Goldman Sachs just moved the goalposts. Again.

The investment bank pushed its forecast for the first Federal Reserve rate cut from September to December 2026 in a note dated May 8, conceding that the Iran war’s inflationary tail is now the dominant force in US monetary policy. A second cut is now pencilled in for March 2027, rather than December 2026.

BofA Global Research went further, scrapping any cuts this year entirely. Its analysts now see the Fed on hold until July 2027.

The shift marks the moment the Iran war stopped being a regional crisis and became an everyone’s-mortgage problem. For months, Wall Street treated the conflict as a geopolitical story — dramatic headlines, volatile oil swings, breathless cable coverage — but ultimately contained. That assumption is now dead.

What Changed

Two things. First, energy prices haven’t come down. Brent crude was trading above $111 a barrel as of April 28, according to The National, with West Texas Intermediate nearing $100. The Strait of Hormuz — the narrow waterway through which a fifth of global oil and gas normally passes — remains under a double blockade by Iran and the US. Vessel traffic has collapsed since the conflict began on February 28.

The World Bank expects energy prices to rise 24% this year, reaching their highest level since the Russia-Ukraine war in 2022. The bank describes a 10 million barrel-per-day supply reduction — the largest supply shock on record.

Goldman itself warned that Brent could approach $120 a barrel later this year if peace talks remain deadlocked.

Second, the labor market isn’t cooperating with the rate-cut thesis. US employment increased more than expected in April, and the unemployment rate held steady at 4.3%, according to data released May 8. A strong jobs market gives the Fed less cover to ease.

The Inflation Split

Goldman laid out the mechanics plainly: energy-cost passthrough is likely to keep year-over-year core PCE inflation “closer to 3% than 2% all year.” The war-driven components are energy, shipping, and commodities — the World Bank expects an overall commodities price surge of 16% this year, with fertiliser prices jumping nearly a third and base metals hitting all-time highs.

But there’s also a sticky domestic layer. The Fed’s preferred inflation gauge has been above its 2% target for six years running. Powell’s team managed to drag inflation down from 7% to the mid-3% range, but the “last mile” — as University of Texas economist Carola Binder described it — is where the central bank “got stuck.”

The rate cuts the Fed delivered in late 2024 and 2025, bringing the benchmark rate from 5.25%–5.5% down to the current 3.5%–3.75% range, now look premature to some analysts. Dana Peterson, chief economist at the Conference Board, called the last three cuts of 2025 “a policy mistake,” noting that the labor market was fine and inflation was still declining.

“Now it looks like the Fed might have to turn around and raise them back up,” Peterson said.

The Powell Exit

This is the economic landscape Jerome Powell leaves behind when his term as Fed chair ends on May 15. Powell acknowledged at his final press conference that inflation “had gone pretty much back to target” before the tariff shock and the Iran war intervened. Former top Fed staffer Vincent Reinhart, now chief economist at BYN Investments, agreed that those external shocks were largely beyond Powell’s control — but argued earlier mistakes, particularly the “transitory” inflation call of 2021, left the central bank with no margin for error.

The Fed’s April 29 meeting produced an 8–4 vote to hold rates steady — the closest split since 1992. The dissent signals just how divided the committee is on whether to wait out the war-driven inflation or act anyway.

Kevin Warsh, President Trump’s pick to replace Powell, will inherit the mess. BofA’s analysts expect Warsh to push for lower rates, but note that “the data flow precludes cuts for now.” The incoming chair faces a choice between his political instincts and an inflation rate that refuses to cooperate.

Markets Missed the Plot

Here’s the part that should bother anyone with a variable-rate mortgage. While equity markets have rallied intermittently on signs of a fragile US-Iran truce — Reuters reported shares mixed and the dollar gaining as Iran talks teetered — the real cost of the conflict was being quietly loaded onto 2026 borrowers. Cheering a ceasefire that hasn’t materialised while oil sits north of $110 is a particular kind of optimism.

Goldman’s message, stripped of the careful phrasing, is simple: the war tax on borrowing costs has arrived, and it’s not going away before Christmas. Maybe not even then.

“If the labor market does not weaken sufficiently this year,” Goldman’s analysts wrote, “we would instead expect the FOMC to deliver two final cuts in 2027, when we expect core inflation to return to the 2% target.”

That “if” is doing a lot of work. And the jobs market just told you which way it’s leaning.

Sources