(Bloomberg) — Market bets on Federal Reserve interest-rate hikes are still too aggressive given that inflation in the world’s biggest economy is cooling, according to Goldman Sachs Group Inc.

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A rate increase at the central bank’s September meeting has become “very unlikely” due to softer retail sales data, disappointing employment numbers and slowing inflation prints, the investment bank’s chief economist Jan Hatzius wrote in a client note.

“Under our baseline economic forecasts, the inflation news is more likely to improve further than to deteriorate anew as the year progresses,” Hatzius wrote in the note published Sunday. “We still think market pricing for the funds rate is too hawkish.”

Traders have pushed back their expectations for the next quarter-point Fed hike to January, after they had been fully pricing in a move in December a week earlier, according to data compiled by Bloomberg. While pricing has turned less hawkish, there’s still room for the unwind to run, according to Goldman.

Fed bets are crucial to the global government bond market given that US policy moves tend to influence interest rates around the world. Treasury investors are now caught between two competing forces: cooling inflation is reviving the case for owning bonds, while heavy government borrowing and persistent fiscal concerns are putting pressure on buyers to demand more compensation to hold longer-maturity debt.

What Bloomberg Strategists Say…

“While front-end yields can rely on diminished rate-hike bets for this year, the long-end remains vulnerable”

— Edward Harrison, Markets Live strategist

That tension risks keeping long-dated yields elevated even as price pressures ease, weakening the rally that slowing inflation would normally deliver. Yields on Treasury two-year notes, among the most sensitive to changes in US policy, remain above 4% as investors ponder whether and when the Fed will hike borrowing costs again.

The US Treasury curve is likely to steepen further on the back of improving inflation and reduced hike premiums and trouble budget news, according to Goldman’s note.

“After two months of materially softer jobs and inflation data, it’s hard to see any of the doves shifting toward hikes,” Hatzius wrote, referring to Fed officials who vote on interest rates this year.