Goldman Sachs Vice Chairman Rob Kaplan expects the Federal Reserve to raise interest rates in December but cautioned against aggressive tightening, which could harm the economy without effectively curbing inflation. Speaking to CNBC, Kaplan advised policymakers to proceed cautiously due to the economy's mixed performance. He emphasized that the U.S. inflation problem is more structural than cyclical, driven by factors like higher oil prices rather than an overheating economy.
Kaplan warned that a surprise rate hike in October could increase Treasury risk premiums, especially as U.S. debt exceeds 100% of GDP. He noted that higher diesel costs have spread to 40 or 50 other items, including food, exacerbating inflation. Despite this, the latest labor data showed initial jobless claims fell by 6,000 to 194,000 for the week ended October 17, indicating labor market stability.
Treasury yields moved lower on Thursday, with the 10-year yield falling over 11 basis points to 5.032%, and the 30-year yield dropping more than 8 basis points to 5.349%. Kaplan viewed widening credit spreads among highly leveraged borrowers positively, suggesting the market is increasingly scrutinizing credit quality. He also highlighted a disconnect between improving corporate profitability and the financial experiences of consumers without financial assets.
The Consumer Price Index (CPI) rose 3.7% year over year in September, up from 3.4% in August, while producer prices increased 1.3% month over month. According to CME FedWatch, traders priced in an 8.3% chance of a rate hike in October, compared with an 82.5% probability of at least one hike by December.