Major investment banks have significantly revised their Federal Reserve policy expectations, with JPMorgan now forecasting the central bank's next move will be a rate hike rather than a cut, while other major institutions have postponed their rate reduction timelines following mixed December employment data.
JPMorgan Shifts to Rate Hike Forecast
JPMorgan has withdrawn its outlook for a January rate cut and now predicts the Fed's next move will be a 25-basis-point rate hike in the third quarter of 2027. The bank cited expectations that the labor market will tighten by the second quarter and that the disinflation process will be gradual. Macquarie has reiterated its forecast of a rate hike in the December 2026 quarter, aligning with the more hawkish outlook.
Banks Postpone Rate Cut Expectations
Several major financial institutions have pushed back their rate cut forecasts following the December employment data:
| Bank |
Previous Forecast |
Revised Forecast |
| Goldman Sachs |
March cuts |
September cuts |
| Barclays |
June cuts |
December cuts |
| Morgan Stanley |
January/April cuts |
June/September cuts |
| Wells Fargo |
March-June cuts |
Maintained |
| BofA Global Research |
June-July cuts |
Maintained |
Goldman Sachs noted that if the labor market stabilizes as expected, the Federal Open Market Committee will likely shift from risk management mode to normalization mode. The bank has also lowered its 12-month U.S. recession probability to 20% from 30%.
December Employment Data Influences Market Expectations
Data released on Friday showed U.S. employment growth slowed more than expected in December. However, the unemployment rate declined to 4.4% and wage growth remained solid, suggesting the labor market was not rapidly deteriorating. These mixed signals have boosted expectations that the central bank will leave borrowing costs unchanged at its January meeting.
Traders are now betting on a 95% chance for the Fed to keep rates unchanged at its January meeting, according to the CME FedWatch tool, representing an increase from 86% before the employment data release.
Political Tensions Over Fed Independence
Tensions between President Trump and Fed Chair Jerome Powell have intensified over central bank independence. Powell stated on Sunday that the Trump administration had threatened him with a criminal indictment, raising concerns about political pressure on monetary policy decisions. Powell characterized this as a "pretext" to gain more influence over interest rates that Trump wants cut dramatically.
Market Outlook and Analysis
JPMorgan noted that if the labor market weakens in the coming months or if inflation falls materially, the Fed could still ease rates later in the year. However, the bank expects labor market conditions to tighten and disinflation to proceed gradually. BofA Global Research maintained that the mix of data is consistent with their view that breakeven job growth might be falling due to labor supply shocks even faster than the Fed will acknowledge.
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