MNI INTERVIEW: Fed September Hike Is A Close Call - Kaplan

The Federal Reserve should seriously consider raising interest rates at its September meeting or later this year because inflation remains uncomfortably high, but the decision to hike is not clear cut given how much price pressures are being driven by supply shocks, former Dallas Fed President Robert Kaplan told MNI.

“I actually think this is a difficult decision to make and I would be very open-minded going into September to taking some action, raising rates,” said Kaplan, now vice chairman of Goldman Sachs, in a telephone interview. “But it’s not a no-brainer. I have arguments on both sides.”

One obvious motivation for rate hikes is an inflation rate that has been above target for over five years and has shown very little improvement over the past year – and a policy rate level that Kaplan does not think is particularly restrictive. 

“The oil spike and the war has clouded all this where you're getting readings now solidly in the threes, and if that's the case, it's clear then the Fed is somewhere between 25 and 75 (basis points) too low,” he said.

SUPPLY DRIVEN

Much of what has been keeping inflation above target is a series of supply shocks, including tariffs, constraints on labor force growth due to immigration reform, and the spike in oil prices related to the Iran war, said Kaplan.

“At the same time we have a boom in AI infrastructure spending which strains all those supply constraints. Raising the fed funds rate may be necessary but it’s not a uniquely well suited tool to deal with a supply shock,” he said. 

In addition, Kaplan said business activity outside AI related sectors is sluggish, and there is little sign of overheating in the labor market or consumer spending. Those factors argue for a wait-and-see approach that allows the Fed to hold rates where they are.  

“Inflation has been above target and sticky but the reasons have been, in my opinion, supply related,” he said. 

LESS NOISE

Against that backdrop, Kaplan is sympathetic to Warsh’s desire to provide less forward guidance and that his colleagues approach each meeting with an open mind, rather than coming in with hardened preconceptions about the direction of policy.  

Still, the former policymaker is hopeful that the chairman can find a way to more effectively explain the thinking behind the latest policy decision to hold rates steady last month. (See: MNI: Warsh Needs To Restore Confidence, Former Officials Say) 

“I would suggest that he use this as an opportunity to insert four or five sentences to explain the rationale for the move in July,” said Kaplan. “The committee voted to keep rates as they are in July. Here’s why, here is the nature of the discussion.”

Beyond that, Kaplan thinks Warsh is wise to not pre-commit to future actions that look highly uncertain and could box in the FOMC. “I agree with him about being more careful about forward guidance.”

MNI INTERVIEW: Ex-BLS Chief - AI Impact On Labor Small So Far

Labor markets all over the world are on the cusp of being affected by AI, but impacts in America are limited so far, former Bureau of Labor Statistics commissioner Erika McEntarfer told MNI, warning that policymakers need to be ready for a variety of economic outcomes. 

"So far there's very few signs that AI is replacing workers at scale," she said. That runs opposed to predictions for years now from AI leaders that a wipeout in white collar jobs is eminent.

On the current outlook, McEntarfer expects Friday's preliminary payroll benchmark to be positive -  though not particularly large - for the first time since 2022. She said low rates of churn and hiring suggest a labor market that has more slack than the low unemployment rate would otherwise suggest. That is hitting young workers particularly hard, she added. 

McEntarfer stressed that early evidence is hardly the last word on the future of work in an AI world and recommended that policymakers prepare for a variety of outcomes. (See: MNI INTERVIEW: AI Exacerbates Job, GDP Volatility - Fed's Sly) 

"It is very important to not over-torque on any one forecast of what you think the impacts will be, and instead to have policy options that will dial up if certain impacts take place," she said, noting the failures of unemployment insurance during Covid. 

LABOR STABILITY

McEntarfer served as Bureau of Labor Statistics commissioner from 2024 until August 2025, when she was fired by President Donald Trump after a weak jobs report, a dismissal widely seen as politicization of national statistics. Before the BLS, she spent time at the White House Council of Economic Advisers, the Treasury and the Census Bureau. She is now a fellow at Stanford’s Institute for Economic Policy Research.

There is little evidence of AI depressing employment or job postings in the most highly-exposed occupations, she said, even if it could be creating pockets of disruption that aren’t easily visible in aggregate data.

