Why Markets May Be Pricing in Too Many Fed Rate Hikes

This episode of Goldman Sachs Exchanges features Vice Chairman and former Dallas Fed President Rob Kaplan discussing why markets may be pricing in more Federal Reserve tightening than is warranted. Kaplan points to a divergence between booming AI infrastructure and defense spending and rate-sensitive areas such as housing and autos that are already straining under higher rates.

1. Kaplan expects the Fed to raise rates one more time to roughly 4%–4.25%, then pause to reassess.
2. He attributes market pricing of more hikes to a risk premium that may be related to uncertainties over oil prices and how Fed Chairman Warsh would adjust policy in reaction to economic data.
3. Kaplan says AI infrastructure and defense spending are continuing to boom while interest-rate sensitive parts of the economy, such as housing and autos, are already straining under higher rates.
4. He describes a "low fire, low hire" labor market where tariffs, immigration-driven labor constraints and an oil shock are coinciding with a historic capex boom.