Goldman Sachs Kaplan: The Federal Reserve's "wait and see" approach in July was completely correct, and it may continue to "kick the can down the road" before September to maintain flexibility
Goldman Sachs Vice President Kaplan believes that the Federal Reserve's decision to hold steady in July was completely correct and recommends maintaining flexibility before September. He pointed out that inflation and deflation pressures are intertwined, with AI infrastructure and tariffs pushing up inflation, while AI applications and China's overcapacity bring about deflation. He is concerned that long-term U.S. Treasury yields are affected by fiscal deficits and suggests that the Federal Reserve Chair explain the decision-making logic at the Jackson Hole meeting to avoid rigid forward guidance
According to the Zhitong Finance APP, Robert Kaplan, Vice President of Goldman Sachs, stated that the Federal Reserve's decision not to raise interest rates in July was "absolutely" the right choice, urging policymakers to keep an open mind before the September meeting. He pointed out that the current inflation and deflation pressures are intertwined, creating a complex "headwind," and a rigid forward guidance could backfire.
"If I see meaningful improvement, I might be inclined to continue 'kicking the can down the road' and hold off," Kaplan said in an interview on Thursday. "But I want to use every moment before September to reassess, avoiding rigidity or preconceived conclusions."
Kaplan's views are rooted in his Wall Street experience (currently serving as Vice Chairman of Goldman Sachs) and his tenure as President of the Dallas Federal Reserve. He observed that the current forces driving inflation include price pressures from AI infrastructure development, while tariffs, labor constraints, and soaring oil prices further exacerbate this pressure. Meanwhile, the widespread application of AI and China's overcapacity are acting in the opposite direction, reinforcing deflationary trends.
"If it weren't for the Iran war and rising oil prices—which I believe have pushed overall inflation higher and spilled over into other items—I guess we might not even be discussing the possibility of interest rate hikes," Kaplan said. The Producer Price Index (PPI) report released on Thursday showed a slowdown in wholesale inflation in the U.S., providing more support for his viewpoint.
Kaplan suggested that Federal Reserve Chairman Kevin Walsh should use his speech at this month's Jackson Hole Global Central Bank Annual Meeting to briefly explain the logic behind the decision to hold steady in July, rather than just making "philosophical" remarks. He noted that the Federal Reserve has a history of overusing forward guidance, which aligns with Walsh's previous criticisms.
Kaplan is more concerned about long-term U.S. Treasury yields than the federal funds rate itself. He stated that the rise in global long-term government bond yields reflects a structural supply-demand imbalance, rooted in the ongoing massive fiscal deficit, rather than Federal Reserve policy.
"In a robust economic environment, you would typically expect deficits to narrow," he said, "but these deficits have not narrowed."
Traders are expressing their unease about this trajectory by downplaying the Federal Reserve's signals of holding steady. The $25 billion 30-year Treasury bond auction held by the U.S. Treasury on Thursday is expected to yield the highest rates since 2001
