, as a central banker, the key is that we are on a path to likely reach balance. But it's a fragile balance, I would say, because it's subject to the OPEC agreement, it's also subject to what prices do and what happens to global supply as well as demand. We're watching all those factors, and we don't nee do get it exactly right, but ... we work here to have a good sense of the market dynamics and what drives a dynamic market.

Why do you think inflation has been so low for the last several years?

Technology-enabled disruption, in my view, is accelerating and more pronounced and stronger than in any time in my life. I've worked with businesses my entire career. Businesses or business models are being disrupted at a rate I haven't seen before, and business functions are increasingly being disrupted or ... technology-enabled approaches are replacing people. And shockers have more ability to shock for the lowest price, and they can do it easily, with just as much convenience — maybe greater convenience — than they've ever had. That is also limiting the pricing power of businesses, which is also having a muting effect on inflation. So I think you have a little bit of a collision between the cyclical forces and the structural forces, and I think the structural forces are far more powerful than people may realize.

We'll have to see how this unfolds, and I've said, as we take slack out of the labor market and tighten the labor force, we're still going to see more of these cyclical forces build. But we'll have to see how these cyclical forces are offset by these very strong structural forces, and it means that we may find that the natural rate of unemployment — meaning the rate of unemployment at which we start to create price pressures — can get to a lower level … than we have historically. But we're going to have to see, and this is where I've said publicly I'm willing to be patient and see how the economy unfolds and see how these forces interact with one another.

Do you think further rate hikes or balance sheet reduction is warranted in 2017?

On the balance sheet, I believe we should be in the process of letting the balance sheet roll off very soon. I think we should be doing that in the very near future; we should begin that process. In terms of rate increases ... I'd like to see more evidence that we're making progress toward reaching our 2% inflation objective before I would be inclined to take the next step in removing accommodation. I'm willing to be patient right now, and I think in light of what we're seeing, it's appropriate at this juncture to be patient, and I'd like to see more evidence that we're making progress on our 2% inflation objective, so I'll be looking for that in the weeks and months ahead.

You’ve been involved in a number of philanthropic organizations, including a venture philanthropy group that bears your name. How does your experience in investment banking inform how you think about supporting nonprofits?

I learned as a businessperson that if you're going to run a successful business, you've got to add value that's distinctive. You've got to do something that's distinctive — you've got to serve a client with a service or a product that ... has got to be better than what they can get anywhere else. If you've got that, and you can do it in a disciplined way, you can have a pretty successful business.

That same thinking is true for nonprofits. So when I spend time with nonprofits — which I spend a lot of time with through Draper Richards Kaplan, my venture firm — we're choosing to back nonprofits. I'm looking for nonprofits that have a leader, who's willing to learn, who's willing to build a team, who's coachable, but I'm looking for a model and a service or product that adds value, that's distinctive. It can add value locally, it can add value more broadly, but that's the one thing that nonprofits and businesses have in common.

How can the market better support the work of nonmarket actors who provide nonmarket services?

One of the dangers in the nonprofit world is, it's hard to argue against what a lot of nonprofits do. The heart is in the right place, they're trying to do the right thing, they're trying to add value. I respect people who are trying to do it. What market players can do — let's say you're a business executive and you sit on the board, for example. You can push it one more level and say, "But is it distinctive? What would the world lose if they lose us?" Or, "What can we do to improve what we're doing to make it more distinctive and add more value to this community and to this constituency?" I think the best nonprofit boards are willing to push that, and that's what makes a great nonprofit, in my opinion.

One of the themes of your books is realizing one’s own leadership and potential. Has the U.S. workforce realized its potential?

No. There are a number of challenges facing the U.S. workforce. The U.S. workforce is aging, demographic trends [indicate] an aging population, and therefore our workforce, all things being equal ... the rate of growth is going to decline, which will slow GDP growth.

Within that, there are lots of pockets of inefficiencies in the workforce. While we're trying to remove labor slack from the economy. There's a big skills gap in this country, meaning that there are many more skilled positions open than there are skilled workers. That's a structural problem, and I think that's about the fact that we need to dramatically beef up middle-skills training, job training and retraining, and it has to be done locally, because worker mobility is historically low.

Someone is not going to move 500 miles or 1,000 miles to take a job — it's more likely that if you're out of the job, you're going to need to get retrained locally. And we have not beefed up sufficiently that training capability. We're getting there, but not fast enough to keep up with the skills gap, which is growing. And it's growing because technology is rapidly causing people to be replaced by technology, and it's changing the relative importance of various jobs.

Unemployment is relatively low, and yet our public discourse is dominated by the need for more jobs. What do you see as the root of that disconnect?

I prefer to look at a different measure. I look at headline unemployment, but I also look at lots of other measures — look at discouraged workers, look at people working part time for economic reasons that would like to work full time, and in particular I like to look at something called U-6. Headline unemployment is U-3, but the measure I like better is U-6, which is unemployment rate plus discouraged workers who have given up looking, plus people working part time who want to work full time. That number is 8.6%. That number has also been declining, right along with the unemployment rate. The pre-recession low of that number is 8.1%. So that tells me we've still got some slack.

Those discouraged workers are not easy to get back into the workforce. This is why we need increased job training. But even though we have some slack, that 8.6% is not that much above the pre-recession low. But we've got to do more to get discouraged workers and people who are structurally struggling to participate in the workforce and be productive in the workforce.

For reprint and licensing requests for this article, click here.
Technology Economy Regulatory relief Energy industry Federal Reserve Bank of Dallas
MORE FROM AMERICAN BANKER