Quick overview

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Expectations of near-term interest rate cuts by the Federal Reserve are cooling amid a still-solid labor market and mounting tensions between Donald Trump and Fed Chair Jerome Powell, adding a new layer of uncertainty.

Forecasts that the U.S. Federal Reserve (Fed) would cut interest rates in the short term are fading, according to leading U.S. banks. Labor market data released last Friday suggest the economy is not weakening enough to warrant an accelerated easing cycle. At the same time, the conflict between President Donald Trump and Fed Chair Jerome Powell has intensified concerns over the institution’s independence.

Against this backdrop, Barclays and Goldman Sachs have joined Morgan Stanley in pushing back their expectations for rate cuts until mid-2026. JPMorgan, meanwhile, now anticipates that the Fed’s next move could be a 25-basis-point rate hike in the third quarter of 2027.

“If the labor market weakens again in the coming months, or if inflation falls substantially, the Fed could still ease policy later this year,” JPMorgan said. However, the bank expects employment dynamics to “cool in the second quarter and the disinflation process to remain fairly gradual.”

Goldman & Barclays Change Rate Cuts Expectations

Goldman Sachs and Barclays—both of which had previously forecast cuts in March and June—now expect a 25-basis-point reduction in September and December, respectively. “If the labor market stabilizes as we expect, the FOMC will likely shift from risk-management mode to normalization mode,” Goldman said. Morgan Stanley also revised its outlook on Friday, pushing back its expected rate cuts to June and September from January and April.

Not all banks have adjusted their projections. Wells Fargo and BofA Global Research maintained their expectations for two rate cuts, the first between March and June and the second between June and July. “The mix of data is consistent with our view that equilibrium job growth may be slowing (a labor supply shock) even faster than the Fed is willing to acknowledge,” BofA added.

Trump Pressure, a Resilient Labor Market, and Geopolitical Risks

Last week’s relatively solid U.S. jobs report reinforced the case for a more gradual easing path. While net job creation came in slightly below expectations—nonfarm payrolls rose by 50,000 in December versus a forecast of 70,000—the labor force participation rate fell from 62.5% to 62.4%. This helped keep the unemployment rate at 4.4%, below the 4.5% anticipated by markets.

Another factor weighing on the Fed is confirmation that the Department of Justice has opened a criminal investigation into Jerome Powell, linked to the renovation of the Fed’s Washington headquarters and statements made before Congress. Sources close to Powell have argued that the legal offensive is a response to the Fed’s refusal to adjust interest rates in line with the White House’s political preferences.

Changing Rate Expectations: Market Implications

The expectation that the Federal Reserve will delay rate cuts until at least June reinforces a “higher for longer” monetary policy scenario. While inflation continues to decelerate, it has yet to clearly converge toward the Fed’s target.

For global markets, this outlook supports elevated real interest rates in the United States, keeps Treasury yields high across the curve, and limits risk appetite—particularly for assets that are more sensitive to borrowing costs and dollar-based financing.