Goldman Sachs and Bank of America have become the latest Wall Street banks to push back their forecasts for Federal Reserve interest rate cuts, arguing that employment and inflation data support the central bank keeping rates unchanged at least until the end of this year. As the conflict in Iran impacts oil markets and pushes inflation higher, traders are increasing bets that the Fed will hold rates steady this year, with expectations for a potential hike in early 2027. This shift is echoed by a growing number of Fed officials, including the two who dissented at the last policy meeting, who have not ruled out the possibility of the next rate move being upward. The April non-farm payrolls report showed U.S. employers added more jobs than expected for a second consecutive month, highlighting the labor market's resilience amid ongoing Middle East tensions. The U.S. will release Consumer Price Index (CPI) and Producer Price Index (PPI) data on Tuesday and Wednesday. Aditya Bhave, head of U.S. economics at Bank of America, wrote in a May 8 report: "The data do not support rate cuts this year. The strong April jobs report was the final straw, especially in the context of hawkish commentary from Fed officials." He and his colleagues now expect the Fed's next rate cut to occur in July 2027, compared to a previous forecast of September this year. The changing outlook for Fed policy is also reflected in the U.S. Treasury market. Since the outbreak of the conflict, yields on the policy-sensitive 2-year Treasury note have been trading near the top of their recent range. Bank of America rate strategists wrote in a separate report on Monday that the market is "underpricing" the risk of a Fed rate hike. They recommended selling 2-year Treasuries and betting that the short end of the yield curve will underperform longer-dated bonds. Following the release of the U.S. April jobs data last Friday, Goldman Sachs economists, including Jan Hatzius, delayed their forecast for the next rate cut from September to December 2026 and lowered their probability estimate for a U.S. recession over the next 12 months. Morgan Stanley and Barclays similarly expect the Fed to keep rates on hold for a longer period. Strategists noted: "Everyone knows inflation is going higher, but as it rises, the debate in the coming months will inevitably shift to how long it will persist, whether second-round effects will emerge, and how much central banks will hike rates, if at all." However, there are dissenting voices on Wall Street. Citigroup economists Andrew Hollenhorst, Veronica Clark, and Gisela Young maintain their view that the Fed will cut rates before year-end. They argue that traders are underestimating the potential for policy easing, given recent softness in hiring and wage growth. Ahead of Tuesday's CPI data, the median economist forecast is for headline CPI to rise 3.7% year-over-year, up from 3.3% the previous month. Core inflation, excluding food and energy, is expected to be 2.7%. Matt Hornbach, global head of macro strategy at Morgan Stanley, said on Monday: "We are certainly going to see a hotter inflation print this month. Oil prices are moving significantly every day, and this will have an important impact on the inflation path toward year-end."
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