(Bloomberg) -- The Federal Reserve may need to raise interest rates as soon as September if inflation remains elevated, according to Rob Kaplan, vice chairman at
"If inflation prints don't cool between now and we get to September, I actually think the balance of risks suggests it would be wise to take some action, either in September or in the fall," Kaplan said in a Bloomberg TV interview. "That'd be the wiser thing to do."
Traders dumped short-term Treasuries, pushing some yields higher, after Fed Chair Kevin Warsh signaled the central bank remains focused on fighting inflation. The hawkish message was reinforced by the projections of individual Fed members, half of whom expect to hike rates by year-end.
Kaplan said that if inflation remains sticky, it would suggest monetary policy is still too accommodative.
He also noted that Fed policy moves rarely occur as one-off actions, with rate changes more often coming in a series of two or three. "So I think if you move in September, you need to be prepared. There could be one or two more," he added.
Swaps traders are now pricing a quarter-point rate increase by October, compared with expectations for March 2027 before this week's Fed meeting. Two-year Treasury yields, among the most sensitive to policy changes, climbed as much as 17 basis points on Wednesday — their biggest increase since March — before easing about two basis points to 4.17% in Asian trading on Thursday.
Not everyone is expecting higher interest rates. Citigroup Inc. remains among the few Wall Street firms predicting the Fed will ease policy this year, although the bank this week pushed back its forecast for rate cuts to begin in October instead of September, citing weaker jobs data and cooler inflation.
Kaplan cautioned against reading too much into the Fed's latest dot plot, saying it might not have reflected the US-Iran deal and reopening of shipping routes. The outlook could look different by the time officials release their next set of forecasts in September.
"If I were in my former seat, I would be urging caution about interpreting this dot plot because we just had a big change and I want to give a chance for that to work through the system," he added.
Kaplan, who served as president of the Dallas Fed between 2015 and 2021, had sat through Fed meetings chaired by Warsh's predecessors Jerome Powell and Janet Yellen.
--With assistance from Joanne Wong, David Finnerty and Nicholas Reynolds.
(Updates with additional details in seventh paragraph)
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