Goldman Sachs Exchanges
2026-05-04 · Hosted by Allison Nathan · Goldman Sachs
Executive Summary
Rob Kaplan, Vice Chairman of Goldman Sachs and former Dallas Fed President, lays out the path forward for Kevin Warsh’s likely confirmation as Fed Chair, expecting him to be in his seat for the June FOMC meeting. Warsh is expected to bring a higher bar for QE, less forward guidance (potentially eliminating or downgrading the dot plot), and closer coordination with Treasury Secretary Bessent on the balance sheet. Despite a market perception that Warsh will lean dovish, Kaplan argues the FOMC committee — scarred by transitory inflation calls — will likely keep rates on hold through 2026, with the war in Iran pushing inflation higher and Goldman cutting H2 2026 GDP growth from 2.5% to 1.7%.
Key Stories & Changes
1. Warsh Confirmation Path Cleared
Justice Department dropped its case against Powell on Friday; the matter is now at the Inspector General
Senator Tillis reiterated his support, clearing the legislative path
Warsh expected to be seated for the June FOMC meeting
Process appears more conventional than feared; concerns about replacing Cook or all bank presidents did not materialize
President’s terms were extended by five years in December (not widely reported)
2. Warsh’s Monetary Policy Framework
Served as governor under Bernanke during the GFC; remembered for voting for QE in 2011 then publicly stating he thought it was a mistake
Believes the Fed should have emergency balance sheet powers, but the bar for QE should be very high
Key shifts expected vs. Powell:
Fed presidents should talk less — may eliminate or downgrade the dot plot
Closer coordination with Treasury Secretary Bessent on balance sheet management
Big advocate that AI adoption will be disinflationary over the horizon
Believes Chinese overcapacity manufacturing is also disinflationary
3. Current Policy Stance & Dual Mandate Tensions
Pre-war, real Fed funds rate was three-quarters to one percent above inflation, putting policy at neutral (3.5–3.75%)
War is pushing rates up, not down; inflation readings going north
Market now prices near-zero odds of a 2026 rate cut, with first cut not until 2027
Warsh cited the Dallas trim mean in testimony (running ~2.3–2.4% vs. 2.75% headline), but Kaplan warns trim mean can lag during oil shocks that bleed into 20–30 items over months
4. Balance Sheet Outlook
Fed balance sheet ran as high as $9 trillion, now down to $6 trillion and change
Kaplan thought the last $2 trillion of QE was overdone
Regulatory reform (liquidity ratio, supplementary leverage ratio) could allow banks to hold fewer reserves, enabling further runoff
10-year yield over 4.30% is a constraint — neither Warsh nor Bessent will want to push rates higher abruptly
5. Iran War Impact on Goldman Forecasts
Pre-war GDP forecast: 2.5% with inflation cooling in H2
Oil price shock has cut H2 2026 GDP forecast to 1.7–2.1% — a “big step down”
Prices are stickier; central bank cuts have been pushed out
Curve has moved up as a result
Trends Identified
1. Politicization of Fed Concerns Receding
The unusual political backdrop earlier in the cycle — calls for Powell to leave, attempts to pursue Cook, fears of administration control of the Board — has largely faded. Powell is still in his seat, Cook is still on the Board, and presidents’ terms were extended in December. Kaplan argues the process is now more conventional, even as Warsh will inherit some leaning toward administration views.
2. Forward Guidance Pendulum Swinging Back
A clear trend under Warsh will be less Fed communication, fewer speeches from regional presidents, and likely a downgrading of the dot plot. Kaplan and Warsh share concern that excessive forward guidance “boxes the Fed in.” This represents a meaningful philosophical shift from the Bernanke-Yellen-Powell era of communication-as-policy.
3. War-Driven Stagflation Risk
The Iran war is creating a dual squeeze — pushing energy prices and inflation up while simultaneously denting GDP growth. The Fed has no good policy response to a supply-side shock and is effectively a “spectator” until the war ends and the Strait of Hormuz reopens. Until then, the curve continues to drift higher and rate-cut probabilities continue to fall out.
4. Treasury-Fed Coordination Reset
Warsh’s history of advocating for Fed-Treasury coordination on the balance sheet, combined with Bessent’s role at Treasury, suggests a new era of more deliberate joint management of the long-end of the curve. Kaplan views this as a positive development rather than a threat to independence. —-
Sentiment Analysis
Overall Market Sentiment: Cautious / Wait-and-See
The dominant tone is one of structural uncertainty — the Fed is being forced to play defense against an externally driven inflation shock with limited policy room to maneuver.
Risk Factors Highlighted
Iran War Persistence: Until the conflict stops and the Strait of Hormuz reopens, the Fed is “very much in the fog” with no good tools for a supply shock.
Stagflation Dynamic: Rising energy prices pushing inflation up while simultaneously cooling GDP growth — a hard combination for monetary policy.
Inflation Forecasting Difficulty: Kaplan stresses that inflation is much harder to forecast than labor markets, and the FOMC is “scarred by transitory” misses.
Trim Mean Mis-Read: Risk that policymakers over-weight the Dallas trim mean, which can carve out oil spikes that ultimately bleed into broader inflation over months.
Long End Sensitivity: 10-year yield above 4.30% means any abrupt balance sheet reduction could push rates higher and tighten financial conditions.
Premature Dovish Pivot: Risk that Warsh argues for cuts based on “anticipating” disinflation before the committee sees confirming data, creating internal Fed friction.
Regulatory Independence Erosion: Kaplan acknowledges regulatory reform has not been politically independent for 20–25 years; the line between policy and politics may blur further on balance sheet issues.
This episode was covered in today’s The Market Signal — 2026-05-04, a cross-source synthesis of multiple podcast reports.