Interview, Podcast
Why Markets May Be Pricing in Too Many Fed Rate Hikes
- The Federal Reserve raised interest rates for the first time in three years in September 2026 under new Chairman Kevin Warsh.
- Former Dallas Fed President Robert Kaplan views the September rate hike as the correct move, citing the failure of oil prices to settle after falling in the fall of 2025.
- The decision to raise rates was driven by persistent month-over-month inflation near 3% rather than market pressure alone, though the market had anticipated the move.
- The Fed's dot plot indicated a muted response, with the median projection showing only one additional rate hike and no action in 2027.
- Kaplan attributes the Fed's cautious stance to conflicting economic cross-currents: a booming AI infrastructure sector and strong defense spending versus sluggish auto and housing markets serving lower-to-moderate income consumers.
- Kaplan suggests the Fed should likely skip an October rate increase and instead re-evaluate the economy in December.
- The current federal funds rate stands between 3.75% and 4.00%, with Kaplan estimating the nominal neutral rate is approximately 4.00% to 4.25%.
- Kaplan believes the market is currently pricing in too many future rate hikes, likely due to a risk premium for potential escalation in the Middle East conflict or unresolved oil shocks.
- Kaplan asserts that FOMC members are making decisions free from political pressure, viewing the September hike as a demonstration of Chairman Warsh's independence.
- Treasury yields have risen sharply, with the 10-year yield exceeding 5%, driven by revised CBO deficit estimates and a lack of an announced fiscal plan.
- Capital expenditure on AI infrastructure is being funded significantly through debt, a factor already priced into long-duration bond yields.
- Interest-sensitive sectors, such as small businesses and housing companies with short-term inventory financing, are facing squeezed margins due to higher rates.
- Corporate CEOs remain less concerned with Fed funds rates, focusing instead on equity issuance capabilities and Treasury curve stability.
- Corporate profit shares of GDP are rising while labor income growth remains muted, creating a unique labor market dynamic that differs from traditional overheating models.
- The labor market is characterized as "low-fire, low-hire," where supply shocks and labor force constraints are driving inflation rather than demand overheating.
- A prolonged supply shock (lasting six to eight months or more) risks bleeding into broader price indices (30 or 40 items), necessitating Fed intervention to slow this transmission.
- Upcoming data points to be monitored include the PCE price indicator on September 30th and CPI data in mid-October.
- An October rate hike would be triggered if incoming PCE/CPI data shows inflation firming, accelerating, or exceeding expectations.
- Goldman Sachs Exchanges was recorded on September 22, 2026.