Goldman Sachs' Kaplan: The Federal Reserve's "stay put" decision in July was completely correct, and it may continue to "pass the buck" and remain flexible before September.

Robert Kaplan, Vice President of Goldman Sachs, stated that the Federal Reserve's decision not to raise interest rates in July was "absolutely" the correct one and urged policymakers to maintain an open mind ahead of the September meeting. He noted that current inflation and deflationary pressures are intertwined, creating a complex "countercurrent," and that a rigid forward guidance approach could backfire. "If we see meaningful improvements, I might be inclined to continue to 'kick the can down the road' and hold steady," Kaplan said in an interview on Thursday. "But I want to use every bit of time before September to reassess and avoid rigidity or preordained conclusions." Kaplan's views are rooted in his Wall Street experience (he is currently Vice Chairman at Goldman Sachs) and his background as a former president of the Dallas Fed. He observed that the current forces driving inflation include price pressures from the construction of AI infrastructure, and that tariffs, labor constraints, and soaring oil prices have further intensified this pressure. At the same time, the widespread application of AI and China's capacity surplus are working in the opposite direction, reinforcing deflationary trends. "If it weren't for the Iran war and the spike in oil prices which I believe have already pushed up overall inflation and spilled over into other items I suspect we might not even be discussing the possibility of rate hikes," Kaplan remarked. The Producer Price Index (PPI) report released on Thursday showed a slowdown in U.S. wholesale inflation, providing further support for his viewpoint. Kaplan suggested that Fed Chair Kevin Walsh should take advantage of his speech at the Jackson Hole Global Central Bank Symposium this month to briefly explain the logic behind the July decision to hold steady, rather than just making "philosophical" remarks. He pointed out that the Fed has a history of overusing forward guidance, which aligns with Walsh's previous criticisms. Kaplan expressed greater concern about long-term U.S. Treasury yields than about 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 an ongoing massive fiscal deficit rather than Fed 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 signals from the Feds decision to hold steady. On Thursday, the U.S. Treasury's auction of $25 billion in 30-year bonds is expected to yield the highest rate since 2001.