Wall Street collectively turned hawkish; under the dual pressure of strong employment and persistent inflation, Goldman Sachs and Bank of America have successively pushed back their expectations for Fed rate cuts to late 2026 or even 2027, with some traders even betting on rate hikes in 2027.
Article by Zhao Ying
Source: Wall Street Journal
Strong employment data and persistently rising inflation pressures are prompting major Wall Street institutions to collectively delay their expectations for Fed rate cuts, with some even pushing the first potential cut to 2027.
Goldman Sachs and Bank of America sequentially adjusted their forecasts last week, pushing back the expected timing of the Fed's next rate cut from September this year to a later date.
Meanwhile, market traders are increasing bets that the Federal Reserve will hold interest rates steady throughout 2026, with expectations of a potential rate hike in early 2027. Hawkish signals are also emerging within the Fed—during the central bank’s most recent meeting, two officials dissented, arguing that the next move could be a rate hike rather than a cut.
The war in Iran has disrupted oil markets and elevated inflation expectations, further narrowing the room for monetary easing. As a result, U.S. Treasury prices fell on Monday, pushing yields higher; the yield on the two-year Treasury note, which is sensitive to monetary policy, rose more than 6 basis points to 3.95%. U.S. stocks edged higher, and the U.S. dollar index also strengthened slightly.
Employment data became the straw that broke the camel's back
In a report on May 8, Aditya Bhave, Head of U.S. Economic Research at Bank of America, wrote: “The data simply do not support rate cuts this year. Core inflation remains too high and is still rising. The strong April jobs report was the final straw, especially against the backdrop of continued hawkish signals from Fed officials.”
Bhave and his team currently expect the Fed’s next rate cut to be delayed until July 2027, a significant postponement from their previous forecast of September this year. In another report, U.S. Bank interest rate strategists also informed clients that traders are "clearly underpricing" the risk of Fed rate hikes, and recommended shorting two-year Treasuries, betting that short-term yields will underperform long-term yields.
The April non-farm payrolls report showed that U.S. employers added more jobs than expected for the second consecutive month, indicating a resilient labor market despite ongoing conflicts in the Middle East.
Goldman Sachs joins in, with multiple major banks working together in unison.
Led by Jan Hatzius, Goldman Sachs similarly pushed back its forecast for the next Fed rate cut from September this year to December 2026 and lowered the probability of a U.S. recession over the next 12 months following the April employment data release.
Morgan Stanley and Barclays had previously predicted that the Fed would maintain a prolonged pause. Matt Hornbach, Head of Global Macro Strategy at Morgan Stanley, said in an interview with Bloomberg on Monday: "This month's inflation report will certainly be more challenging. Oil prices are fluctuating significantly day by day, which will have a major impact on inflation trends before the end of the year."
Bloomberg macro strategist Simon White also noted that rising inflation is already a market consensus, but the next focus will be on how long inflation remains elevated, whether secondary effects emerge, and the ultimate extent of central bank rate hikes.
Some institutions still maintain expectations of interest rate cuts this year.
Not all Wall Street institutions have shifted to a hawkish stance. Citigroup economists Andrew Hollenhorst, Veronica Clark, and Gisela Young maintain that the Federal Reserve will cut interest rates before the end of the year. Their reasoning is that job growth and wage gains have been subdued over the past few months, yet the market is underpricing the likelihood of accommodative policy.
The market is currently closely monitoring this week’s inflation data. According to a Bloomberg survey, economists expect April’s CPI, to be released on Tuesday, to rise year-over-year to 3.7% from 3.3% last month; the core CPI, excluding food and energy, is forecast to increase by 2.7% year-over-year. PPI data will be released on Wednesday, providing a more complete picture of inflation.
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