Wall Street Pushes Back Fed Rate Cut Forecasts to 2026

Leading financial institutions are overhauling their predictions for the U.S. Federal Reserve's interest rate policy, with several major banks now pushing expected rate cuts well into 2026 or beyond. The shift follows surprisingly resilient labor market data, suggesting the economy is not cooling as quickly as previously thought.

In a dramatic reversal, J.P. Morgan has abandoned its call for a January rate cut. The bank now predicts the Fed's next move will be a 25-basis-point rate hike in the third quarter of 2027. This move aligns it more closely with Macquarie, which has consistently forecasted a rate hike in the fourth quarter of 2026.

Figure 1: Major banks are reassessing their interest rate outlooks following new data on the U.S. economy, impacting the Federal Reserve's policy timeline.

Barclays and Goldman Sachs have also joined Morgan Stanley in delaying their rate cut expectations to mid-2026.

Strong Labor Data Drives Forecast Changes

The catalyst for this widespread revision was Friday's employment report. While U.S. job growth in December slowed more than anticipated, other key indicators pointed to underlying strength. The unemployment rate fell to 4.4%, and wage growth remained solid, signaling that the labor market is not deteriorating rapidly.

This data has solidified expectations that the central bank will hold interest rates steady at its upcoming January meeting. According to the CME FedWatch tool, traders are now pricing in a 95% probability of the Fed keeping rates unchanged, an increase from 86% before the employment data was released.

J.P. Morgan noted that while a rate cut later this year remains possible if the labor market weakens or inflation falls significantly, their base case has changed. "We expect the labor market to tighten by the second quarter and the disinflation process to be quite gradual," the bank stated in a note.

A Breakdown of Wall Street's New Timelines

The new forecasts reveal a growing divide among top financial institutions on the future path of monetary policy.

• Goldman Sachs & Barclays: Both banks previously anticipated rate cuts in March and June. They now expect a 25 bps reduction in September and December, respectively, following an initial cut in June. Goldman Sachs also lowered its 12-month U.S. recession probability from 30% to 20%, stating that the Fed will likely shift from "risk management mode to normalization mode."

• Morgan Stanley: On Friday, the firm revised its forecast, moving its expected rate cuts from January and April to June and September.

• Wells Fargo & BofA Global Research: These banks are outliers, maintaining their bets for earlier rate cuts. Wells Fargo still sees cuts between March and June, while BofA Global Research anticipates action between June and July. BofA suggested the data is consistent with their view that "breakeven job growth might be falling... even faster than the Fed will concede."

Political Pressures and Fed Independence

Adding another layer of complexity is the renewed focus on the Federal Reserve's independence. Fed Chair Jerome Powell stated on Sunday that the Trump administration had threatened him with a criminal indictment.

Powell described the move as a "pretext" to exert more control over interest rates, which President Donald Trump has wanted cut dramatically. This public clash has stoked ongoing concerns about political influence over the central bank's monetary policy decisions.