Goldman Sachs and Bank of America are the latest major Wall Street firms to join the camp predicting a delay in interest rate cuts. They argue that both employment and inflation data support the case for the Federal Reserve to keep rates unchanged at least until the end of this year. As tensions in Iran roil oil markets and push inflation higher, traders are increasing bets that the Fed will maintain its current policy through 2026, with the possibility of a rate hike in early 2027.
This shift in outlook is echoed by a growing number of Fed officials, including two dissenters from the central bank's last meeting who suggested the next move could be a rate increase. Aditya Bhave, head of U.S. economic research at Bank of America, wrote on May 8, "The data simply does not support a rate cut this year. Core inflation is too high and trending upward. The strong April jobs report was the final straw, especially given the hawkish commentary from Fed officials."
Bhave and his colleagues now expect the Fed will not cut rates again until July 2027, a significant shift from their previous forecast of September this year.
Rising oil prices on Monday contributed to lower U.S. Treasury prices and higher yields. The policy-sensitive two-year Treasury yield rose more than 6 basis points to 3.95%. Former President Donald Trump stated that the fragile ceasefire between the U.S. and Iran is in a "precarious state." Investor demand was weaker than expected in the first part of the government's quarterly refunding auction—a sale of $58 billion in three-year notes—leading yields to extend their gains.
The Bloomberg Dollar Index edged higher, and U.S. stocks also advanced. As part of the Treasury's quarterly refunding, it will sell $42 billion in 10-year notes on Tuesday and $25 billion in 30-year bonds on Wednesday.
The exceptionally strong April nonfarm payrolls report, combined with soaring energy costs due to the Iran situation, has directly undermined the rationale for interest rate cuts. The report showed U.S. employers added more jobs than expected for a second consecutive month, highlighting the labor market's resilience even amid ongoing Middle East conflict.
Meanwhile, key upcoming inflation readings will be revealed through the Consumer Price Index (CPI) report on Tuesday and the Producer Price Index (PPI) report on Wednesday.
In a separate note to clients on Monday, Bank of America's rates strategists wrote that the risk of a Fed rate hike is "underappreciated" by traders. They recommended selling two-year Treasuries and betting that the front end of the U.S. yield curve will underperform longer-dated bonds.
Following Friday's release of the April jobs data, the Goldman Sachs team led by Jan Hatzius also pushed back their forecast for the Fed's next rate cut from September to December 2026. They concurrently lowered their estimate for the probability of a U.S. recession over the next 12 months.
Morgan Stanley and Barclays had previously forecast that the U.S. central bank would extend the period of unchanged rates. Macro strategist Simon White said, "Everyone knows inflation is moving higher, but as it climbs, the discussion in the coming months will inevitably turn to: how long will it stay elevated? Will there be second-round effects? And by how much will the Fed hike rates, if at all?"
Ahead of Tuesday's CPI report, the median estimate from surveyed economists shows headline CPI is expected to rise 3.7% year-over-year, up from 3.3% the prior month. Core CPI, which excludes food and energy prices, is forecast to increase 2.7% year-over-year.
Nevertheless, some others on Wall Street, particularly Citigroup economists Andrew Hollenhorst, Veronica Clark, and Giselle Yang, maintain their expectation that the Fed will cut rates by year-end. They argue that traders are underestimating the likelihood of central bank easing, given the recent slowdown in hiring and wage growth.
Matt Hornbach, global head of macro strategy at Morgan Stanley, said Monday, "We are set to get a more 'explosive' inflation report this month. We know oil prices are swinging wildly day to day, and they have a significant impact on inflation's path toward year-end."
**The Fed's Dilemma**
In 2025, the Federal Reserve implemented a key revision to its monetary policy strategy statement, effectively abandoning the "average inflation targeting" framework introduced in 2020 to address low-rate environments and returning to a more traditional framework that balances its dual mandate of price stability and maximum employment. This adjustment was no coincidence; it marks a fundamental shift in the post-pandemic global macro environment: supply chain restructuring, the normalization of geopolitical conflict, and the end of the "low inflation era."
The core dilemma facing the Fed today is the emerging risk of "stagflation." On one hand, core inflation remains stubbornly high due to sticky housing and service prices, with April CPI expected to grow 3.7% year-over-year, far exceeding the 2% policy target. On the other hand, economic growth momentum is slowing, and the unemployment rate faces upward pressure. This combination makes the Fed's trade-off between "price stability" and "maximum employment" exceptionally difficult. Policymakers must walk a tightrope between curbing inflation and avoiding a recession, with any decision carrying potentially unforeseen consequences.
More alarming than the data is the deep transmission mechanism of geopolitical shocks. The oil price surge triggered by the Iran conflict is not a simple "supply shock"; its effects are evolving into a systemic inflation spiral through multiple channels. First, shipping risks in the Strait of Hormuz directly push up global energy and transportation costs. Second, rising prices for intermediate goods like chemicals, fertilizers, and jet fuel gradually permeate core goods and services prices. Finally, inflation expectations themselves could become self-fulfilling, creating a second-round "wage-price" effect.
This complexity has directly fractured consensus within the Fed. At the April policy meeting, the Fed voted 8-4 to hold rates steady, marking the highest number of dissenting votes since October 1992. "Hawkish" officials like Minneapolis Fed President Neel Kashkari warned the next move could be a rate hike, while other officials expressed greater concern about the recession risks from overtightening.
Regardless of where today's CPI data ultimately lands, one trend is becoming increasingly clear: the Fed's policy space is being rapidly compressed. The delay in the rate cut window is not merely a data-driven technical adjustment; it may well signal the global economy's formal entry into a "triple-high" era of high interest rates, high volatility, and high geopolitical risk.
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