"Even when you drill down into occupations that are more exposed to disruption from AI, what you largely see is employment and unemployment trends that are very stable," she said. "There's actually been a surge in job postings for software developers in the last few months. Probably not what anyone was expecting to see, given all of the fears about AI replacing software developers."

Firms spending the most on AI are actually adding more workers than those spending less, McEntarfer said. "We're not seeing the big spenders automating a lot of work. We're instead seeing them investing."

AI could be one reason for the slowdown in hiring of young workers, but a mix of potential culprits also includes increased remote work, she said.

PRODUCTIVITY 

AI’s impact on worker productivity is mixed but generally positive, while firm adoption has accelerated unevenly across the economy. 

"On the micro side, there is actually a fair amount of evidence that AI does improve productivity in certain tasks among certain individuals," she said, pointing to evidence concerning customer service agents, coders, and writing. "The disconnect is whether any of this is translating into increased productivity in the economy writ large."

The rise in productivity in the last few years started before the launch of ChatGPT and probably represents post-pandemic restructuring of jobs, capital, and processes, she said. 

BLS DATA 

McEntarfer has confidence in the continued reliability of BLS data, despite resource constraints. Staffing is down about 20% compared to the start of 2025, mostly due to DOGE and voluntary resignations, she said.

"They are starting to hire again at BLS, but 20% of the workforce is a lot to replace, so that will take a while. It does impact the amount of data that can be collected," McEnarfer said. (See: MNI INTERVIEW: Mounting BLS Pressure Harmful For Data- Groshen) 

"I can vouch for the accuracy and lack of interference in the data up until the moment that I was fired. Since my firing, the senior career servants at BLS who are running the agency, have been very clear that if there is interference, they will there will be mass resignations and there will be whistles blown to the press," she said. 

MNI: Warsh Needs To Restore Confidence, Former Officials Say

Federal Reserve Chairman Kevin Warsh needs to make clear in his Jackson Hole speech what might lead to him to raise interest rates this year in order to win back market confidence, even if he fails to commit to a pre-specified rate path in keeping with his dislike of forward guidance, former Fed officials and staffers told MNI.

The time for vague comments about the economy from the Fed chair is over, they said, if a wobbly Treasury market is to regain its anchor. 

“Ideally, he speaks about the monetary policy outlook and gives some detail about how he is thinking about it.  Not forward guidance, but information about his monetary policy reaction function and discussion about the economic outlook,” said William Dudley, former president of the New York Fed.   

“Alternatively, if he picks a different topic, say the balance sheet or coordination with the Treasury, or AI and productivity, it needs to be substantive. The worst outcome would be a vague speech that talks about the task forces’ work—that would just be seen, I suspect, as more of the same.”

Former Boston Fed President Eric Rosengren agrees, saying Warsh does not need to provide forward guidance but does need to "provide a coherent explanation for how the inflation rhetoric is consistent with actions taken to date."

Longer-dated bonds sold off sharply following Warsh’s July press conference as investor doubts grew about the Fed’s commitment to its 2% target, a downturn that eventually prompted intervention by the Treasury in the form of an announcement of increased buybacks. (See MNI INTERVIEW: Ex-CBO Chief Says Yields Will Likely Rise More)

The Treasury move has complicated a key tenet of Warsh’s move away from forward guidance, which was to glean a clearer signal of where rates should be headed from financial markets themselves.

INFORMATION VACUUM 

“The question really is what's he going to say about their policy framework -- that's the real issue, if anything. He obviously would probably prefer to have more information from the five task forces,” said Steven Cecchetti, a former New York Fed economist and BIS official.  

“My prediction is he's going to say, I don't really have much to say because I'm waiting for my task forces to report, and on current conditions, I've had my say in the press conference, and you read our minutes -- see you later.”

Michael Feroli, a former Fed economist now at JP Morgan, thinks that might be insufficient. He says the solution could be even simpler.

“I think he needs to say what every other Fed speaker has found it easy to say: that if inflation remains too high the Fed will need to raise the fed funds rate,” Feroli said. 

