Goldman Sachs Warns Markets Too Aggressive on Federal Reserve Rate Hikes

Goldman Sachs Group Inc.'s chief economist, Jan Hatzius, has stated that market bets on Federal Reserve interest-rate hikes are still too aggressive. According to Hatzius, inflation in the world's largest economy is cooling, making a rate increase at the central bank's September meeting 'very unlikely'. This assessment comes after softer retail sales data, disappointing employment numbers, and slowing inflation prints.

Traders have pushed back their expectations for the next quarter-point Fed hike to January, having previously fully priced in a move in December. Goldman Sachs still believes that market pricing for the funds rate is too hawkish. The investment bank's note also highlights that while price predictions have turned less hawkish, there's still room for the unwind to run.

The US Treasury curve is likely to steepen further due to improving inflation and reduced hike premiums and trouble budget news, according to Goldman Sachs' analysis. This could weaken the rally that slowing inflation would normally deliver. Yields on Treasury two-year notes remain above 4% as investors ponder whether and when the Fed will hike borrowing costs again.