Fed’s July pause was the right move – but risks are far from over, Kaplan warns
Goldman Sachs Vice Chairman Robert Kaplan believes the Federal Reserve made the correct – and necessary – choice when it opted to leave interest rates unchanged in July. At the same time, he stresses that the central bank is far from declaring victory over inflation and should resist locking itself into any predetermined path ahead of its September meeting.
Why Kaplan backs the July pause
In July, the Federal Open Market Committee (FOMC) voted 9-3 to keep the federal funds rate in a range of 3.50% to 3.75%. Kaplan, a former president of the Federal Reserve Bank of Dallas, argued that this pause gives policymakers crucial time to evaluate whether inflation is genuinely easing or merely stalling at an uncomfortably high level.
Bloomberg reported on August 13 that Kaplan saw the July decision as appropriate, even though inflation is still above target and the vote was unusually split. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan all dissented, favoring a 0.25 percentage point hike instead of a pause.
For Kaplan, that split underscores the uncertainty inside the Fed. He insists that officials should use the weeks leading up to the September 15-16 meeting to weigh every new data point rather than committing to a rate move too early.
“If I see meaningful improvement, I might be willing to stay put,” he said, emphasizing that he wants to use “every moment before September” and avoid “rigidity or preconceived notions” about the next step.
Inflation data: progress, but not mission accomplished
Recent inflation figures offer some relief but not enough for complacency. According to the Bureau of Labor Statistics, consumer prices in July rose just 0.1% on the month and 3.4% compared with a year earlier, a slight slowdown from June’s 3.5% annual rate.
Core inflation – which strips out volatile food and energy costs – increased 0.2% over the month and 2.5% over the year. That annual rate edged down from 2.6% in June. Yet the energy index was still 14.7% higher than a year earlier, underscoring how elevated energy costs continue to ripple through the economy.
Kaplan’s stance is that these numbers point in the right direction but still leave the Fed in a tight spot: inflation is cooling, yet remains above the 2% target, and some underlying forces could easily reignite price pressures.
Conflicting inflation forces: why the outlook is murky
Kaplan highlights that the forces shaping inflation are pulling in opposite directions. On one side are powerful drivers of higher prices:
– Artificial intelligence investment is fueling demand for electricity, building materials, data centers, high‑end chips, and specialized labor.
– Tariffs are raising the cost of imported goods and key inputs for businesses.
– Labor constraints mean companies must pay more to attract and retain workers, especially in sectors already struggling with shortages.
– Elevated oil prices push up transportation, manufacturing, and household energy costs.
In his view, these factors could make it harder for inflation to glide smoothly back to 2%. Investment booms, trade barriers, and capacity bottlenecks all risk keeping cost pressures elevated for longer than markets currently expect.
The AI paradox: inflationary now, disinflationary later
Artificial intelligence plays a particularly complex role in Kaplan’s analysis. In the near term, he expects AI‑related spending to be inflationary. Building data centers, upgrading power grids, and hiring highly skilled engineers and technicians all require significant capital and labor, driving up demand and prices in those sectors.
Over a longer horizon, however, the same technology could be a powerful disinflationary force. As businesses deploy AI to streamline operations, automate routine tasks, and optimize supply chains, they may be able to produce more with the same – or even fewer – workers and assets. That productivity boost can help offset wage increases and other cost pressures, ultimately lowering unit costs and dampening inflation.
Kaplan’s message is that the Fed has to navigate through this transition carefully: tightening policy too much during the investment phase risks stifling growth and innovation, while being too lenient could entrench higher inflation before the productivity payoff arrives.
Tariffs, labor, and oil: persistent upward pressures
Beyond AI, Kaplan points to three more durable inflation drivers:
– Tariffs: When import duties rise, companies importing goods or components typically face higher costs. Some absorb part of that hit, but much of it is passed on to consumers in the form of higher prices. Tariffs can also disrupt supply chains, forcing firms to source from higher‑cost suppliers.
– Labor shortages: Demographic trends, skills mismatches, and shifting worker preferences have left many employers struggling to fill vacancies. To compete for talent, they increase wages and benefits. That’s positive for incomes, but can fuel price increases if productivity does not keep pace.
– Oil prices: Expensive oil feeds into nearly every corner of the economy – from freight and air travel to plastics, fertilizers, and household utilities. These cost increases can be slow to reverse, particularly if geopolitical tensions or production cuts keep energy markets tight.
The Fed itself acknowledged in its July statement that inflation remained “elevated in part because supply shocks” in sectors such as energy had driven prices sharply higher.
Other Fed voices: how divided is the central bank?
Kaplan’s call for patience and flexibility sits within a broader internal debate about how aggressive the Fed should be.
Chicago Fed President Austan Goolsbee has labeled inflation the primary challenge for the U.S. economy, even as he characterizes the labor market as stable but somewhat fragile. Although he does not vote on the FOMC in 2026, his comments reflect the concern many officials still have about price stability.
