Episode summary
Why Markets May Be Pricing in Too Many Fed Rate Hikes
Exchanges (Goldman Sachs)
· · 19 min · Hosts: Tucker York, Alison Mass, FX de Mallmann · Guests: Rob Kaplan
Summary
Rob Kaplan argues the Fed’s September rate hike was justified, but he thinks markets are pricing in too many additional increases. He says inflation was still running hot on a month-over-month basis, oil prices had stayed elevated, and the Fed was right to start acting after a period of patience.
Kaplan expects a cautious path from here: one more hike would take policy to roughly 4% to 4.25%, near his estimate of nominal neutral, after which the Fed should pause and reassess. He says the market is building in a risk premium because investors are unsure how Chairman Kevin Warsh will react to incoming data and because oil-related risks could linger longer than expected.
He also argues the economy is unusually split. AI infrastructure and defense spending remain strong, while housing, autos, and other interest-sensitive businesses are already feeling strain. That mix, along with tariffs, immigration constraints, and a supply shock from oil, makes this cycle harder to read than a standard demand-driven slowdown, and leaves the Fed trying to slow the spread of inflation without choking off the stronger parts of the economy.
Key takeaways
- Kaplan expects the Fed may raise rates once more, then pause, with policy around 4% to 4.25% and near neutral.
- He says markets are pricing in more hikes than he thinks are likely, partly because of uncertainty around Kevin Warsh’s reaction function and oil risk.
- The AI infrastructure boom and defense spending are still strong, but housing and autos are already strained by higher rates.
- Kaplan says the Fed funds rate will not slow AI capex much, because financing has already adjusted along the Treasury curve.
- He sees a supply-shock environment—oil, tariffs, constrained labor, and immigration limits—with no textbook precedent for the Fed.
Notable quotes
“I think the market is yes, expecting more hikes than at the moment, at the moment I think is likely”
“The reason two moves resonates with me, that gets you to four, four and a quarter”
“I think the nominal neutral rate is around four, four and a quarter”
“I think you've got a low fire, low hire labor market”
“We've got a few supply shocks in the face of a historic CapEx boom, and so that's a set of factors that I'm not sure there's a textbook you read on how to understand how to deal with that”
How the episode opens
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 this time around. Good to be with you. So, as I just said, we have seen the first hike from the Fed in a number of years under new chairman Kevin Warsh.
Start off, 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 2025. I would not have done the third cut. They were worried about the labor market.
We then get into 2026, 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 going to settle back down. They haven't.
And so, I think they were right to do nothing in July, but 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.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed rate hikes
- neutral rate
- oil shock risk premium
- supply-side shocks
- ai capex and defense spending
Companies and tickers mentioned
- GS
- SPOT
- Goldman Sachs
- Spotify
- Apple Podcasts
Watch the episode
Watch “Why Markets May Be Pricing in Too Many Fed Rate Hikes” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from Exchanges (Goldman Sachs)
-
Playing for Scale: The Future of Sports Investing -
John Waldron on GDP Growth, AI, and the M&A Outlook -
Brookfield’s Connor Teskey on the Real Bottleneck in the AI Buildout -
Goldman Sachs Chairman and CEO David Solomon on AI: Implementation, Accountability, and Jobs -
Why Oil Prices Are Surging Despite Recovering Supply -
Where Chinese Exports Are Gaining the Most Market Share
Exchanges (Goldman Sachs), this episode and its artwork belong to Goldman Sachs. Octagon is not affiliated with the show; this page is an independent summary.
