Quick overview

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Major banks are increasingly divided between those still expecting at least one Fed rate cut and those now ruling out any monetary easing in 2026, as the conflict in the Middle East continues to push up energy prices and harden the Federal Reserve’s stance.

Just days before Kevin Warsh takes office as the new chair of the Federal Reserve (Fed), Goldman Sachs pushed back its forecast for rate cuts to December this year and March 2027, arguing that rising energy costs are keeping inflation well above the central bank’s 2% target.

Previously, the bank had expected cuts in September and December. But the war in the Middle East — now entering its tenth week — has changed the outlook. Goldman is not alone. Major Wall Street investment banks have either downgraded or completely abandoned expectations for rate cuts in 2026.

“The pass-through from higher energy costs is likely to keep core PCE inflation closer to 3% than 2% throughout the year,” Goldman analysts wrote in a note dated May 8.

As a result, they argued that “a combination of softer monthly inflation data, once the oil crisis fades, and further weakening in the labor market will probably be necessary for the FOMC to cut rates this year.”

Major banks split on Fed outlook

The Federal Reserve’s Federal Open Market Committee (FOMC) left interest rates unchanged at its April 29 meeting, in an 8-4 vote — the narrowest split since 1992 — with inflation still running well above target. Meanwhile, market participants expect the Fed to maintain its 3.50%-3.75% range through the end of the year, according to the CME FedWatch tool.

Wall Street’s outlook is now highly fragmented. Firms such as BNP Paribas, HSBC, JP Morgan, and RBC expect no rate cuts in 2026. Others, including Jefferies, Nomura, and Wells Fargo, still forecast a first cut in September. At the more hawkish end, Bank of America and Morgan Stanley see cuts delayed until mid-2027 or even early 2027, respectively.

Goldman, for its part, is not ruling out an even later timeline. “If the labor market does not weaken sufficiently this year, we would expect the FOMC to deliver its final two cuts in 2027, when we forecast core inflation returning to the 2% target,” the bank added.