Goldman, BofA push back first Fed rate cuts on sticky jobs data

Major Wall Street banks have shifted their monetary policy outlook in response to mixed labor market signals and persistent inflationThe rate at which prices rise across an economy. expectations. Goldman Sachs and Bank of America joined a growing consensus of forecasters pushing back their first Federal Reserve rate cut calls, citing what Goldman characterized as a last straw jobs data point. The labor market remains resilient despite cooling consumer confidence, complicating the Fed's dual mandate and forcing officials to err on the side of caution. June rate cut expectations have been effectively priced out, with the market now assuming the first cut may not arrive until December 2026 or later, a significant pushback from expectations held just weeks ago.

The data backdrop remains contested. The Conference Board Employment Trends Index rose to 105.77 in April from a revised 105.52 in March, suggesting labor demand remains resilient. However, consumer confidence is sagging amid elevated energy prices from the Strait of Hormuz closure and gasoline prices near 4.54 dollars per gallon. The Consumer Price Index is due Tuesday, and markets are pricing in a potential reacceleration if energy pass-through effects materialize. Fed officials have publicly emphasized their intention to keep policy restrictive if inflationThe rate at which prices rise across an economy. doesn't sustainably decline, and incoming economic data has validated their cautious stance.

The implications for fixed income and equity markets are substantial. A higher-for-longer rate regime supports money market yields and extends the attractiveness of short-durationBond price sensitivity to interest rate changes. fixed income strategies, pressuring long-duration bonds and growth-heavy equities. Japan's 10-year bond auction saw stronger-than-average demand on Tuesday as higher global yields attract international buying, signaling that rate expectations are shifting globally. Bank net interest margins benefit from a steeper yield curvePlot of bond yields across maturities., but mortgage refinancing activity is likely to remain subdued, weighing on consumer housing affordability. Equity valuations face headwinds as discounted cash flow models incorporate longer-duration rate assumptions, and small-cap and high-growth sectors are particularly vulnerable to multiple compression.

The counter-narrative argues that the labor market is indeed cooling beneath the surface, with participation rates soft and wage growth moderating in real terms. If Q2 data deteriorates sharply, the market could rapidly reprice rate cut expectations back up, creating a whipsaw for those positioned for rates to stay high. Additionally, if the Strait of Hormuz closes for an extended period and stagflation dynamics dominate, the Fed may face pressure to cut rates even with sticky inflationThe rate at which prices rise across an economy., forcing a policy choice between financial stability and price stability.