Goldman Sachs on Tuesday lowered its probability for a U.S. recession in the next 12 months to 25% from 35% and said the Federal Reserve will "most likely" hike interest rates by 25 basis points in July.

The Wall Street bank's new bet follows reduced stress in the banking sector and comes days after President Joe Biden signed a bill that suspends the U.S. government's debt ceiling, averting a potential default.

Goldman said the new debt ceiling limit will result in only "small spending" cuts that should leave the overall fiscal impulse "broadly neutral" in the next two years, while the banking stress will subtract only 0.4% from real gross domestic product (GDP) growth this year.

The bank now forecasts the Fed's terminal rate in the range of 5.25% to 5.5%, similar to peers such as Deutsche Bank and UBS.