Investment banking firm Goldman Sachs has significantly revised its predictions for when the Federal Reserve will lower interest rates, now projecting the first cuts won’t occur until December 2026 and March 2027. The firm previously anticipated reductions would begin in September and December of this year.
The dramatic shift in timeline reflects concerns that elevated energy costs will continue driving inflation higher than desired levels. Multiple international financial institutions have similarly scaled back their expectations for U.S. rate reductions in 2026, with forecasts ranging from modest decreases to no changes whatsoever.
The ongoing Middle East conflict, now in its tenth week, has contributed to rising energy prices and made Federal Reserve officials more cautious about inflation risks, according to industry analysts.
“With energy cost passthrough likely to keep year-over-year core PCE inflation closer to 3% than 2% all year, we think that a combination of lower monthly inflation prints after the oil shock fades and further labor market softening will likely be needed for the FOMC to cut this year,” Goldman Sachs stated in research notes dated May 8.
The Federal Reserve maintained current interest rates at its April 29 meeting following an unusually contentious 8-4 vote, marking the closest margin since 1992. Current inflation levels remain substantially higher than the Fed’s 2% goal.
Market analysts anticipate the central bank will maintain interest rates in the 3.50% to 3.75% range through year’s end, based on CME Fedwatch tool data.
“If the labor market does not weaken sufficiently this year, we would instead expect the FOMC to deliver two final cuts in 2027, when we expect core inflation to return to the 2% target,” Goldman Sachs added in their analysis.
