- J.P. Morgan now sees the next Fed move as a 25 bp hike in Q3 2027, scrapping its prior call for a January 2026 cut.
- Goldman Sachs, Barclays and Morgan Stanley pushed expected cuts to mid-to-late 2026 as labor markets stay tight and inflation remains sticky.
- With unemployment at 4.4% and FedWatch implying a high chance of no change in early 2026, firms expect rates to stay higher for longer.
- Escalating political attacks on Chair Jerome Powell are raising fresh concerns about perceived Fed independence even as economists stress a data-driven stance.
Read More
The most recent forecasts from major Wall Street firms reflect a significant shift in expectations: rather than anticipating rate cuts in early 2026, the consensus is now that interest rates will remain elevated well into mid-to-late 2026 or even 2027. J.P. Morgan’s projection of a policy hike in the third quarter of 2027 marks a departure from previous assumptions of imminent easing.
Labor market data serve as the primary justification for this change. Even as job growth slowed in December, unemployment fell to 4.4% and wage pressures remain intact—signals that the Fed’s dual mandate is not yet satisfied and that premature easing could risk inflation persistence.
The inflation trajectory has also contributed to the delay in expected cuts. With inflation—especially core inflation—showing limited signs of decline, the Fed is likely to adhere to a cautious, data-dependent strategy, pushing back against assumptions of early rate reductions. Market instruments (such as the FedWatch tool) now reflect far lower probabilities for rate cuts in the first half of 2026.
Moreover, mounting political tensions, particularly allegations from former President Trump against Chair Powell, underscore a broader risk: while analysts such as Goldman Sachs’ Jan Hatzius reaffirm that decisions will remain “data-driven,” the credibility and perceived independence of the Fed face stress. For markets and investors, credibility risks may influence risk premiums, Treasury curves, and inflation expectations.
Strategically, investors should reposition portfolios toward assets that benefit from higher-for-longer rates—long-duration fixed income may suffer, whereas sectors with strong cash flows, inflation-hedged assets, and financials could outperform. Similarly, central banks, corporates, and governments facing refinancing needs will need to plan for sustained funding costs. Open questions include: what thresholds for labor market cooling or inflation decline would prompt cuts, how political pressures might affect policy transparency, and how market expectations will shift should data surprise on the downside.
Supporting Notes
- J.P. Morgan now expects no rate cuts in 2026, forecasting a 25 bps hike in Q3 2027.
- Goldman Sachs has pushed back its expected rate cuts to September (‐25 bps) and December 2026, from earlier calls for cuts in March and June.
- Morgan Stanley similarly revised its forecast to cuts in June and September 2026 instead of earlier predictions for early-year easing.
- Despite slower job growth in December, unemployment dropped to 4.4% and wages stayed strong—evidence of continued labor market tightness.
- The CME FedWatch probability of the Fed holding rates steady in January 2026 rose to 95%, up from 86% before the December data.
- Goldman Sachs reduced its 12-month U.S. recession odds to 20% from 30%, reflecting renewed confidence in economic resilience.
- Political developments include Trump’s alleged threat to indict Powell over a Federal Reserve building renovation, raising concerns about threats to central bank autonomy.