TLDR
- Goldman Sachs vice chairman Rob Kaplan says the Fed may need to raise rates as soon as September if inflation stays high
- Fed Chair Kevin Warsh signaled the central bank is still focused on fighting inflation, sending short-term Treasury yields higher
- Half of Fed members now expect a rate hike by year-end
- Swaps traders are pricing in a quarter-point increase by October
- Kaplan also flagged a “historic” capital spending boom driven by AI and computing infrastructure
Rob Kaplan, vice chairman at Goldman Sachs and former president of the Dallas Federal Reserve, says the Fed may need to raise interest rates as early as September.
Kaplan made the comments in a Bloomberg TV interview on Thursday. He said if inflation does not cool between now and the fall, acting would be “the wiser thing to do.”
“If inflation prints don’t cool between now and we get to September, I actually think the balance of risks suggest it would be wise to take some action,” Kaplan said.
He also warned that rate hikes rarely come alone. If the Fed moves in September, Kaplan said officials should be prepared for one or two more increases to follow.
Treasury Yields Jump After Fed’s Hawkish Signal
Markets reacted quickly. Traders sold short-term Treasuries after Fed Chair Kevin Warsh reinforced a hawkish tone following this week’s Fed meeting.
Two-year Treasury yields climbed as much as 17 basis points on Wednesday. That was their biggest single-day jump since March. Yields eased slightly to 4.17% in Asian trading on Thursday.
Half of the individual Fed members now expect at least one rate hike before the end of the year. That shift in the dot plot caught markets off guard.
Swaps traders moved fast. They are now pricing in a quarter-point rate hike by October. Before this week’s Fed meeting, markets had not expected a hike until March 2027.
Kaplan said if inflation remains sticky, it would signal that monetary policy is still too loose.
A Caution on the Dot Plot
Despite the hawkish tone, Kaplan urged caution when reading the Fed’s latest projections. He noted that the dot plot may not have accounted for the recent US-Iran deal and the reopening of key shipping routes.
“I would be urging caution about interpreting this dot plot because we just had a big change,” he said. He wants to see how that development works through the economy before drawing conclusions.
The Fed will release a new set of projections in September. Kaplan said the picture could look very different by then.
Kaplan served as Dallas Fed president from 2015 to 2021, sitting through meetings led by both Jerome Powell and Janet Yellen.
He also noted separately that the US is in the middle of a “historic” capital spending boom, driven by investment in infrastructure for AI and computing power. He said the Fed needs to monitor that trend carefully.
Goldman Sachs shares were up 0.78% at the time of reporting.
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