2 Wall Street banks see no Fed rate cut until late 2026

Goldman Sachs and Bank of America have pushed their Federal Reserve rate cut forecasts to late 2026 and mid-2027 respectively, a significant reversal driven by a robust April jobs report and persistent inflation that has shaken expectations of monetary easing this year.

"The data simply does not support a cut this year," Aditya Bhave, head of U.S. economics research at Bank of America, wrote in a May 8 report. "Core inflation is too high and still pointing up. The strong April jobs report was the final straw, especially against a backdrop of continued hawkish talk from Fed officials."

The recalibration sent ripples through markets, pushing the policy-sensitive two-year Treasury yield up more than 6 basis points to 3.95 percent. The U.S. dollar index also strengthened, while stocks saw a muted rise, suggesting investors are grappling with the prospect of borrowing costs remaining elevated for longer.

This shift puts the market on high alert for this week's inflation data, with economists forecasting the April Consumer Price Index will climb to 3.7 percent. The new "higher for longer" reality puts downward pressure on equity valuations and suggests any hopes for a dovish Fed pivot have been put on hold, with the next move depending entirely on whether inflation shows signs of cooling.

A Hawkish Consensus Forms

Bank of America's team, led by Bhave, now predicts the next Fed cut will not arrive until July 2027, a dramatic delay from their previous forecast of September this year. Shortly after the jobs data, Goldman Sachs economists led by Jan Hatzius also moved their forecast back, pushing their expectation for the first cut from September to December 2026.

These moves bring them closer to the views held by Morgan Stanley and Barclays, who had already projected a prolonged pause. "This month's inflation report will certainly be a bit trickier," Morgan Stanley's global macro strategist Matt Hornbach said in a Bloomberg interview, citing the volatility in oil prices stemming from the Iran war.

However, not all of Wall Street has abandoned hope for easing this year. Economists at Citigroup are maintaining their call for a cut before year-end, arguing that recent months have shown a flattening in both job and wage growth that makes current market pricing for tightening too aggressive.

Data Overturns Rate Cut Narrative

The primary catalyst for the forecast upheaval was the April non-farm payrolls report, which showed U.S. employers adding more jobs than expected for a second straight month. This sign of a resilient labor market, even amid geopolitical conflict, convinced many that the economy can withstand higher rates.

Traders are now pricing in the possibility that the Federal Reserve, which last moved rates with a hike in July 2023, will keep the fed funds rate in its current 5.25% to 5.50% range throughout 2026. Some are even placing bets on a potential rate hike in early 2027.

All eyes now turn to the upcoming inflation reports. According to a Bloomberg survey, economists expect the headline CPI for April to show a 3.7 percent year-over-year increase, up from 3.3 percent the prior month. The Producer Price Index (PPI) data, due Wednesday, will provide a more complete picture, but the consensus is clear: inflation remains the key obstacle to any monetary easing.

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