Fed Hold Was Right! Goldman’s Kaplan Warns of Another Bomb

Robert Kaplan, Vice Chairman of Goldman Sachs (GS-US) and former President of the Dallas Federal Reserve Bank, stated on Thursday (13th) that the Federal Reserve's (Fed) decision to hold rates steady in July was 'absolutely the right decision.' He urged policymakers to remain open-minded ahead of the September meeting, carefully observing how inflationary and disinflationary forces interact, and avoiding pre-committing to any policy direction.

Speaking on Bloomberg Television, Kaplan said that if he sees meaningful improvement in inflation over the coming weeks, he could be willing to wait longer before taking action. However, he emphasized using the full period before the September meeting to make a judgment, so as not to lock in a rigid policy stance prematurely.

He pointed out that surges in artificial intelligence (AI) infrastructure investment, tariffs, labor constraints, and soaring oil prices are all pushing prices upward. On the other hand, widespread AI adoption boosting productivity and China's excess capacity are creating disinflationary pressures, leaving the Fed in a more complex policy environment.

Kaplan noted that without the war risk involving Iran and the sharp rise in oil prices—driving overall inflation higher and spreading to other categories—the market might not even be discussing rate hikes today. Thursday's release of the July Producer Price Index (PPI), showing cooling wholesale inflation in the U.S., further supports his view.

He suggested that Fed Chair Kevin Warsh should use this month's Jackson Hole Global Central Banking Symposium to briefly explain the rationale behind the July hold, rather than delivering purely ideological remarks. Kaplan also echoed Warsh's criticism of forward guidance, arguing that the Fed's past overreliance on this tool has, at times of conflicting economic signals, restricted policy flexibility.

Kaplan expressed greater concern about long-end U.S. Treasury yields than the federal funds rate. He argued that rising long-term bond yields globally reflect structural supply-demand imbalances caused by persistently large fiscal deficits—not monetary policy. While fiscal deficits typically narrow during periods of strong economic performance, the U.S. deficit has not shrunk.

Markets have also shown concern about this trend. On Thursday, the U.S. Treasury auctioned $25 billion in 30-year bonds, with expected winning yields reaching their highest level since 2001—indicating that even with the Fed pausing rate hikes, long-term bond markets continue to face pressure from supply and fiscal risks.