Fed rate cuts pushed back as inflation pressures mount

After weeks of market optimism around rate cuts, major Wall Street banks are pumping the brakes. Goldman Sachs pushed its forecast for the first Fed rate cut from June to December 2026, while Bank of America moved its call even further out to March 2027. The shift reflects mounting concern that inflationThe rate at which prices rise across an economy., driven by a supply shock in crude oil from the ongoing Middle East conflict, will remain sticky longer than previously expected.

The catalyst for the reassessment is the closure of the Strait of Hormuz and elevated geopolitical tensions between the US and Iran. Oil prices have surged, with traders bracing for extended supply disruption. A 10-week conflict in the Middle East has already sent oil climbing, and the loss of 100 million barrels per week through Hormuz compounds the shock. Central banks, particularly the Federal Reserve, face a structural dilemma: inflationThe rate at which prices rise across an economy. risks argue against rate cuts, but growth concerns argue for them. For now, inflation hawks are winning the debate on Wall Street.

The implications cut across asset classes. Higher-for-longer rates support the US dollar and squeeze emerging markets already facing imported inflationThe rate at which prices rise across an economy.. Energy importers like India and parts of Europe face margin pressure. The US consumer, already saddled with near-record high gas prices (around $4.54), could see demand destruction. However, defense names and energy producers benefit from the elevated geopolitical risk premium. Treasury yields are climbing as markets price out the "Fed pivot" narrative that dominated late 2025.

Sceptics note that cuts rarely come as markets expect. If geopolitical tensions ease or oil supply normalizes faster than feared, the Fed could cut sooner. Meanwhile, if the economy shows weakness despite sticky inflationThe rate at which prices rise across an economy. (a stagflation scenario), the Fed might feel forced to cut regardless. The market is caught between two risks, and the delayed-cut narrative could reverse quickly.