Your Dovish Take on Powell Is Wrong, Goldman Tells Bond Traders

(Bloomberg) -- Goldman Sachs Group Inc. is telling traders to be wary of reading Federal Reserve Chairman Jerome Powell’s comments last week as dovish for the path of interest rates.

Ten-year Treasury yields fell Friday on Powell’s speech at the Kansas City Fed’s annual policy symposium, when he said “there does not seem to be an elevated risk of overheating.” What’s more, the maturity’s spread over two-year yields is close to the lowest since 2007.

Goldman rates strategists lowered their year-end 10-year yield forecast last week on the back of a slower rebound in term premium. Yet in a report Monday, Goldman economists emphasized Powell’s nod to a recent Fed study that indicated it would be ill-advised for the central bank to ignore low unemployment. That emboldened the Goldman economists to reiterate their call for two more rate hikes in 2018 and four next year.

“Unlike the bond market, we did not view Powell’s speech as dovish, partly because of its references to the Fed staff study,” Goldman Sachs economist Daan Struyven wrote in the note. “We expect not only a limited core inflation overshoot but also a sizable unemployment undershoot — and an FOMC that continues to care about that undershoot.”

U.S. money-market traders aren’t on board with a tightening path as aggressive as Goldman predicts, or even the Fed’s own projections. For this year, traders see a September hike as a lock, yet haven’t fully baked in another in December.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Greg Chang

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