Goldman and BofA delay Fed cut forecasts; labor data stalls rate pivot

Major Wall Street banks are reversing course on rate-cut timing. Goldman and BofA cited strong jobs data and persistent inflationThe rate at which prices rise across an economy. concerns as reasons to extend their forecasts for the first Fed cut from mid-2026 deeper into the year. This 'last straw' moment reflects a growing consensus that the labor market remains resilient enough to keep the Fed in hold mode, and that inflation pressures (driven partly by the Iran oil spike) are not transient.

The macro environment has shifted subtly. A few weeks ago, markets were pricing in three to four rate cuts by year-end. Now that consensus is fragmenting. Morgan Stanley's Matt Hornbach expects CPI data due Wednesday morning (for April, when pump prices spiked sharply) could surprise to the hot side, further cementing hawkish Fed expectations. If CPI comes in above 3.5% or shows elevated momentumThe empirical fact that winners keep winning over the medium term., equities could see a sharp reversal, particularly growth and tech names that have thrived in zero-rate scenarios.

Semiconductors, memory chips, and speculative growth stocks are most vulnerable. These names have rallied on the assumption that the Fed would pivot dovish by summer. If that timeline extends to late 2026 or beyond, multiple compression is likely. Conversely, banks and financials could benefit from higher-for-longer rate environment, but the current environment of geopolitical uncertainty and oil shocks creates unpredictable credit losses.

The Fed communication is also under scrutiny. New Fed Chair nominee (expected to be announced) will face questions about inflationThe rate at which prices rise across an economy. credibility. If the nominee is perceived as dovish, it could temporarily boost stocks, but any hint of rate hikes into strength could trigger a 15-20% equity correction. Treasury yields are also rising on the back of this shift, putting pressure on leveraged buyout valuations and private credit spreads.