Goldman Says Market Overstates Fed Tightening, Sees Little Chance of September Hike

"Given the baseline economic outlook, inflation data are more likely to improve further than deteriorate again as the year progresses," Hatzius said. He added that the market's outlook for the policy rate remains overly hawkish.

Investors have also rapidly scaled back expectations for another rate increase. As recently as a week ago, markets had almost fully priced in a 0.25 percentage-point hike by December. That expected timing has now shifted to January 2027.

Goldman Sachs said there is still room for rate-hike expectations to decline further. With employment and inflation data coming in noticeably weaker than expected over the past two months, the bank said dovish Fed officials are unlikely to shift toward supporting another increase.

The bank also said declines in long-term Treasury yields may be limited. Slower inflation and fading expectations for further hikes are positive for bond prices, but heavy US government debt issuance and fiscal concerns could keep upward pressure on longer-dated yields.

Goldman Sachs expects the US Treasury yield curve to steepen further. Cooling inflation and weaker expectations for rate hikes should pull down short-term yields, while fiscal pressures support long-term rates.