JPMorgan argued that investors’ expectations that the US Federal Reserve would cut interest rates by two 25 basis points in 2026 will not materialize. The bank expects the Fed to keep rates stable through 2026, with its next move likely to be a rate hike in 2027.
The bank said in a Jan. 9 note to clients that while the U.S. economy is expected to see faster employment and growth in 2026, core inflation will remain above 3%. It was pointed out that this macroeconomic outlook weakens the legitimacy of another rate cut by the Fed.
“Given this macroeconomic backdrop, we do not believe that even a relatively dovish new Fed chair will be able to persuade the FOMC to cut rates,” JPMorgan chief economist Michael Feroli said in a note. Feroli wrote that the Fed will keep interest rates stable through 2026, with the first rate hike of 25 basis points likely occurring in the third quarter of 2027.
However, market prices indicate a more dovish picture than JPMorgan expected. The market is pricing in a 32% chance of two rate cuts in 2026, a 25% chance of one rate cut and a 22% chance of three rate cuts, according to data from the CME FedWatch tool. There is an 8% chance that the Fed will leave interest rates unchanged until the end of the year.
Meanwhile, US President Donald Trump is expected to appoint a new Fed chair in the coming months. The new chairman’s four-year term begins in May. President Trump has frequently pressured the Fed to accelerate rate cuts, arguing that interest rates should be around 1%. Currently, the Fed’s base interest rate ranges from 3.5% to 3.75%.
Tensions between the White House and the central bank escalated over the weekend. Fed Chairman Jerome Powell announced in a video that he has been called by the U.S. Department of Justice to testify before Congress regarding last year’s testimony regarding the cost of renovating the Fed building. President Trump is known to have previously tried to use the cost of these renovations as grounds for removing Powell from his post.
*This is not investment advice.