FLESHING OUT

Former Fed board staffer Nathan Sheets says the central bank needs to do a better job at not needlessly exacerbating market volatility. "The big drivers of the uncertainties in the back end of the curve are fiscal, but the Fed's role is to dampen those concerns, not be an amplifier of the term premiums," he said. 

"At some point Warsh is going to have to put down a marker that all this rhetoric that he's advanced on inflation, his commitment to price stability, and bringing it back actually means something and it's not just words."

Sheets suggested that this can be achieved without forward guidance. "He's got to share more of a view, more of a strategy, more of a reaction function," Sheets said. "Where is the economy? What's driving inflation, and when's it going to come down? What's the role of monetary policy? You can do all of that without giving formal forward guidance."

That was also the view of former New York and Dallas Fed economist Joseph Tracy, who believes Warsh can curtail forward guidance without depriving the market of the information it needs to adequately price rates across the curve. 

"It's really important for the markets to be able to think like the Fed and better predict those future policy decisions that -- through that expectations channel -- will be better embedded in longer-term interest rates, which are going to affect financial market conditions," Tracy said. "That's where I think it would be a mistake if dialing back to communications makes it even harder to understand how the FOMC is going to be adjusting its policy thinking."

MNI INTERVIEW: Risks To Fed Independence Growing

Many of the conditions that would see the Federal Reserve under heightened pressure to accommodate Washington’s growing financing needs are already in place, with the latest being Treasury Secretary Scott Bessent's attempt to suppress long-term bond yields, economists Stephen Cecchetti and Kim Schoenholtz told MNI. 

Their warning comes as the federal debt burden rises, interest costs as a share of GDP near a record, and President Donald Trump openly presses for lower interest rates. If investors begin to doubt the Fed's willingness or ability to resist political pressure, these forces could make it harder for the central bank to maintain its inflation target, they said. 

"We're a long way from being Turkey or Argentina, but we are moving in a direction where long-term interest rates could easily go higher and where it can become more difficult for the Federal Reserve to achieve its long-term inflation objective. And that is extremely worrisome," said Cecchetti, former head of the monetary and economic department at the Bank for International Settlements. 

“It’s not that we’re seeing clear evidence that the Fed is responding to fiscal pressures. We’re not there yet,” added Schoenholtz, former Citigroup global chief economist. “But a lot of the factors that drive fiscal dominance are in place.”

RED FLAGS

Bessent's intervention to prop up long-term U.S. government bonds after the 30-year Treasury yield topped 5.3% this month -- its highest since 2007 -- is another red flag, according to the two economists who co-author the Money, Banking, and Financial Markets blog. 

"The Treasury secretary is using gimmicks to try to alter long-term yields rather than focusing on the standard therapy of trying to reduce the primary deficit. That raises questions about fiscal management again," Schoenholtz said. 

With the Congressional Budget Office projecting the U.S. debt ratio could rise by another 20 percentage points over the coming decade under current policy, the point at which investors will seriously question the solvency and sustainability of the U.S. fiscal position becomes more real, they said. (See MNI INTERVIEW: Ex-CBO Chief Says Yields Will Likely Rise More)

"It doesn't matter how competent a central banker you are or how committed you are to your objectives. What fiscal dominance is about is it's the fiscal authority not giving you an environment in which you can actually do your job," Cecchetti said. 

For now, long-term inflation expectations remain relatively contained, and current movements in Treasury yields can still be explained by strong investment demand from the AI boom and higher risk premiums, they said.

“There’s no constellation of developments yet that could tell us clearly this is now a world in which fiscal dominance is a key aspect of forming market prices,” Schoenholtz said.

FISCAL CONSOLIDATION

If Bessent succeeds in lowering longer-term yields, that could ease overall financial conditions even as inflation remains above the central bank’s 2% objective. (See MNI INTERVIEW: Buybacks Likely To Lower Yields A Few BP-Gagnon)

It would amount to monetary easing at a time when policy may already be insufficiently restrictive, Cecchetti and Schoenholtz said, adding the quantities needed to cap yields could well be in the trillions of dollars. The Fed bought USD2 trillion in its pandemic-era QE program. 

"When the Fed did this, at least it had the potential of signaling something about monetary policy. Now you have to ask the question, does this really signal something about fiscal policy?" Cecchetti said. 

