Why Markets May Be Pricing in Too Many Fed Rate Hikes
Former Dallas Fed President Robert Kaplan discusses the Fed's September 2026 rate hike, arguing that the market is pricing in too many future hikes given mixed economic signals. He believes two total moves (to 4-4.25%) would bring rates to neutral, with the economy showing strength in AI and defense spending but weakness in interest-sensitive sectors like housing and autos.
Summary
In this Goldman Sachs Exchanges episode from September 22, 2026, Robert Kaplan, Vice Chairman of Goldman Sachs and former Dallas Fed President, analyzes the Federal Reserve's decision to raise interest rates for the first time in three years under new Chair Kevin Warsh. Kaplan supported the September rate hike, citing persistent month-over-month inflation running near 3% annualized rather than the Fed's hoped-for 2.5%, despite acknowledging that some inflation is driven by oil price shocks from year-ago lows.
Kaplan argues the market is currently pricing in more rate hikes than are likely necessary. He notes that nine of ten FOMC officials expect at least one more hike, but believes a measured approach of skipping October and potentially acting again in December would be more appropriate. His reasoning centers on the concept of a neutral rate, which he estimates at 4-4.25% in nominal terms, suggesting that two total hikes would bring the Fed to neutral territory and possibly one more to be slightly restrictive.
The economic backdrop reveals significant cross-currents: the AI infrastructure boom and defense spending are robust and already pricing in expected rate increases, while interest-sensitive sectors like housing, autos, and business lending to small and moderate-income consumers are sluggish. Kaplan emphasizes that the Fed's main tool—the federal funds rate—won't slow the AI build but will squeeze vulnerable borrowers reliant on short-term financing.
On fiscal matters, Kaplan highlights concern over an expanding federal deficit despite strong nominal growth of nearly 5%, suggesting government spending may be higher than realized. Treasury yields, particularly long-duration bonds, are being driven more by deficit concerns and oil prices than by Fed policy expectations, as the market has already priced in rate increases.
Kaplan also discusses the unique challenge posed by multiple supply shocks—COVID, energy, tariffs, and labor constraints—occurring simultaneously with a historic capital expenditure boom. He argues that while the Fed cannot eliminate supply shocks, raising rates can slow their transmission to other price categories, preventing broader inflation creep. He distinguishes between a "low-fire, low-hire" labor market dynamic where the usual relationships between unemployment, hours worked, and wages don't necessarily signal overheating.
Regarding Fed transparency and independence, Kaplan expresses confidence that FOMC members are acting without political pressure and notes that Chair Warsh is attempting to demonstrate independence, though markets continue to scrutinize his reaction function. He suggests reading Fed presidents' speeches provides good insight into internal debates. Finally, he indicates that upcoming inflation data (PCE on September 30th and CPI in mid-October) will be critical to determining whether an October meeting produces action or waiting until December is warranted.
About this episode
Markets may be pricing in more tightening by the Federal Reserve than is warranted due to a divergence playing out in the economy, according to Goldman Sachs Vice Chairman and former Dallas Fed President Rob Kaplan. In the Goldman Sachs Exchanges podcast, Kaplan notes that while artificial intelligence (AI) infrastructure and defense spending are continuing to boom, interest-rate sensitive parts of the economy, such as housing and autos, are already straining under higher rates. Taken together, these crosscurrents are creating a more muted response from the Fed. Key takeaways: The Fed may still hike, but not much: Kaplan expects the Fed to raise rates one more time to bring rates to roughly 4%–4.25%, then pause to reassess. The markets, however, are pricing in more hikes, which Kaplans attributes to a risk premium from investors that may be related to uncertainties over oil prices and how Fed Chairman Warsh would adjust policy in reaction to economic data. The neutral rate still matters: Kaplan says this policy rate, while not the “be all,” is still relevant. Kaplan thinks another rate hike would probably push Fed policy above the neutral rate and be “slightly restrictive” for the economy. A shock without a playbook: Kaplan describes an economy with a "low fire, low hire" labor market where tariffs, immigration-driven labor constraints, and an oil shock are coinciding with a historic capex boom—a supply-side setup with no textbook precedent. That shock is forcing the Fed to focus on containing the "bleed" of inflation into other goods, he says. Date of recording: September 22, 2026 The opinions and views expressed herein are as of the date of publication, subject to change without notice, and may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The material provided is intended for informational purposes only, and does not constitute investment, legal, or tax advice, a recommendation from any Goldman Sachs entity to take any particular action or be used as a basis for any other investment decision, or an offer or solicitation to purchase or sell any securities or financial products. Any forward-looking statements, case studies, computations or examples set forth herein are for illustrative purposes only. Past performance is not indicative of future results. Neither Goldman Sachs nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the statements or information contained herein and disclaim any liability whatsoever for reliance on such information for any purpose. Each name of a third-party organization mentioned is the property of the company to which it relates, is used here strictly for informational and identification purposes only and is not used to imply any sponsorship, affiliation, endorsement, ownership or license rights between any such company and Goldman Sachs. This material should not be copied, distributed, published, or reproduced in whole or in part or disclosed by any recipient to any other person without the express written consent of Goldman Sachs. A transcript is provided for convenience and may differ from the original video or audio content. Goldman Sachs is not responsible for any errors in the transcript. © 2026 Goldman Sachs. All rights reserved. Learn more about your ad choices. Visit megaphone.fm/adchoices
Key Insights
- Kaplan argues that the market is pricing in more Fed rate hikes than are likely necessary, building in risk premiums for uncertainty about Chair Warsh's reaction function and the potential for sustained high oil prices.
- He contends that persistent month-over-month inflation near 3% annualized, rather than the Fed's target of 2.5%, justified the September rate hike, even though part of the inflation reflects oil price shocks beyond the Fed's control.
- Kaplan claims the Fed's primary tool—the federal funds rate—cannot slow the AI infrastructure boom or defense spending, which are already pricing in expected increases, meaning rate hikes will primarily squeeze interest-sensitive borrowers in housing, autos, and small business.
- He argues that multiple simultaneous supply shocks (COVID, energy, tariffs, labor constraints) occurring alongside a historic capital expenditure boom represent an unprecedented economic situation without a clear policy textbook, requiring the Fed to focus on preventing inflation transmission to other categories rather than stopping the shocks themselves.
- Kaplan observes that profit's share of GDP is rising while labor's share remains muted, creating resilient corporate margins but leaving low-to-moderate income workers struggling despite nominal wage gains, presenting a different policy challenge than traditional labor market overheating scenarios.
Topics
Transcript
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 Alison 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 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 Warsh. What was your first reaction…
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