Goldman Sachs Vice Chairman Robert Kaplan indicated that the Federal Reserve might implement an interest rate hike by September if inflation persists. He emphasizes the Fed's commitment to a 2% inflation target and believes that new Fed Chair Kevin Warsh will need to demonstrate readiness to act if inflation does not ease in the coming months. Kaplan suggests that while no immediate action is needed in June or July, a persistent sticky inflation print by September would necessitate a response from the Fed to convince markets of their commitment. This potential hawkish stance comes as bond traders are pricing in a 75% probability of a Fed rate hike by the end of 2026.
Kaplan also discussed the complexities of current economic trends, highlighting two significant but opposing forces: an infrastructure boom and an AI adoption boom. The infrastructure boom, involving $800 billion in spending, is likely to put upward pressure on inflation due to increased demand for materials and labor. Conversely, the AI adoption boom is expected to be disinflationary, improving productivity and corporate margins, which could lead to a decline in labor's share of GDP and an increase in profit share. The Fed's challenge will be to understand how these dynamics ultimately impact inflation.
Additionally, Kaplan noted that a potential resolution to the conflict in Iran has contributed to a decrease in oil prices, specifically Brent crude dropping from nearly $100 per barrel to a lower range, which could ease some inflationary pressures. This decline in oil prices, coupled with the opening of the Strait of Hormuz, is seen as a positive development that could provide the Federal Reserve with additional flexibility regarding interest rate decisions. However, despite this, Goldman Sachs Research has revised its forecast, now expecting rate cuts to be delayed until June and December 2027, pushing back from previous expectations and suggesting elevated borrowing costs for at least another 12 to 18 months.
Goldman Sachs' chief US economist, David Mericle, has also pushed his projection for rate cuts to June and December 2027, citing resilient economic activity and employment data as factors lowering the bar for potential rate hikes. The unemployment rate is projected to rise only slightly to 4.4% this year, down from a previous forecast of 4.6%. Mericle also acknowledged that an argument for a higher federal funds rate could gain traction, particularly given the strong investment demand for AI, which further complicates the Fed's policy decisions in navigating a "somewhat fuzzy" neutral rate. Currently, the federal funds rate sits between 3.5% and 3.75%, and Goldman Sachs expects two 25-basis-point cuts to bring the terminal rate to a range of 3% to 3.25% by the end of 2027.
