JP Morgan throws out the most hawkish prediction on Wall Street: the Fed will not cut interest rates in 2026 and will increase rates by 25 basis points in 2027.

According to reports, Morgan Stanley's Chief US Economist, Michael Feroli, predicts that the Federal Reserve will not lower interest rates at all in 2026, with the next policy adjustment being a 25 basis point rate hike in the third quarter of 2027. This would raise the upper limit of the federal funds rate to 4.00%, while the current rate range is 3.50% to 3.75%. This forecast puts Morgan Stanley at odds with the Fed's own rate outlook and the majority of Wall Street institutions. As tensions in Iran continue to drive up energy prices and inflation remains stubbornly high, there are no signs that this discrepancy will narrow. Why does Feroli believe that rate cuts are unlikely? In an interview in March, Feroli explained his views, pointing out two factors that are forcing the Fed to remain cautious: one is that the labor market is too robust, not conducive to easing; and two is that inflation has remained above the Fed's 2% policy target. Currently, the US unemployment rate is 4.4%, and core inflation is falling too slowly to provide sufficient justification for a rate cut. "We do have an inflation problem," Feroli said, but he also emphasized that the issue is not "intractable." In his view, the fundamentals of the US economy are "quite solid," and inflation "will gradually improve." The conflict in Iran has made the situation even more complex. "The Middle East conflict brings new uncertainties," Feroli said. Since the conflict erupted at the end of February, international oil prices have risen significantly. Just as the Fed was expecting inflation to cool down, oil prices have brought new upward pressure on inflation. The Fed also acknowledged in its March statement that the impact of the Middle East situation on the US economy is "still uncertain." Even Fed Chairman Powell is cautious. At a press conference in March, he said that the rate cut predicted in the Fed's dot plot for 2026 is not set in stone: "If inflation does not improve as expected, there will be no rate cut." Feroli also stressed that his forecast is not definitive. Morgan Stanley cited his views, saying, "If the labor market weakens in the coming months, or if inflation significantly falls, the Fed may still loosen policy later this year." Current market pricing: Expectations for rate cuts continue to dwindle The market is gradually aligning with Feroli's assessment. The CME's FedWatch tool, based on futures prices, calculates an 8.1% probability of a rate cut in December. In late March, futures traders even briefly priced in a probability of over 52% for a rate hike before the end of 2026. The Fed's next interest rate meeting is scheduled for April 29th, and the market generally expects no policy action at that time. The focus now is no longer on whether the Fed will pause rate hikes, but on how long high rates will be maintained. Other major banks' views: A collective shift towards hawkishness Morgan Stanley is currently the most hawkish institution on Wall Street, but other major banks are also shifting in that direction. Goldman Sachs, Barclays, and Morgan Stanley have all pushed back their expectations for rate cuts from mid-year, but still expect the Fed to start cutting rates in 2026. What does this mean? For borrowers, long-term high rates mean that all costs will rise. Mortgage rates, car loan rates, credit card rates, and personal loan costs will all remain at higher levels for a longer period. If Morgan Stanley's forecast is correct, the 30-year fixed mortgage rate is likely to remain above 6% for all of 2026. In addition, the leadership change at the Fed is worth watching. Powell's term as Fed chair will expire in May 2026, and Trump has nominated former Fed Governor Kevin Warsh to take over. However, Feroli warns that even if the new chair leans dovish, it will not be easy to reverse policies: "The Fed chair cannot unilaterally decide policy, the new chair must build consensus within the Federal Open Market Committee (FOMC)." As the Iran conflict remains unresolved, oil prices remain high, and inflation shows no signs of decreasing, the conditions necessary for a Fed rate cut have not yet appeared. And Morgan Stanley's assessment is that these conditions may not materialize for a long time.