Major Wall Street firms are rapidly recalibrating expectations for U.S. interest-rate cuts, with Bank of America and Goldman Sachs now forecasting that the Federal Reserve will keep borrowing costs elevated far longer than previously expected as the Iran war drives energy prices higher and the U.S. labor market continues to show surprising resilience.
The revised outlook underscores how dramatically the global economic picture has shifted over the past two months. What many investors initially viewed as a temporary geopolitical shock is increasingly being treated as a prolonged inflationary event capable of reshaping monetary policy well into 2027.
BofA Global Research now expects the Fed to leave rates unchanged for the remainder of this year and only begin cutting rates in mid-2027, forecasting two quarter-point reductions in July and September of that year. Goldman Sachs has also delayed its expectations for monetary easing, now projecting the first cuts in December 2026 and March 2027 rather than beginning in September 2026 as previously anticipated.
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The revisions place the two banks among a growing number of global financial institutions reassessing assumptions that the Fed would soon pivot toward a more accommodative stance.
Policymakers now appear trapped between two competing pressures: an economy that remains unexpectedly strong and an inflation environment being destabilized again by surging energy costs linked to the Middle East conflict.
The war between the U.S. and Iran has fundamentally altered the inflation outlook. Oil prices remain far above pre-war levels after shipping disruptions and Iranian restrictions in the Strait of Hormuz squeezed global energy supply. That has reignited fears of a second inflation wave across major economies just as central banks believed they were regaining control over price growth.
Unlike previous inflation spikes driven primarily by pandemic supply-chain distortions, the current shock is being viewed as more structurally dangerous because it directly affects transportation, manufacturing, logistics, and household energy costs simultaneously. Economists increasingly warn that the inflationary effects could take many months to fully filter through the global economy.
The Federal Reserve’s problem is that inflation is accelerating at a time when the labor market has shown little sign of cracking. Fresh U.S. employment data released Friday showed job growth in April exceeded expectations while unemployment held steady at 4.3%, reinforcing the perception that the economy remains too strong for policymakers to justify near-term rate cuts.
The resilience of hiring has become one of the central reasons financial markets are steadily abandoning hopes for aggressive monetary easing. For much of last year, investors believed weakening growth would eventually force the Fed to cut rates rapidly. Instead, the economy has remained remarkably durable. Consumer spending has slowed only modestly, corporate earnings have largely remained resilient, and businesses continue hiring at a pace inconsistent with a recession.
That combination is complicating the Fed’s inflation battle because a strong labor market tends to support wage growth and consumption, both of which can keep prices elevated. Analysts at Goldman Sachs said the path toward lower rates now depends heavily on whether employment conditions weaken materially.
“If the labor market does not weaken sufficiently this year, we would instead expect the FOMC to deliver two final cuts in 2027,” Goldman analysts wrote in a May 8 note.
The shift in forecasts also highlights growing recognition that the Fed may be entering a prolonged holding pattern rather than preparing for a rapid easing cycle. The central bank held rates steady at its April 29 meeting in a sharply divided 8-4 vote, the closest split among policymakers since 1992.
That unusually fractured decision exposed deep disagreements within the Fed over how aggressively inflation risks should still be treated. Some officials remain concerned that inflation could become entrenched again if policy is loosened prematurely, especially with oil prices elevated and geopolitical risks unresolved.
Markets currently expect the Fed to keep rates within the 3.50% to 3.75% range through the end of the year. That outlook represents a major reversal from earlier market expectations that several cuts could arrive in 2026.
BofA analysts also pointed to the influence of likely incoming Fed leadership changes.
“We think (incoming Fed Chair) Warsh will push for lower rates, but the data flow precludes cuts for now,” the bank said in a May 8 note.
“However, cuts should be in play by next summer, with inflation much closer to target.”
The reference to Kevin Warsh, a former Fed governor viewed as more market-friendly than some current policymakers, suggests investors are already beginning to price in the possibility that future leadership changes could eventually tilt the Fed toward easing.
Still, the immediate challenge remains inflation.
The Fed’s preferred inflation measures continue to run well above its long-standing 2% target, and the resurgence in energy prices threatens to delay progress further. That has revived fears of a “higher-for-longer” interest-rate environment becoming semi-permanent.
Such a scenario is expected to have far-reaching implications across financial markets. This is because higher rates for longer tend to pressure housing markets, corporate borrowing, and consumer credit while also forcing investors to rethink valuations for technology stocks and other growth sectors that benefited from years of cheap money.
The implications extend globally. Many emerging-market economies had hoped lower U.S. rates would weaken the dollar and ease pressure on their currencies and debt markets. But that’s not what is happening. Instead, prolonged Fed tightness risks strengthening the dollar further and tightening financial conditions worldwide.
The longer the Middle East conflict drags on, the greater the possibility that central banks around the world will face the same dilemma confronting the Fed: slowing inflation without crushing economic growth.
For now, Wall Street’s message is becoming increasingly clear. The era of imminent rate cuts appears to be fading, replaced by growing acceptance that geopolitical instability and energy-market disruption may keep monetary policy restrictive far longer than investors once believed.