JPMorgan pulls Fed rate hike forecast forward to December 2026

JPMorgan expects the Federal Reserve to deliver a quarter-point rate hike in December, pulling forward its previous forecast for a move in the second half of 2027, after Chair Kevin Warsh's press conference raised questions about the central bank's credibility on inflation.

"At his press conference, Warsh once again failed to clearly articulate how he intends to fulfill his strongly proclaimed commitment to fighting inflation," Michael Feroli, chief U.S. economist at JPMorgan, said in a note. Feroli added that Warsh questioned whether the PCE price index should remain the Fed's official inflation target.

The brokerage now sees the fed funds rate at 3.75%-4.00% after a December hike, with a September move still possible if inflation accelerates. It raised its year-end 2026 forecast for the 10-year Treasury yield to 4.85% from 4.7% and the 30-year yield to 5.4% from 5.2%. JPMorgan also forecast July nonfarm payrolls of 75,000 with unemployment edging up to 4.3%.

The revision points to expectations of tighter policy that could pressure equity valuations and raise borrowing costs, with markets pricing a 65.2% probability of a September hike, down from 81% before the Fed's statement. The Fed held rates at 3.75%-4.00% at its July meeting, with three of the 12 FOMC members dissenting in favor of a quarter-point increase.

The decision to hold was widely expected, but the outcome exposed divisions within the committee. Underlying inflation has strengthened in recent months, supported by higher fuel and food prices and strong AI-related business spending, yet Warsh did not signal that an immediate hike was the preferred response.

JPMorgan characterized its forecast revision as a warning about the Fed's credibility rather than market pressure. "We do not view this revision as the market 'pressuring' the Fed, but rather as another challenge urging the Fed to act decisively to uphold its credibility," the report said. The bank believes Warsh's ambiguous messaging on the disinflation path could push other FOMC members to pursue their price-stability mandate with greater urgency.

Rate expectations diverge across Wall Street

Brokerages remain split on the Fed's next move. Goldman Sachs and Barclays continue to expect policymakers to hold rates through year-end, while BofA Global Research forecasts three hikes beginning in September. Citigroup, a long-standing dove, reaffirmed its forecast for cuts in October and December this year and another in January 2027.

The last time the Fed faced a comparable credibility test was in 2022, when it abandoned its "transitory" inflation view and delivered a series of 75-basis-point hikes that pushed the fed funds rate to a two-decade high. Long-end Treasury yields have since climbed toward levels not seen since before that tightening cycle, with the 10-year approaching 4.85% as investors price in persistent price pressures.

What a December hike would mean

A December hike would mark the first increase since the Fed began cutting rates, reversing a policy path that markets had priced through 2026. Higher long-end yields would tighten financial conditions, raising funding costs for corporates and households and pressuring rate-sensitive sectors such as real estate and utilities. The dollar could strengthen, weighing on emerging-market assets and commodities priced in the currency.

The next test comes with the July jobs report, due Aug. 7, which JPMorgan expects to show 75,000 new positions and unemployment at 4.3%. Warsh is scheduled to speak at the Jackson Hole symposium on Aug. 27, where markets will look for clarity on the Fed's reaction function after the chair scrapped forward guidance.

This article is for informational purposes only and does not constitute investment advice.