"If it is the case that what the Treasury is doing now Is intended to signal that they are going to propose fiscal consolidation, a shifting of that path that we were talking about, then that could be effective." 

MNI INTERVIEW: China Rebalance Momentum Building - Pettis

Signs of a more open economic debate in Beijing suggest domestic momentum may be building to rebalance China’s economy towards household consumption, a leading economist told MNI, arguing that domestic factors are more likely to drive the process than Washington’s trade policy.

Although calls from trading partners for China to rebalance its economy have so far proved ineffectual, Chinese academic economists have recently become more willing to publicly debate the country’s economic trajectory as advanced industries expand rapidly while weaker parts of the economy and domestic consumption lag, said Michael Pettis, a nonresident senior fellow at the Carnegie Endowment for International Peace.

Pettis emphasised a greater willingness to discuss the extent of unemployment and underemployment, as well as whether the upper leg of a K-shaped recovery, driven by heavily subsidised investment in new industries, can lift the more employment-intensive lower leg. "Something must be happening," Pettis said, pointing to what he described as a notable change from previous years, when economists faced greater constraints in debating such matters.

The widening tolerance could indicate a growing recognition within China’s policy establishment that the economy needs to shift more income towards households and rely more heavily on consumption, added Pettis, who has lived in China for more than 20 years.

He also pointed to what he sees as a fundamental distortion in China’s growth model. Despite relatively cheap labour, investment remains heavily capital-intensive. "If you have very cheap wages, your growth should be labour-intensive," Pettis argued. "And yet it's capital-intensive. There's something fundamentally wrong there." (See: MNI EM: Advisors See New Bond Quotas To Bolster China Growth)

Pettis in 2025 called on Beijing to boost domestic demand to help rebalance the global economy. (See MNI INTERVIEW 2: China Domestic Demand Key For China-US Race)

U.S. FOCUS

The upcoming Xi-Trump meeting in September, which could result in the formation of a joint trade and investment board and lower bilateral tariffs on non-strategic goods, is unlikely to narrow the overall U.S. trade deficit, he said. 

Bilateral tariffs alone are unlikely to reduce the U.S. global trade deficit or prompt economic rebalancing in surplus economies such as China, he added, reiterating that global trade imbalances are driven by capital flows stemming from persistent excess savings in surplus economies such as China, which result in corresponding current-account deficits in countries including the U.S.

YUAN OUTLOOK

"I think the yuan will appreciate in nominal terms this year, mainly because there is so much pressure from trading partners to do so. But I don't expect the appreciation to be significant," he said. If Chinese inflation remains at zero while inflation elsewhere runs at around 3%, the yuan could appreciate by about 3.5% in nominal terms, equivalent to only around 0.5% in real terms, Pettis added.

He argued that a stronger currency could form part of China’s economic rebalancing by helping transfer income towards households, though currency appreciation represents only one of several possible policy mechanisms.

Currency appreciation may prove the most realistic policy for China’s major trading partners to press Beijing to adopt, he said. Europe and the U.S. have limited ability to demand fundamental changes to China’s domestic economic arrangements, such as reforms to its social security system, but they can use access to their markets as leverage over exchange-rate policy, he noted.

"So revaluing the currency may not be the best solution, but it is a realistic one," Pettis concluded.

MNI INTERVIEW: September Hike Possible - Ex RBA's Fabo

Markets have likely underpriced the chance of a Reserve Bank of Australia rate hike in September, as the Board may want to get further tightening out of the way sooner rather than later before slowing activity and housing weakness make another increase harder to justify, former senior RBA economist Justin Fabo told MNI.

Fabo, founder of Antipodean Macro and the RBA’s former Head of International Financial Markets, said the July minutes suggested there was a strong internal case for further tightening, with members waiting for additional data on inflation, the labour market, housing and the economic impact of the Middle East conflict before the next meeting.

"September was significantly underpriced after the July meeting, when markets had priced only about three to four basis points of tightening," Fabo said. Following Wednesday’s July CPI data, which saw trimmed-mean inflation hold at 3.6% y/y rather than fall 10bp as expected, markets now price around a 40% chance of a 25-basis-point hike to 4.60% at the Sept 29 meeting.

