Goldman Sachs’ Kaplan: The Federal Reserve may implement “consecutive interest rate hikes” in the fall

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

Rob Kaplan, Vice Chairman of Goldman Sachs and former President of the Dallas Fed, has issued a clear warning: If inflation data fails to cool down, the Fed may restart rate hikes as early as this fall, and it is likely to be a series of 2 to 3 consecutive tightening actions rather than a single move.

This hawkish statement, combined with Fed Chair Walsh's tough signals on fighting inflation and sharply revised official inflation forecasts, has directly led to a "major reversal" in swap market pricing. Traders have pulled forward their expectations for the first rate hike from the distant March 2027 to October of this year.

The sharp revision of policy expectations quickly spread across asset markets. Short-term U.S. Treasuries, which are most sensitive to interest rates, suffered intense sell-off. The yield on 2-year U.S. Treasury bonds saw its biggest single-day gain since March, directly triggering a panic flash crash in the Asian trading session’s precious metals market on Thursday, with gold prices falling below the $4,300 mark.

Risk of “Consecutive Rate Hikes” Emerging in Fall

Rob Kaplan noted in an interview that if inflation data has not cooled from now until September, the wise course of action would be to raise rates in September or the fall. He emphasized that if inflation remains sticky, it will indicate that the current monetary policy is still too loose.

More importantly, Kaplan warned the market to be alert to the risk of “consecutive rate hikes.” He pointed out that the Fed’s policy adjustments are rarely isolated events, and interest rate changes usually occur in a series of 2 to 3 consecutive actions. “If action is taken in September, you need to be prepared for possibly one or two more hikes.” Having served as Dallas Fed President from 2015 to 2021 and experienced both the Janet Yellen and Jerome Powell eras, Kaplan’s warning based on historical experience is sounding the alarm for the market.

Official Hawkish Tone and Upward Revision of Inflation Expectations

Kaplan’s warning resonates with the hawkish signals released by the Fed. In the June FOMC decision, the Fed kept rates unchanged at 3.50%-3.75%, but the policy statement led by new Chair Walsh has clearly turned more hawkish. The statement officially removed the previous forward guidance for the rate path, no longer reiterating “closely monitoring both employment and inflation risks,” instead emphasizing “price stability” as the primary goal.

The dot plot shows that half of the policymakers expect at least one rate hike this year. Meanwhile, the Fed’s Summary of Economic Projections sharply raised inflation expectations: The median PCE inflation forecast for this year rose from 2.7% to 3.6%, core PCE inflation forecast rose from 2.7% to 3.3%, and the economic growth forecast for this year was lowered from 2.4% to 2.2%.

In addition, Walsh broke tradition by not submitting forecasts for the economic outlook or rate levels. At the press conference, he revealed that the Fed has set up five special task forces to promote reform, which may include changing the indicators used to measure inflation and prioritizing rate tools over balance sheet tools.

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