Market Hawks Get Softer on Fed Rate Hikes Amid Cooling Inflation

Goldman Sachs Group believes market bets on Federal Reserve interest-rate hikes are too aggressive given that inflation in the US is cooling. According to Goldman's chief economist Jan Hatzius, a rate increase at the central bank's September meeting has become 'very unlikely' due to softer retail sales data, disappointing employment numbers, and slowing inflation prints.

In his client note, Hatzius wrote that under their baseline economic forecasts, the inflation news is more likely to improve further than to deteriorate anew as the year progresses. He stated, 'We still think market pricing for the funds rate is too hawkish.'

The investment bank's analysis suggests that traders have pushed back their expectations for the next quarter-point Fed hike to January, after they had been fully pricing in a move in December just a week earlier.

Goldman notes that while pricing has turned less hawkish, there's still room for the unwind to run. The Fed's bets are crucial to the global government bond market, given that US policy moves tend to influence interest rates around the world.