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Goldman Sachs Says Markets Are Too Hawkish on Fed, Sees Little Chance of September Rate Hike
Forecast Trend Report by Period
As U.S. inflation eases, Goldman Sachs says financial markets remain overly hawkish in their pricing for Federal Reserve rate increases.
Bloomberg reported on Aug. 17 that Goldman Sachs Chief Economist Jan Hatzius sees a rate increase at the Federal Open Market Committee's September meeting as "very unlikely." He pointed to a string of weaker retail sales, employment and inflation data.
Given the bank's baseline economic outlook, inflation is more likely to improve further than to reaccelerate later this year, Hatzius said. Market expectations for the policy rate also remain too hawkish, he added.
Expectations for another rate increase have retreated quickly in recent days. As recently as a week ago, investors had almost fully priced in a 0.25-percentage-point increase by December. That expected timing has now shifted to January next year.
Goldman Sachs said there is still room for rate-hike expectations to fall further. With employment and inflation data weakening more clearly than expected over the past two months, the bank sees little chance that dovish Fed officials will swing toward supporting another increase.
The bank also said declines in long-term Treasury yields may be limited. Slowing inflation and fading expectations for additional rate increases are positive for bond prices, but heavy U.S. government debt issuance and fiscal concerns could put upward pressure on longer-dated yields.
Goldman Sachs expects the U.S. Treasury yield curve to steepen further. Cooling inflation and softer rate-hike expectations could push short-term yields lower, while fiscal strains support long-term rates.
