Six IBs Expect Two Rate Cuts; Two Project One Cut, Two See Three Cuts
Inflation to Peak in First Half, Expected at 2.7% by Year-End
Limited Job Growth Anticipated; Unemployment Rate to Remain at 4.4%
Six out of ten major investment banks (IBs) on Wall Street expect the United States Federal Reserve (Fed) to cut its benchmark interest rate twice next year. This outlook is somewhat more dovish than the Fed’s recent projection of a single rate cut, as indicated in its dot plot. The consensus among leading IBs is that, given the policy rate is now close to the neutral rate, the monetary easing cycle will likely conclude after around two rate cuts next year.
According to the “2026 U.S. Economic Outlook and Key Issues” report released by the Bank of Korea’s New York Office on December 20 (local time), six out of ten major Wall Street IBs-including Goldman Sachs, Morgan Stanley, Wells Fargo, Barclays, Bank of America, and Nomura Securities-expect the Fed to lower its benchmark interest rate, currently at 3.5-3.75% per annum, by 0.25 percentage points on two occasions next year.
JP Morgan and Deutsche Bank project that the Fed will cut the benchmark rate once by 0.25 percentage points next year, in line with the Fed’s dot plot forecast. In December of last year, the Fed’s Federal Open Market Committee (FOMC) released a dot plot immediately after its regular meeting, indicating a median year-end policy rate of 3.4% and suggesting the possibility of one rate cut in the coming year.
In contrast, Citibank and TD Securities forecast that the Fed will cut the benchmark rate three times by 0.25 percentage points each next year.
The Bank of Korea’s New York Office explained, “The similar outlook for Fed policy rate cuts in 2026 among major IBs is due to the fact that rate cuts in the second half of this year have brought the policy rate close to the neutral rate, and the economic, employment, and inflation outlooks for the U.S. next year are generally similar.” The office added, “Most IBs expect the current rate-cutting cycle to end in the second or third quarter of next year, as policy uncertainty under the Donald Trump administration eases, tax cuts are implemented, and continued corporate investment supports solid economic growth.”
Fifty-six IBs project that inflation will remain under upward pressure, particularly in the goods sector, peaking in the first half of next year before gradually slowing, with year-end inflation expected to reach 2.7%. This is because companies that have not been able to fully pass on tariff costs to consumer prices may raise goods prices to secure profit margins. The current tariff pass-through rate reflected in prices is estimated at 20-40%. However, as price pass-through is completed in the first half of the year and base effects emerge, inflation is expected to slow in the second half. Inflation this year is expected to rise by 2.6% year-on-year.
The labor market is expected to recover only gradually, due to limited labor supply and job reductions resulting from tariff hikes. The number of employed persons is projected to increase by an average of 72,000 per month next year, slightly higher than this year’s estimate of 62,000. Forty-four IBs forecast the unemployment rate for next year at 4.4%, the same as this year’s projection.
Despite weaker consumer spending due to sluggish employment, the U.S. economy is expected to maintain a similar growth rate to this year, supported by increased investment and the effects of tax cuts. Sixty-six IBs forecast the U.S. growth rate for 2026 at 2.0%, unchanged from this year’s projection. In particular, continued expansion of corporate investment, especially in artificial intelligence (AI), and tax cuts serving as incentives for tangible asset investment are expected to underpin robust growth.
The Bank of Korea’s New York Office stated, “The reduction of tax burdens on households and businesses under the One Big Beautiful Bill (OBBA), along with lower interest expenses due to rate cuts, will partially offset the slowdown in consumption and support investment. In particular, corporate investment is expected to remain strong not only in AI but also in other sectors, based on increased investment capacity secured through tax cuts.”
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