The Federal Open Market Committee is much more likely to make a 25 basis-point cut in interest rates than a 50 basis-point cut when it meets next week, according to Rob Kaplan, vice chairman at Goldman Sachs and a former president of the Federal Reserve Bank of Dallas.
This is despite the most recent jobs report, for July 2025, showing weaker-than-expected job growth, with only 73,000 jobs added. Kaplan said he expects another “anemic” jobs update for August, but the fact that inflation continues to run above the Federal Reserve’s target makes a jumbo rate cut “very difficult to see.”
“I think we’re most likely to see a 25 basis-point cut next week and then see the FOMC enter a holding pattern, where they continue to be very cautious about moving into a stimulus posture,” Kaplan said. “Yes, we had a weak jobs report, but the jobs market didn’t fall off a cliff and actually retract.”
Kaplan shared this perspective during a live taping of the Bloomberg Odd Lots podcast broadcast from the Future Proof Festival in Huntington Beach, California.
The FOMC members are in a tricky spot, with various countervailing trends to contend with, Kaplan said.
“There’s actually kind of a balance being struck right now in the jobs market,” he said. “Even with weaker job creation, unemployment is remaining low. That’s because we’ve shut down undocumented immigration and we haven’t lifted legal immigration at all. That’s having a real material impact on unemployment. Supply is just anemic right now. Hiring is at a stall speed but there is much less supply, so unemployment has remained stable.”
At the same time, Kaplan said, key parts of the U.S. economy are running hot — with affluent, older consumers continuing to spend and a significant degree of investment going into the “AI boom” in the form of new data centers and power infrastructure investments.
“If it weren’t for weakness in jobs, I actually think the Fed would prefer to stand pat on interest rates and wait even longer to cut,” Kaplan said. “The fact of the matter is that inflation remains elevated, and it’s not like we're moving towards the inflation target. We’re going sideways. … For me, the neutral rate is around 3.5% right now, so we don’t have a lot of space to cut even if jobs fall off in a big way. Maybe 75 to 100 basis points, tops.”
What’s Coming for Stocks
Kaplan said he views the outlook for the U.S. stock market as being reasonably positive, even as valuations remain elevated. The reason why? Potential productivity and profitability gains made via the broader adoption of artificial intelligence.
“As we all know, the stock market is an assessment of what’s going to happen for next three to five years in the economy,” Kaplan said. “What the markets are saying is that we are in the middle or even early innings of an AI data center and power boom. The markets think AI will drive both growth and productivity. It’s not showing up yet in productivity ... but the market believes that it will in another year or two. The stock market, right or wrong, is making that bet.”
Kaplan said his extensive experience traveling in China and other Asian markets has given him a unique perspective on “what AI can do” for productivity.
“When I travel in China, I’m really struck by one big difference on AI compared with the U.S.,” Kaplan said. “Here in the U.S. we think about AI and AI investments in terms of hyper-scalers. We think about AI investment as supporting these giant companies that now make up a big portion of the S&P 500, who are spending hundreds of billions on AI development and reaping the profits.”
In China, conversely, the investment into AI and the returns generated as a result are much more diffused.
“In China, it’s all the regular businesses that are actively using AI to lower costs and improve productivity across the board,” Kaplan observed. “We’re doing that too, to some extent, but China is further along. Their margins are lower over there, so they’re doing it out of pressure and necessity. It’s so competitive that they need to lower costs. There’s a lot to learn from what they’re doing in China.”
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