Goldman Sachs' Kaplan: Fed May "Raise Rates Consecutively" in the Fall

The substantial strengthening of the Federal Reserve's hawkish stance and the severe warnings from former officials are shattering the market's expectations of easing, triggering dramatic repricing in both interest rate derivatives and spot markets.

Goldman Sachs Vice Chairman and former Dallas Fed President Rob Kaplan has recently issued a clear warning,If inflation data fails to cool down, the Federal Reserve could restart rate hikes as early as this fall, and it is likely this would not be a one-off move, but rather a series of 2 to 3 consecutive tightenings.

This hawkish rhetoric, combined with Fed Chair Waller's tough signals in fighting inflation and sharply revised official inflation forecasts, has directly resulted in a "dramatic reversal" in swap market pricing. Traders have shifted their expectations for the first rate hike forward significantly from the distant March 2027 to as soon as this October.

The sharp adjustment in policy expectations is quickly spilling over into cross-asset markets. Short-term U.S. Treasuries, which are most sensitive to interest rates, have experienced heavy sell-offs, with the 2-year U.S. Treasury yield posting its largest single-day gain since March, directly triggering a panic flash crash in precious metal markets during Thursday's Asian session, leading gold prices to lose the $4,300 threshold.

Risks of "Consecutive Rate Hikes" Emerging This Fall

In an interview, Rob Kaplan pointed out that if inflation data fails to cool from now until September, the prudent move would be to raise rates in September or during the fall. He emphasized that if inflation remains sticky, it will indicate that current monetary policy is still too accommodative.

Even more critically, Kaplan warned the market to be vigilant against the risks of "consecutive rate hikes." He noted that the Fed’s policy adjustments are rarely isolated events; rate changes usually occur in series of 2 to 3 actions."If action is taken in September, you should be prepared—there may be one or two additional rate hikes." Having served as Dallas Fed President from 2015 to 2021 and witnessed both the Janet Yellen and Jerome Powell eras, Kaplan’s warning based on historical experience serves as a wake-up call for the market.

Official Hawkish Tone and Upward Revision of Inflation Expectations

Kaplan’s warning resonates with the hawkish signals coming from the Federal Reserve itself. At the June FOMC meeting, the Fed kept rates unchanged at 3.50%-3.75%, but the policy statement led by new chair Waller clearly turned more hawkish. The statement officially removed the previous forward guidance on the rate path, no longer reiterating its close attention to both employment and inflation risks, and instead emphasized “price stability” as the primary goal.

The rate dot plot shows that half of decision makers expect at least one rate hike this year. At the same time, the Fed's Summary of Economic Projections significantly raised inflation expectations: this year's median PCE inflation forecast has risen from 2.7% to 3.6%, core PCE inflation from 2.7% to 3.3%, and this year's economic growth forecast was lowered from 2.4% to 2.2%.

In addition, Waller broke with convention by not submitting forecasts for the economic outlook or rate levels. He revealed at the press conference that the Fed has set up five special internal working groups to drive reform, which could include changing the inflation measure, and has placed rate tools as an even higher priority than balance sheet tools.

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