Wall Street takes turns delaying timing expectations; is this the year the Federal Reserve cuts interest rates?

Author: Zhao Ying, Wall Street Insights

Strong employment data and persistently rising inflation pressures are pushing Wall Street’s major institutions to collectively postpone expectations of a Federal Reserve rate cut, with some institutions even extending the timing of the first cut to 2027.

Goldman Sachs and Bank of America both adjusted their forecasts last week, pushing the Federal Reserve’s next rate cut timing from September this year to later.

Meanwhile, market traders are increasing bets that the Federal Reserve will keep interest rates unchanged throughout 2026 and are also expecting the possibility of a rate hike in early 2027. There have also been hawkish signals within the Federal Reserve. At the central bank’s most recent meeting, two officials held dissenting views, arguing that the next step could be a rate hike rather than a rate cut.

The Iran conflict has hit oil markets, driving up inflation expectations and further compressing the room for monetary easing. As a result, U.S. Treasury prices fell on Monday and yields rose. The two-year U.S. Treasury yield, which is sensitive to monetary policy, rose by more than 6 basis points to 3.95%. U.S. stocks edged higher, and the U.S. dollar index also strengthened slightly.

Employment Data Becomes “The Last Straw That Breaks the Camel’s Back”

In a report dated May 8, Aditya Bhave, head of U.S. economic research at Bank of America, wrote: “The data simply does not support a rate cut this year. Core inflation is too high and still rising. The April employment report was strong, becoming the last straw that breaks the camel’s back, especially against the backdrop of Federal Reserve officials continuing to send hawkish signals.”

Bhave and his team currently expect the Federal Reserve’s next rate cut to be delayed until July 2027, a significant shift from the prior forecast of September this year. In another report, Bank of America’s rates strategist also told clients that the pricing of the risk of Federal Reserve rate hikes by traders is “clearly insufficient,” and suggested shorting two-year Treasuries, betting that short-end yields would underperform long-end yields.

The April nonfarm payrolls report showed that U.S. employers added jobs for a second consecutive month above expectations, indicating that even if the conflict in the Middle East continues, the job market remains resilient.

Goldman Sachs Follows Suit, Multiple Major Banks Join Forces

After April’s employment data was released, the team led by Jan Hatzius at Goldman Sachs also pushed its forecast for the Federal Reserve’s next rate cut back from September this year to December 2026, and simultaneously lowered the probability that the U.S. economy will fall into a recession over the next 12 months.

Morgan Stanley and Barclays had previously predicted that the Federal Reserve would maintain a prolonged pause. On Monday, Matt Hornbach, global head of macro strategy at Morgan Stanley, told Bloomberg: “This month’s inflation report is definitely going to be more challenging. Oil prices are fluctuating dramatically day by day, and that will have a major impact on the inflation trajectory through the end of the year.”

Bloomberg macro strategist Simon White also noted that inflation moving upward has become a market consensus, but the subsequent discussion will focus on how long inflation stays at elevated levels, whether there are secondary effects, and the final magnitude of rate hikes by the central bank.

Not All Institutions Are Giving Up on Rate Cut Expectations This Year

Not all Wall Street institutions have shifted hawkishly. Citigroup economists Andrew Hollenhorst, Veronica Clark, and Gisela Young maintain that the Federal Reserve will cut rates before the end of the year. Their rationale is that employment growth and wage growth over the past few months have been lackluster, and the market’s pricing for easier policy is actually too low.

The market is currently closely watching this week’s inflation data. According to a Bloomberg survey, economists expect the year-over-year increase in April CPI to rise from 3.3% last month to 3.7% on Tuesday; core CPI excluding food and energy is expected to rise 2.7% year over year. PPI data will be released on Wednesday, giving the market a more complete picture of inflation.