Richmond Fed President Tom Barkin has echoed Kaplan’s concerns, citing tariffs, firm oil prices, and surging AI‑related demand as ongoing sources of inflation pressure. Barkin has said it remains an “open question” whether another rate increase will be needed to return inflation to 2%.
Cleveland Fed President Beth Hammack, by contrast, has argued for a more forceful approach. In an August 13 speech, she maintained that rates should rise again promptly, pointing out that inflation has remained above target for more than five years. She also warned that sustained business borrowing and investment could prolong or even intensify inflation if not offset by tighter policy.
These differing perspectives inside the Fed help explain why Kaplan is so adamant that the central bank avoid over‑promising and instead react to incoming data.
Why Kaplan is more worried about long‑term yields than the policy rate
While much of the public debate focuses on the Fed’s short‑term policy rate, Kaplan is increasingly concerned about movements in longer‑term Treasury yields. Rising yields on 10‑year and 30‑year government bonds can tighten financial conditions even if the Fed holds its policy rate steady.
Higher long‑term yields can:
– Drive up mortgage rates, cooling housing demand and construction.
– Increase borrowing costs for businesses issuing bonds to finance investment.
– Reprice risk across global markets, affecting asset valuations and credit spreads.
If long‑term yields climb too far, too fast, they can act as a de facto rate hike, slowing the economy independently of the Fed’s formal decisions. Kaplan’s focus on this area suggests he sees the bond market as a critical signal of how tight policy already is – and how much more tightening the economy can realistically absorb.
The case for flexibility ahead of the September meeting
Kaplan’s central message is that the Fed must remain nimble. With inflation moderating but not yet on a guaranteed downward path, and with powerful structural forces still at play, he argues against committing in advance to either another hike or an extended pause.
Instead, he advocates a data‑dependent strategy built around three key questions:
1. Is inflation clearly and sustainably moving toward 2%?
2. Are energy, tariffs, and AI‑driven investment pressures easing, stabilizing, or intensifying?
3. How tight are overall financial conditions, including long‑term yields and credit markets?
Only by reassessing these factors repeatedly, he suggests, can the Fed avoid both the risk of over‑tightening – which could trigger an unnecessary downturn – and the danger of allowing inflation expectations to drift higher.
What Kaplan wants to hear from Warsh at Jackson Hole
Kaplan is also urging Fed Chair Kevin Warsh to use his upcoming remarks at the Jackson Hole symposium to clarify July’s decision not to raise rates. Rather than delivering only a broad essay on monetary policy doctrine, Kaplan wants Warsh to offer a concise, concrete explanation of the central bank’s thinking.
He believes the chair should:
– Spell out the key economic indicators that tipped the balance in favor of a pause.
– Describe how the Fed weighs conflicting forces like AI‑related investment and energy prices.
– Reiterate the commitment to bringing inflation back to 2% without suggesting a pre‑set path for rates.
Since taking over as chair in 2026, Warsh has scaled back the Fed’s reliance on detailed forward guidance, forcing investors and businesses to lean more heavily on real‑time data on employment, inflation, and growth. The July statement reflected this more reserved approach, offering limited direction about the likely path of policy beyond emphasizing a data‑dependent stance.
Kaplan accepts the value of that shift – it allows the Fed to adjust quickly when conditions change – but believes July’s move was contentious enough that a brief, plain‑spoken explanation would help reduce uncertainty.
What it means for households and businesses
For households, Kaplan’s analysis suggests that borrowing costs may not fall quickly, even if the Fed keeps its policy rate on hold for a while. Mortgage rates and credit card interest are heavily influenced by longer‑term yields and banks’ funding costs, both of which can remain elevated in a world of lingering inflation risks.
Businesses face a similarly mixed picture. On one side, a pause offers some relief compared with an immediate additional hike. On the other, higher long‑term yields, wage pressures, and expensive energy make financing and operations more challenging. Companies investing heavily in AI infrastructure may feel this most acutely in the short run, even if they hope to reap productivity gains later.
The broader strategic challenge for the Fed
The situation Kaplan describes highlights a broader strategic dilemma: the Fed is trying to guide the economy through overlapping structural shifts – digital transformation, new industrial policies, changing trade patterns, and demographic change – using tools designed largely for cyclical booms and busts.
In such an environment, neat textbook relationships between interest rates, inflation, and unemployment can break down. That makes flexibility, humility, and constant reassessment essential. Kaplan’s endorsement of the July pause is less a sign of dovishness than a recognition that policy errors become more costly when the underlying economy is in flux.
As the September meeting approaches, the Fed will have to decide whether the recent moderation in inflation is durable enough to justify another hold, or whether persistent pressures from energy, tariffs, and investment require additional tightening. Kaplan’s view is clear: keep all options open, watch the data closely, and explain the reasoning transparently – starting with Jackson Hole.