Strong employment figures and persistent inflationary pressures are leading major Wall Street institutions to collectively delay their expectations for the Federal Reserve's first interest rate cut, with some firms pushing the anticipated timing all the way to 2027.
Goldman Sachs and Bank of America adjusted their forecasts last week, pushing back their projected timing for the next Fed rate cut from September of this year to a later date.
Simultaneously, market traders are increasing bets that the Fed will hold rates steady throughout 2026, with some anticipating a potential hike in early 2027. Hawkish signals are also emerging from within the Fed itself—during the central bank's last meeting, two officials dissented, suggesting the next policy move could be a rate hike rather than a cut.
The impact of the Iran-Israel conflict on oil markets and its effect of pushing up inflation expectations are further constraining the scope for monetary easing. Influenced by these factors, U.S. Treasury prices fell on Monday, pushing yields higher. The policy-sensitive two-year Treasury yield rose over 6 basis points to 3.95%. U.S. stocks saw modest gains, and the U.S. dollar index also strengthened slightly.
The April jobs report proved to be the final catalyst for the shift in outlook. Aditya Bhave, head of U.S. economics at Bank of America, wrote in a report on May 8th: "The data simply do not support a rate cut this year. Core inflation is too high and still rising. The strong April jobs report was the last straw, especially against the backdrop of Fed officials consistently sending hawkish signals."
Bhave and his team now expect the Fed's next rate cut to be delayed until July 2027, a significant postponement from their previous forecast of September this year. Bank of America's rates strategists, in a separate report, also told clients that traders are "significantly underpricing" the risk of a Fed rate hike and recommended shorting two-year Treasuries, betting that short-term yields will underperform longer-term ones.
The April non-farm payrolls report showed U.S. employers added jobs for a second consecutive month beyond expectations, indicating labor market resilience even amid ongoing Middle East conflicts.
Following the April jobs data, a team led by Jan Hatzius at Goldman Sachs similarly delayed their forecast for the next Fed rate cut from September this year to December 2026. They also concurrently lowered their probability for a U.S. economic recession within the next 12 months.
Morgan Stanley and Barclays had previously predicted the Fed would maintain an extended pause. Matt Hornbach, global head of macro strategy at Morgan Stanley, stated in a Bloomberg interview on Monday: "This month's inflation report is certainly going to be trickier. Oil prices are moving significantly every day, which will have a major impact on the inflation trajectory through year-end."
Bloomberg macro strategist Simon White also noted that rising inflation is now a market consensus. However, the upcoming debate will focus on how long inflation remains elevated, whether secondary effects emerge, and the eventual magnitude of central bank rate hikes.
Not all Wall Street institutions have shifted to a hawkish stance. Citigroup economists Andrew Hollenhorst, Veronica Clark, and Gisela Hoxha maintain their view that the Fed will cut rates before the end of the year. Their reasoning is that job growth and wage gains have been subdued in recent months, and market pricing for policy easing is actually on the low side.
Markets are now closely focused on this week's inflation data. According to a Bloomberg survey, economists expect the year-over-year CPI for April, released Tuesday, to rise to 3.7% from 3.3% in March. Core CPI, excluding food and energy, is forecast to rise 2.7% year-over-year. PPI data released on Wednesday will provide a more complete picture of inflation.
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