Robert Kaplan, Vice Chairman at Goldman Sachs and former president of the Federal Reserve Bank of Dallas, stressed that the Fed needs to be prepared to demonstrate its commitment to a 2% inflation target if inflation persists. While acknowledging that the Fed doesn't need to act in June or July, Kaplan believes that by September, if inflation prints remain sticky, the central bank must show it's ready to take action. He noted that inflation has been above target for five years, making it crucial for the Fed to communicate a clear stance.
Kaplan also discussed the impact of an Iran deal, suggesting it could provide the Fed more time before a potential interest rate hike. The recent signing of a memorandum of understanding between the U.S. and Iran and the anticipated opening of the Strait of Hormuz are expected to alleviate oil prices, which could help bring goods inflation back down. However, Kaplan remains concerned about the overall oil picture and structural issues like a historic capital expenditure boom in the U.S. driven by AI data infrastructure, which could exert upward pressure on prices.
He argued that while AI adoption itself could be disinflationary by improving productivity, the infrastructure boom associated with it might strain inflation. Kaplan emphasized that the Fed should not accept a 3% inflation world and must reiterate its commitment to a 2% target. Fed Chair Kevin Warsh faces the challenge of convincing markets of this commitment, especially given that the CPI was at 5%, more than twice the Fed's target, prior to the Iran deal. Kaplan suggested Warsh should be clear that if inflation doesn't ease in the next few months, the Fed is prepared to act.
