Fed Rate Hike Could Come in September, Goldman Sachs Executive Warns

Key Takeaways

• Rob Kaplan, Goldman Sachs vice chairman, suggests the Federal Reserve could raise rates in September if inflation remains elevated
• Fed Chair Kevin Warsh’s hawkish messaging pushed short-term Treasury yields sharply higher
• The latest dot plot shows half of Fed officials anticipating at least one rate increase before year-end
• Market participants now expect a quarter-point rate adjustment by October
• Kaplan highlights an unprecedented capital expenditure surge fueled by artificial intelligence and data center infrastructure

Rob Kaplan, currently serving as vice chairman at Goldman Sachs and formerly leading the Dallas Federal Reserve, has indicated that the central bank might implement an interest rate increase as soon as September.

During a Thursday interview with Bloomberg TV, Kaplan outlined his view that if inflationary pressures fail to moderate before autumn arrives, taking preemptive action would represent “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 emphasized that rate increases typically don’t occur in isolation. Should the Fed proceed with a September adjustment, Kaplan believes policymakers should anticipate the possibility of one or two additional hikes subsequently.

Bond Market Responds to Fed’s Hawkish Messaging

Financial markets responded swiftly to the shifting outlook. Investors offloaded short-term government bonds after Fed Chair Kevin Warsh doubled down on a hawkish tone in statements following the week’s Federal Reserve meeting.

Two-year Treasury yields surged by as much as 17 basis points on Wednesday—marking their largest single-session increase since March. Those yields moderated slightly to 4.17% during Asian market hours on Thursday.

The most recent dot plot revealed that half of Federal Reserve officials now anticipate at least one rate hike before 2025 concludes. This unexpected pivot in the Fed’s summary of economic projections surprised market participants.

Derivatives traders quickly adjusted their positioning. Interest rate swaps now reflect expectations for a quarter-percentage-point increase by October. Prior to this week’s FOMC meeting, market pricing didn’t anticipate any rate movement until March 2027.

According to Kaplan, persistent inflation would indicate that current monetary policy remains insufficiently restrictive.

Reading the Fed’s Projections with Caution

Notwithstanding the more aggressive policy stance, Kaplan advised against overinterpreting the Federal Reserve’s most recent forecasts. He pointed out that the dot plot likely didn’t incorporate the implications of the recent US-Iran agreement and the resumption of normal operations in critical maritime shipping lanes.

“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 Federal Reserve is scheduled to publish updated projections in September. Kaplan suggested the economic landscape could appear significantly different at that juncture.

Kaplan led the Dallas Federal Reserve from 2015 through 2021, participating in policy meetings under the leadership of both Jerome Powell and Janet Yellen.

In a separate observation, he highlighted that the United States is currently experiencing a “historic” surge in capital expenditures, propelled by substantial investments in artificial intelligence infrastructure and computing capacity. He stressed that the Fed must closely track this emerging trend.

Goldman Sachs shares were up 0.78% at the time of reporting.