Goldman Sachs’ Kaplan Backs Fed’s July Rate Hold, Calls for Data-Driven Flexibility Ahead of September

Goldman Sachs Vice Chairman Rob Kaplan, a former president of the Federal Reserve Bank of Dallas, has strongly endorsed the central bank’s choice to leave interest rates unchanged at its July meeting. Kaplan characterized the move as the right call given the time available to assess inflation trends and broader economic conditions before the September gathering of policymakers.

The Federal Open Market Committee voted 9-3 on July 29 to maintain the target range for the federal funds rate at 3.50% to 3.75%. Three regional bank presidents preferred a quarter-point increase. Before the decision, markets had assigned roughly a one-in-three chance of a hike.

Support for the July Pause

Kaplan said officials still have adequate opportunity to examine inflation and economic activity ahead of the next policy meeting. He stressed the importance of avoiding rigid or predetermined views while reviewing the data that will arrive in the intervening weeks.

His comments reflect a personal assessment of monetary policy rather than any formal Federal Reserve position, as Kaplan is no longer a policymaker. He currently serves as vice chairman of Goldman Sachs and sits on the bank’s management committee.

Competing Forces on Inflation

Kaplan highlighted a complex mix of factors that are pushing inflation in opposing directions. On the upside, he pointed to heavy investment in artificial intelligence infrastructure, tariffs, constraints on labor supply, and higher oil prices. Building data centers requires substantial resources including power, land, equipment, and workers, which can add pressure on prices. Tariffs may raise costs of imported goods, while labor shortages can drive wage increases. Elevated energy prices feed through to fuel, transport, and production costs.

At the same time, wider adoption of artificial intelligence applications has the potential to boost productivity, lower costs for businesses, and support a faster pace of disinflation. Kaplan argued that the Federal Reserve should evaluate these developments in a comprehensive manner rather than focusing on any single influence.

Recent inflation readings provided some evidence of progress. The Consumer Price Index rose 0.1% in July and 3.4% over the prior year, in line with expectations. Core CPI, which excludes food and energy, increased 0.2% monthly and 2.5% annually. The yearly core rate edged lower from 2.6%, though overall inflation remains above the central bank’s 2% target.

Labor market data added another layer. Nonfarm payrolls declined by 23,000 in July, well below forecasts for a gain of around 80,000 to 85,000. Downward revisions also removed a combined 103,000 jobs from the May and June figures. After the report, market-implied odds of a September hold rose notably.

Message for Jackson Hole and Longer-Term Yields

With the Jackson Hole Economic Policy Symposium approaching, Kaplan suggested that Federal Reserve Chair Kevin Warsh use the occasion to provide a clear, concise explanation of why rates remained unchanged in July. He indicated that a purely philosophical address would be less useful when markets are seeking insight into the committee’s reasoning. Such clarity, he said, need not lock the Fed into a specific September path.

Beyond the near-term decision, Kaplan expressed greater concern about long-term U.S. Treasury yields than about the federal funds rate itself. He attributed the rise in longer-dated yields across several countries primarily to a structural imbalance between the supply of government debt and investor demand. Persistent budget deficits have led to continued heavy issuance of bonds, requiring markets to absorb growing volumes of paper.

The U.S. federal budget deficit reached a record $432 billion in July, bringing the fiscal-year total through that month to $1.799 trillion. Even after adjustments for calendar-related benefit payments, the monthly shortfall stood at $333 billion, an 18% increase from a year earlier. A recent $25 billion auction of 30-year Treasury bonds produced a yield of 5.22%, the highest borrowing cost for that maturity since 2001.

Kaplan noted that elevated long-term yields can persist even when the policy rate remains steady, underscoring the distinction between short-term monetary settings and the fiscal forces shaping the bond market. These dynamics influence mortgage rates, corporate financing costs, and the government’s own borrowing expenses.