Robert Kaplan, Vice Chairman at Goldman Sachs and former Dallas Fed President, indicates that he would lean towards raising interest rates by September if he were still in his former role at the Federal Reserve. This stance is driven by concerns over persistent inflation. Kaplan highlighted that while the job market has shown relative weakness and the CPI report was confusing, he observes strength in parts of the economy related to infrastructure build and AI adoption, contrasting with a more sluggish outlook for companies tied to housing, autos, and the low-to-moderate income consumer.
Kaplan noted that the ongoing war in Iran and the resulting spike in oil prices have significantly contributed to headline inflation, potentially bleeding into other items. He suggested that without these geopolitical factors, discussions about further rate increases might not even be occurring. Despite his inclination towards a potential September hike, Kaplan affirmed that the Fed's decision not to raise rates in July was appropriate. He also retrospectively disagreed with the last rate cut in December, stating he would not have made that move.
He further explained that while AI adoption is expected to improve margins and productivity for many companies, providing a strong earnings story for the S&P, other factors like tariffs, labor constraints, and the oil spike are inflationary. Conversely, AI adoption and Chinese overcapacity could be disinflationary. This creates a complex environment for the Fed, leading to considerable debate. Kaplan also touched upon the long end of the Treasury curve, attributing its global backup to structural forces such as deficits, rather than solely to the Fed's actions. He projects that if higher rates are needed, it would likely involve one to three quarter-point moves, totaling 50 to 75 basis points, spread over the next one to two years.