However, the RBA is unlikely to focus on any single inflation number when deciding whether to raise the cash rate, and will examine domestic services and housing inflation alongside the trimmed mean and other underlying measures, he said. "Monthly inflation data can also be distorted by seasonal adjustment and volatile components such as travel, meaning the Board will need to assess the underlying detail rather than react mechanically to the trimmed mean," Fabo added.

While services inflation accelerated to 3.7% y/y in July from 3.5% in June, the monthly increase was unchanged at 0.7%.

The Bank will also monitor whether businesses pass through the recent award-wage increase quickly, alongside further services price pressure, Fabo said.

The RBA’s data-dependent approach could make it increasingly difficult to deliver another hike if it waits, he argued. If the Board does not move in September and activity slows further, it may become harder to justify tightening even if inflation remains above target.

Fabo has previously pointed to strong services inflation pushing up trimmed mean as a key risk to the RBA's strategy, and remains concerned it will repeat its 2023 mistake of ending its tightening cycle at 4.35% before price pressures are properly contained. (See MNI INTERVIEW: RBA Needs Low Services Inflation To Limit Hikes) 

HIGHER NEUTRAL 

If neutral interest rates are now higher than previously thought, holding at 4.35% may not be sufficient, he said. The RBA's latest minutes highlighted arguments for pre-emptive tightening, including the risk that inflation could remain above target for longer, while the unemployment rate remains around 4.5%. If the RBA does not hike in September, the risk is that it again finds itself waiting for inflation to weaken and activity to slow, eventually making further tightening increasingly difficult, he said.

Fabo saw limited downside to another hike given the upside risks to inflation, although the Board would need to weigh those risks, including that housing weakness could weigh on household consumption and new dwelling prices.

Weakness in established housing markets has historically prompted developers to cut prices on new projects to stimulate demand, feeding through to the new-dwelling component of CPI and potentially lowering trimmed mean inflation, Fabo added. The RBA’s liaison with housing developers will be important in assessing whether weaker demand is beginning to translate into lower prices, he said.

MNI INTERVEW: Finnish USD Bonds Will Match Euro Funding Costs

Finland will ensure its future dollar-denominated bond issuance matches the euro benchmark funding cost, the head of debt management at the State Treasury told MNI.

The Finnish State Treasury intends "to match the EUR benchmark funding cost when issuing in USD," because "the rationale for our USD issuance is investor base diversification," Anu Sammallahti told MNI.

Policy changes in the U.S. would only affect Finland's dollar-denominated issuance "indirectly, if the funding cost in USD relative to our EUR benchmark curve gets too expensive,” she said in emailed responses to questions.

"Our USD benchmark issuance is relatively infrequent (once a year), limited to a specific range on the yield curve (3-10 years) and not large in size," she noted, after being asked about market conditions for U.S. debt in the wake of the announcement by the U.S. Treasury of an increase in buybacks of longer-dated debt.

Finland last issued USD1.5 billion in dollar-denominated 10-year bonds in a syndication in May, and normally conducts one such issuance a year.

Finland’s RFGB investor base has traditionally been "centred in Europe and the euro area. This has been unchanged, but with interest rates at a more traditional historical level -- i.e., not zero rates -- we have also seen more global interest in our euro benchmark bonds over the past few years," Sammallahti said. (See MNI: Dutch Fiscal Discipline Limits Any Yield Rise)

HEDGE FUNDS

While hedge funds have "become meaningful market participants" in both primary and secondary markets for European government bonds over the past 10 years, in general she saw no major risks to market liquidity and functioning, she said.

"A diversified investor base is naturally a benefit to any market and both buy-and-hold and trading participants are needed for a functioning market. To the extent hedge funds improve secondary market liquidity, they are proving a relevant service," she added. (See MNI INTERVIEW: Must Tackle Hedge Fund Debt Risk - BIS's Gelos)

AVERAGE MATURITY

Sammallahti noted that the increase in average RFGB fixing has not required a change in strategy.

"We follow the debt management strategy set by the Ministry of Finance, which for the 2024-28 guides us to extend the portfolio average maturity somewhat," she said.

"This has not affected our bond issuance strategy and is not dependant on the level of rates."