Interview, Fireside Chat, Earnings Call
The Fed's Tightrope: Inflation, Labor, and the Path Ahead
- Goldman Sachs Research forecasts a December rate cut and projects "a couple more cuts in 2026," contrasting with market expectations of three cuts.
- Robert Kaplan warns that market probabilities for a December cut are "way too high," predicting the Fed may find the decision "much tougher" due to conflicting signals and a "vacuum of data" from the government shutdown.
- Kaplan anticipates three headwinds—tariffs, restrictive immigration policies, and the government shutdown—will suppress labor market strength, with tariff effects expected to be more pronounced for small businesses in the near term.
- Specific impacts of uncertainty include workers on provisional immigration status reducing work, schooling, and spending, while tariff-related price increases are not expected to be felt until 2026.
- Three tailwinds—tax incentives (tax on tips, overtime, accelerated depreciation), regulatory reform, and the AI data center power boom—are expected to support growth "coming into 2026."
- The government shutdown is expected to resolve in the short term, potentially reducing or becoming a tailwind by early next year, though economic impacts may remain weak for the "next couple of months."
- Inflation is expected to run "sideways probably for a while" rather than disinflating immediately, with service sector cost increases contributing to sticky inflation, potentially kicking in latter half of next year.
- Business activity is not forecast to fall off a cliff, but small businesses face survival risks over the next "one to two years" due to cost pressures, leading to "belt tightening" rather than immediate price passes.
- The nominal neutral Fed funds rate is estimated at "about 3.5%, 3.75%" given an underlying inflation rate between 2.75% and 3%, though Chair Powell characterizes the December 9th and 10th decision as a "game time decision."
- Kaplan expects the Fed to be "very uncomfortable" with a neutral stance given inflation is reported as running "7,500 basis points above target," and notes global concerns about Fed independence may explain gold's "50 percent plus" rally.
- A new Fed chair might initiate discussion on extending the average maturity of the Fed portfolio by buying more long-term bonds, and the market is advised to exercise caution unless severe labor weakening or significant inflation improvement occurs.
- Monitoring will focus on divergent spending between low-moderate and affluent consumers, alongside service sector business conditions and pricing expectations which constitute the bulk of the economy.