Fmr. Dallas Fed President Rob Kaplan calls for Fed caution on rate cuts, cites housing concerns

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Goldman Sachs Vice Chairman Robert Kaplan believes the Federal Reserve should cut interest rates by 25 basis points but proceed with caution on future cuts, citing ongoing inflation concerns.

In an interview with CNBC, the former Dallas Fed president emphasized that the central bank has limited room to maneuver, with only “75 to 100 basis points” of cuts available before reaching neutral territory.

Kaplan suggested that the Fed’s significant presence in the mortgage market may be inappropriate, noting that “the treasury would be a better place to manage that mortgage portfolio.”

He indicated that ideally, the Fed’s portfolio should primarily consist of treasuries (US10Y [https://seekingalpha.com/symbol/US10Y]), (US2Y [https://seekingalpha.com/symbol/US2Y]), (US30Y [https://seekingalpha.com/symbol/US30Y]) rather than mortgage-backed securities (MBS [https://seekingalpha.com/symbol/MBS]), (MBSD [https://seekingalpha.com/symbol/MBSD]), which have become a major factor in housing markets.

“Mortgage rates are a factor, but they’re a piece of a bigger puzzle,” Kaplan explained. “There’s local regulation, permitting, cost of materials, availability of labor… We need to look at all these things because housing is such a big part of the economy. When it’s this sluggish, it creates a headwind for the economy.”

The former Fed official addressed the conflicting views on economic conditions, describing “cross currents” affecting growth. “On the negative side, tariffs – whatever you think about them – in the short run, they slow growth.”

“Limiting immigration, the deportations, very low labor force growth is also a headwind,” he continued. “So, that’s creating part of the weakness you’re seeing.”

Kaplan estimated the current neutral rate at about 3.5%. With the Fed funds rate at 4.25-4.5%, he argued the Fed doesn’t have much room for cuts, particularly with “inflation running well above target,” making these decisions more difficult than a year ago when the Fed had significantly more room to cut.

Looking ahead, Kaplan highlighted potential economic tailwinds including “an AI data center power boom,” upcoming tax incentives, regulatory relief, and potential rate cuts.

“The economy is reflecting those headwinds. I think eventually both are going to converge,” he said, suggesting that while current conditions remain challenging, longer-term growth prospects appear more positive as these factors take effect.

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