Wall Street banks delay Fed rate-cut forecasts amid sticky inflation

Major Wall Street forecasters are revising their monetary policy calls sharply lower after a combination of strong jobs data and elevated energy costs convinced them the Federal Reserve will stay on hold much longer than expected. Goldman Sachs in particular cited elevated energy prices and the Middle East conflict as reasons to push its Fed cut forecast further into late 2026 or early 2027, breaking ranks with earlier expectations for mid-year action.

The timing matters because these revisions follow weeks of Fed communications suggesting possible patience. Now, with energy prices surging due to the Strait of Hormuz closure and inflationThe rate at which prices rise across an economy. risks mounting globally, banks are converging on a view that the central bank will tolerate higher-for-longer rates. This caps the current narrative of easy-money relief that drove equities higher in April.

The shift ripples across asset classes. Bond yields are rising as the market reprices rate expectations; equities face headwinds from higher discount rates on future earnings. Real estate and durationBond price sensitivity to interest rate changes.-heavy sectors suffer most. Meanwhile, sectors tied to higher rates like financials gain some support. The yield curvePlot of bond yields across maturities. steepens under this backdrop, benefiting banks that can lever the spread.

Skeptics counter that sticky inflationThe rate at which prices rise across an economy. may prove transitory if geopolitical tensions ease or if demand destruction from high oil prices materializes faster than expected. Some strategists argue Goldman and BofA are being too hawkish given still-weak core inflation readings outside energy. If the Hormuz closure ends soon and oil rolls over, rate-cut expectations could snap back decisively.