Goldman says markets too hawkish on betting Fed will hike rates
A rate increase at the central bank’s September meeting has become “very unlikely” due to softer retail sales data
Goldman Sachs Group Inc. contends that current market speculation surrounding Federal Reserve interest-rate hikes is excessively cautious, despite evidence suggesting that inflation in the United States is easing, according to a client note by the investment bank's chief economist Jan Hatzius. Hatzius asserts that the likelihood of a rate increase during the Federal Reserve's September meeting has become "very unlikely" due to softer retail sales data, disappointing employment numbers, and slowing inflation prints.
He further explains that the inflation news is more likely to improve further than to worsen over the course of the year. The economist contends that market pricing for the funds rate is presently too hawkish. While traders have shifted their expectations for the next quarter-point Federal Reserve hike to January, a significant decrease from the previous full pricing of a move in December, Goldman still believes there is room for further unwinding of these expectations.
The note highlights that Federal Reserve policy moves significantly impact the global government bond market, as US policy shifts typically influence interest rates worldwide. Treasury investors are currently faced with a dilemma between cooling inflation, which may bolster the case for investing in bonds, and heavy government borrowing and persistent fiscal concerns, which exert pressure on bond buyers to seek higher compensation for holding longer-term debt.
This tension may maintain elevated long-dated yields even as price pressures diminish, potentially weakening the rally that would typically occur with easing inflationary pressures. Treasury two-year notes, particularly sensitive to changes in US policy, remain above 4 percent, as investors weigh the potential for future Federal Reserve rate hikes.
The US Treasury curve is expected to steepen further, driven by improving inflation, reduced hike premiums, and concerning budgetary developments, according to Goldman's analysis. Hatzius notes that, after two months of softer job and inflation data, it is challenging to envision any of the dovish Fed officials shifting toward implementing rate hikes.
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