Goldman Sachs Vice Chairman Kaplan issued a stern warning: If inflation data remains stubborn, the Federal Reserve could restart interest rate hikes as early as this fall, and it's highly likely to act consecutively 2 to 3 times. Coupled with the hawkish turn of new Chair Walsh and a sharp rise in official PCE inflation expectations to 3.6%, the market's illusions of easing have completely shattered - the expectation for the first rate hike has moved from March 2027 to this October.

Written by: Zhao Ying

Source: Wall Street Journal

The substantial strengthening of the Federal Reserve's hawkish stance and the serious warnings from former officials are completely crushing the market's hopes for easing, triggering severe repricing in the interest rate derivative and spot markets.

Goldman Sachs Vice Chairman and former Dallas Federal Reserve President Rob Kaplan recently clearly warned that if inflation data does not cool down, the Federal Reserve may restart rate hikes as early as fall, and this is likely not just a single action, but a series of 2 to 3 consecutive tightening steps.

This hawkish statement, combined with Fed Chair Walsh's strong signals against inflation and significantly raised official inflation forecasts, directly led to a "major reversal" in swap market pricing. Traders have pushed the expectation for the first rate hike forward from the distant March 2027 to this October.

The sharp correction in policy expectations quickly transmitted across asset markets. The short-term U.S. Treasuries, most sensitive to interest rates, faced a fierce sell-off, with the two-year Treasury yield posting the largest single-day increase since March, directly triggering panic sell-offs in the precious metals market during Thursday's Asian trading session, causing gold prices to fall below the $4300 level.

Risks of "Series Rate Hikes" Emerging This Fall

In an interview, Rob Kaplan pointed out that if inflation data does not cool down from now until September, a wise move would be to raise rates in September or fall. He emphasized that if inflation remains sticky, it would indicate that current monetary policy is still too loose.

More crucially, Kaplan warned the market to be aware of the risks of "series rate hikes." He pointed out that Fed policy adjustments are rarely isolated events, and interest rate changes typically occur in a series of 2 to 3 actions. "If action is taken in September, you need to be prepared for possibly one or two more rate hikes." Kaplan, who served as president of the Dallas Fed from 2015 to 2021 and experienced the Janet Yellen and Jerome Powell eras, sounded the alarm for the market based on historical experience.

Official Hawkish Tone and Increased Inflation Expectations

Kaplan's warnings resonate with the hawkish signals released by the Federal Reserve. In the June FOMC decision, although the Fed maintained rates at 3.50%-3.75%, the policy statement led by new Chair Walsh has clearly shifted hawkish. The statement officially removed previous forward guidance on the interest rate path and no longer reiterated "closely monitoring risks to both employment and inflation," instead emphasizing "stable prices" as the primary goal.

The dot plot shows that half of the decision-makers expect at least one rate hike this year. Meanwhile, the Fed's economic forecast summary significantly raised inflation expectations: the median PCE inflation expectation for this year increased from 2.7% to 3.6%, while core PCE inflation expectations rose from 2.7% to 3.3%, and the GDP growth forecast for this year was downgraded from 2.4% to 2.2%.

Additionally, Walsh broke from tradition by not submitting forecasts for the economic outlook and interest rate levels. He revealed at the press conference that the Fed has established five special working groups to promote reforms, including potentially changing the metrics used to measure inflation, and prioritizing interest rate tools over balance sheet tools.