Why Markets May Be Pricing in Too Many Fed Rate Hikes
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The Fed has just raised interest rates for the first time in three years. So was one increase enough to bring inflation down, or should investors expect more rate hikes ahead? I'm Allison Nathan, and this is Goldman Sachs Exchanges. Today, we're unpacking what this shift means for companies, for interest rates, and for confidence in the Fed with Goldman Sachs vice chairman and former Dallas Fed president, Robert Kaplan. Rob, welcome back to exchanges.
Good to be here.
A treat to have you actually in the studio Good be this time around. So as I just said, we have seen the first hike from the Fed in a number of years under new chairman Kevin Walsh. What was your first reaction to that? Did you think that was the right move?
I did think it was the right move. Remember, the Fed did three cuts in the fall of twenty five. I would not have done the third cut. They're worried about the labor market. We then get into '26, we've got tax incentives, we've got an AI infrastructure boom, and then you've got the war with an oil spike. I think the Fed tried to be patient, tried to see if oil prices were gonna settle back down. They haven't. And so I think they were right to do nothing in July, but I I I did believe that September was the time to act, and they did the right thing to raise rates in September.
But let me just ask you a follow-up because did they do the right thing because of inflation concerns or because the market was so convinced it was going to hike that it didn't really have a choice? And is there a difference between those two?
Yeah. They had a choice. When you're sitting inside the Fed, I always think I have a choice. And if I think the market is way off, I can go out and communicate and give feedback to the market. But the problem was month over month, year over year inflation we know is problematic. IE it's in the mid threes, but we understand part of that is oil prices a year ago were in the sixties. They're now close to $100 So that's not a shock. The thing that was problematic is the month over month numbers. I think they were hoping that those would cool and start to approach say 0.2 a month. So annualized 2.5
Right. So if you think about the fact that nine of the 10 officials are expecting at least one more hike, Is that realistic, or are you saying they need to actually hike more? Because the market thinks they're gonna hike more.
The market is anticipating that they're gonna hike more. And if I were on the committee, my mindset would be, let's move in September. I would probably be inclined unless there's a reason to act in October. I'd be inclined to skip October. We'll see if they do. And then look again about moving again in December. Then I want to take a fresh look and see whether or not we need to do more. The reason two moves resonates with me, that gets you to four, four and a quarter. They're at three and three quarters to four right now. I know Kevin Worsch said he doesn't use the neutral rate, doesn't look a
Right. So just to be perfectly clear, you think the market is pricing in too many hikes at
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