Wall Street keeps pushing back its expected timing—are Fed rate cuts off the table this year?

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Strong employment data and persistently rising inflation pressures are collectively prompting Wall Street’s major institutions to postpone their expectations for Federal Reserve rate cuts, with some institutions even delaying the anticipated first rate cut to 2027.

Goldman Sachs and Bank of America both adjusted their forecasts last week, pushing back the timing of the Fed’s next rate cut from this September to a later date.

Meanwhile, market traders are increasingly betting that the Fed will keep rates unchanged through all of 2026, and are anticipating a possibility of a rate hike in early 2027. Hawkish signals have also emerged within the Fed—in its last meeting, two officials dissented, believing the next move might be a rate hike rather than a cut.

The Iran war’s impact on the oil market, driving up inflation expectations, has further limited the space for monetary easing. As a result, U.S. Treasury prices fell on Monday, yields rose, and the policy-sensitive two-year Treasury yield climbed over 6 basis points to 3.95%. U.S. stocks edged up slightly, and the dollar index also strengthened a little.

Employment Data Becomes "The Last Straw"

Aditya Bhave, Head of U.S. Economic Research at Bank of America, wrote in a May 8 report: “The data simply does not support a rate cut this year. Core inflation is too high and still rising. The strong April employment report is the last straw, especially as Fed officials continue 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 earlier forecast of September this year. In another report, Bank of America’s rate strategists also told clients that traders are “significantly underpricing” the risk of a Fed rate hike, and advised shorting two-year Treasuries, betting that short-term yields will underperform long-term yields.

The April nonfarm payrolls report showed that U.S. employers added more jobs than expected for the second straight month, indicating that the labor market remains robust despite ongoing Middle East conflicts.

Goldman Follows Suit, Multiple Banks in Unison

The team led by Jan Hatzius at Goldman Sachs also pushed back its forecast for the Fed’s next rate cut from September this year to December 2026 after the release of April’s employment data, and at the same time lowered the probability of a U.S. recession in the next 12 months.

Previously, Morgan Stanley and Barclays had forecast the Fed would remain on hold for an extended period. Matt Hornbach, global head of macro strategy at Morgan Stanley, said in an interview with Bloomberg on Monday: “This month’s inflation report will definitely be more challenging. Oil prices are swinging sharply every day, which will have a major impact on inflation trends before year-end.”

Bloomberg macro strategist Simon White also pointed out that rising inflation is now market consensus, but the discussion next will focus on how long inflation stays elevated, whether there will be secondary effects, and the final extent of central bank rate hikes.

Some Institutions Still Expect Cuts This Year

Not all Wall Street institutions have turned hawkish. Citi economists Andrew Hollenhorst, Veronica Clark, and Gisela Young maintain that the Fed will cut rates before year-end. Their reasoning is that both employment growth and wage increases have been muted in recent months, and market pricing on easing policy is actually too low.

The market is now closely watching this week’s inflation data. According to a Bloomberg survey, economists expect Tuesday’s release of April’s year-on-year CPI growth to rise from last month’s 3.3% to 3.7%; core CPI, which excludes food and energy, is expected to rise 2.7% year-on-year. PPI data will be released on Wednesday, giving the market a fuller inflation picture.

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