Goldman Sachs: The market's bets on Federal Reserve policy remain too hawkish, and the likelihood of a rate hike in September is very small

According to information obtained by Zhihui Finance APP, Goldman Sachs stated that, given that inflation in the world's largest economy is cooling, the market's bets on Federal Reserve rate hikes are still too aggressive. Goldman Sachs chief economist Jan Hatzius wrote in a client note that, due to weak U.S. retail sales data, disappointing employment data, and a slowdown in inflation, the likelihood of the Federal Reserve raising interest rates at its September meeting is "very small."

In a report released on Sunday, Hatzius wrote: "Based on our baseline economic projections, as time goes on, inflation data is more likely to further improve than to deteriorate again. We still believe the market's pricing of the federal funds rate is too hawkish."

Data shows that traders have postponed expectations for the Federal Reserve's next rate hike of 25 basis points to January next year, whereas a week ago they fully expected a hike in December. Goldman Sachs stated that although market hawkish sentiment has eased somewhat, there is still room for further decreases in rate hike expectations.

Given that U.S. policy moves often influence global interest rates, the actions of the Federal Reserve are crucial for the global government bond market. Currently, U.S. Treasury investors face a dilemma: on the one hand, cooling inflation has boosted the willingness to hold U.S. Treasuries; on the other hand, massive government borrowing and ongoing fiscal concerns are forcing investors to demand higher returns for holding long-term bonds. Analysts indicate that while short-term yields may benefit from reduced expectations of rate hikes this year, long-term yields remain vulnerable.

This tension could cause long-term yields to remain elevated even as price pressures ease, thereby eroding the rally that a slowdown in inflation would typically bring. The yield on the 2-year U.S. Treasury, the most sensitive to U.S. policy changes, remains above 4%, as investors weigh when and whether the Federal Reserve will raise borrowing costs again.

Goldman's report pointed out that, due to improvements in inflation, a reduction in rate hike premiums, and negative fiscal budget news, the U.S. Treasury yield curve may steepen further.

"After two consecutive months of substantially weak employment and inflation data, it is hard to see any doves shifting towards a rate hike," Hatzius wrote, referring to Federal Reserve officials who vote on interest rates this year.