Robust employment figures and persistent inflationary pressures are prompting major Wall Street institutions to collectively delay their expectations for Federal Reserve interest rate cuts, with some even pushing the projected timing of the first cut into 2027. Goldman Sachs and Bank of America adjusted their forecasts last week, moving their projected timing for the Fed's next rate cut from September 2024 to a later date. Simultaneously, market traders are increasing bets that the Fed will hold rates steady throughout 2026, with expectations for a potential rate hike emerging in early 2027. Hawkish signals are also appearing within the Fed itself—during the central bank's last meeting, two officials dissented, suggesting the next policy move could be a hike rather than a cut. The impact of the Iran conflict on oil markets and the resulting boost to inflation expectations are further narrowing the window for monetary easing. Consequently, U.S. Treasury prices fell on Monday, pushing yields higher. The yield on the policy-sensitive 2-year Treasury note rose over 6 basis points to 3.95%. U.S. stocks edged higher, and the U.S. dollar index also strengthened slightly. Employment Data Becomes the "Final Straw" Aditya Bhave, head of U.S. economics at Bank of America, wrote in a report dated May 8th: "The data simply don't support a cut this year. Core inflation is too high and still rising. The strong April jobs report was the final straw, especially against a backdrop of Fed officials continuing to send 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 2024. Bank of America rate strategists, in a separate report, also noted to clients that traders are "significantly underpricing" the risk of a Fed rate hike and recommended shorting 2-year Treasuries, betting that short-term yields will underperform long-term ones. The April non-farm payrolls report showed U.S. employers added jobs for a second consecutive month above expectations, indicating labor market resilience even amidst ongoing Middle East conflicts. Goldman Follows Suit, Major Banks Converge Following the April jobs data, a team led by Goldman Sachs' Jan Hatzius also pushed back their forecast for the Fed's next rate cut from September 2024 to December 2026, while simultaneously lowering their probability for a U.S. 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 reports are certainly going to be trickier. Oil prices are moving significantly every day, which will have a major impact on the inflation trajectory into year-end." Bloomberg macro strategist Simon White also pointed out that rising inflation is now the market consensus. The upcoming discussion will focus on how long inflation remains elevated, whether second-round effects emerge, and the extent of the central bank's eventual rate hikes. Some Institutions Maintain 2024 Rate Cut Expectations Not all Wall Street firms have turned hawkish. Citigroup economists Andrew Hollenhorst, Veronica Clark, and Gisela Hoxha maintain their view that the Fed will cut rates before year-end. 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. The market is now closely watching this week's inflation data. According to a Bloomberg survey, economists expect the April Consumer Price Index (CPI), to be released Tuesday, to show a year-over-year increase of 3.7%, up from 3.3% in March. The core CPI, excluding food and energy, is forecast to rise 2.7% year-over-year. Producer Price Index (PPI) data on Wednesday will provide a more complete inflation picture.
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