Goldman sees half-percentage point Fed hikes in May & June

Goldman Sachs Group said it now expects the Federal Reserve to raise interest rates by a half-percentage point at both its May and June meetings to contend with surging inflation, leading the Wall Street bank to revise up its forecasts for US Treasury yields across the curve.

The bank now sees shorter-dated yields rising at a faster pace than longer-dated ones, causing the yield curve to invert by around 20 basis points. It predicts that 2-year yields - now around 2.24% - will rise to 2.9% at the end of this year and 3.15% at the end of 2023. Its 2022 forecast on 10-year yields was revised to 2.7%, up from 2.25% previously. The 10-year yield was around 2.45% in trading Friday.

The forecast changes follow a steady drumbeat of comments from Fed officials who have said they would be willing to raise rates by a half-percentage point at a time if needed, a type of move the US central bank hasn't done since 2000. That has pushed up bond yields and left traders across Wall Street bracing for a more aggressive path from the Fed.

An inverted yield curve is normally seen as a warning signal of a recession. But Goldman Sachs said that while the risk of an economic slowdown has increased, a modestly inverted curve is a less definitive predictor of a recession.