Wall Street Abandons 2026 Rate Cut Bets as Fed Chair Warsh Takes Office This Week

In a dramatic recalibration of monetary policy expectations, major Wall Street banks have abandoned forecasts for Federal Reserve rate cuts in 2026, with Bank of America now projecting the first cut won't arrive until July 2027—just days before incoming Fed Chair Kevin Warsh officially takes the helm on May 15.

The forecast shifts from Bank of America, Barclays, and Deutsche Bank mark a stunning reversal from expectations held just weeks ago and underscore the challenge awaiting Warsh as he inherits a central bank grappling with sticky cpi" title="Understanding inflation and CPI in forex">inflation, resilient labor markets, and elevated energy prices driven by the Iran conflict.

The Great Rate Cut Pushback

Bank of America Global Research announced on May 8 that it "no longer expects the Fed to cut rates this year," pushing its forecast for the first 25-basis-point reduction to July 2027. The bank had previously penciled in two cuts for September and October 2026.

"We initially expected Kevin Warsh would steer policymakers toward easing monetary policy," BofA economists wrote in a note to clients. "But that view has changed amid a shifting economic backdrop."

Barclays made a similar pivot on May 4, scrapping its September 2026 rate cut forecast and moving its timeline to March 2027. The British brokerage cited persistent inflation and the risk that Strait of Hormuz disruptions could keep oil prices—and headline inflation—elevated well into next year.

Deutsche Bank economists warned that "trend inflation has not shown clear signs of dipping below 3%," citing ongoing pressures from tariffs and surging demand for AI-related hardware pushing up computer and software costs.

What Changed? NFP, Inflation, and Oil

The forecast reversals follow three critical data points:

• April NFP beat: The US economy added 115,000 jobs in April, nearly doubling the 65,000 consensus forecast and demonstrating labor market resilience despite elevated borrowing costs.
• Sticky inflation: Core CPI remains at 3.3%, well above the Fed's 2% target, with energy-driven inflation from the Iran war adding upward pressure.
• Hawkish Fed officials: Chicago Fed President Austan Goolsbee and St. Louis Fed's Alberto Musalem have pushed back against near-term cuts, citing concerns that AI-driven productivity gains could boost spending and cause the economy to overheat.

"Core inflation is too high, and moving up," Bank of America noted, adding that rate cuts are "more likely in the second half of 2027 as inflation starts to recede."

Market Implications: Dollar Strength Ahead of CPI

The policy repricing has kept the US Dollar Index ($DXY) supported near the 98.00 level despite recent volatility. EUR/USD traded at 1.1754 as of Monday morning in Asia, consolidating below the key 1.1800 resistance zone as traders await Tuesday's April CPI release at 8:30 AM ET.

CME Group's FedWatch tool now shows less than a 50% probability of any rate cuts until the second half of 2027, a stunning shift from January when markets priced in two to three cuts for 2026.

"The multiple shocks affecting the economy—including the Iran war, tariffs, and emergence of AI—are making it harder to forecast interest rate moves," BofA Global Research acknowledged in its note.

Warsh Inherits a Fed in Waiting Mode

Kevin Warsh, President Trump's nominee to replace Jerome Powell, officially takes office as Federal Reserve Chair on May 15—just four days from now. While Warsh has signaled openness to easing monetary policy, the economic data and institutional resistance within the FOMC suggest his hands may be tied for the foreseeable future.

Stephen Miran, one of Trump's recent Fed appointees, previously argued that the Fed would need to cut rates by "well over 100 basis points" in 2026 to keep the economy moving forward—more than double what markets currently expect and a view that now appears increasingly detached from reality.

The Fed last cut rates in December 2025, lowering the federal funds rate by 25 basis points. The rate has remained in its current range of 3.50%-3.75% ever since, and Wall Street's latest forecasts suggest it will stay there through year-end and well into 2027.

Tuesday's CPI: The Next Major Test

All eyes now turn to Tuesday's April CPI report, expected to show a 0.6% monthly gain and a 3.56% annual rate. A hotter-than-expected print could further cement the no-cut narrative and push the dollar higher, while a softer reading might offer temporary relief to euro and commodity bulls.

For currency traders, the key technical levels to watch this week:

• $DXY: Support at 97.61 (triple bottom), resistance at 98.50
• EUR/USD: Support at 1.1680, resistance at 1.1800
• GBP/USD: Trading near 1.3600, watching 1.3550 support
• Gold (XAU/USD): Consolidating near $4,700 after recent rally past $4,750

The Bottom Line

As Kevin Warsh prepares to take the reins at the Federal Reserve this week, he inherits a central bank that Wall Street now expects to remain on hold for at least the next 14 months. The combination of sticky inflation, resilient job growth, and geopolitical uncertainty has forced a wholesale repricing of rate cut expectations—leaving the dollar supported and forex markets bracing for volatility around Tuesday's CPI print.

For traders, the message is clear: the Fed easing cycle that many anticipated for 2026 has been pushed firmly into 2027, with all the implications that carries for carry trades, dollar positioning, and risk-reward ratios across major currency pairs.