Key takeaways
- Despite the economic risks posed by the Middle East conflict, J.P. Morgan Global Research expects the Fed to remain on hold at its next meeting on April 28–29.
- It will then likely continue holding rates steady for the rest of 2026, before hiking 25 basis points (bp) in the third quarter of 2027.
- However, the Fed could cut rates if the labor market weakens significantly or if the economic fallout from higher energy prices becomes more severe.
While the Middle East conflict has sent energy prices soaring, the Federal Reserve (Fed) opted to keep interest rates steady at 3.5–3.75% at its last meeting in March. Chairman Jerome Powell acknowledged the economic risks posed by the conflict but also highlighted the Committee’s preference for a “wait-and-see” approach.
However, oil prices remain elevated as the conflict wears on, stoking inflation concerns and weighing on growth. Against this backdrop, what’s the Fed’s next move?
“A key cushion for global financial conditions is the Fed’s patience in the face of these shocks.”
Michael Feroli
Chief U.S. economist, J.P. Morgan
Will interest rates go down in April?
Despite heightened inflation risks, J.P. Morgan Global Research expects the Fed to stay on hold at its next meeting on April 28–29. “A key cushion for global financial conditions is the Fed’s patience in the face of these shocks,” said Michael Feroli, chief U.S. economist at J.P. Morgan.
While headline CPI jumped 0.9% month over month in March due to higher gas prices — the biggest monthly increase since 2022 — core CPI increased by a relatively benign 0.2%, suggesting that underlying inflation remains contained. In addition, the March jobs report was stronger than expected, with non-farm payrolls snapping back from the 133,000 decline seen in February to post a 178,000 gain; the unemployment rate also edged down 0.1 percentage points to 4.3%.
“This gives us a little more confidence that economic growth can weather the ongoing energy price shock without too much enduring damage,” Feroli noted. “It should make the late April FOMC meeting an easy call for the Committee to stay on hold.”
What’s the outlook for rate cuts in 2026?
Looking ahead, both upside risks to inflation and downside risks to employment remain, pulling the interest rate outlook in opposite directions. On balance, J.P. Morgan Global Research sees the Fed holding rates steady for the rest of 2026, with the next move likely being a hike of 25 basis points (bp) in the third quarter of 2027.
“With inflation running high and inflation expectations at risk of becoming unanchored, Fed officials have been dialing back their enthusiasm for rate cuts. Lingering concerns about downside risks to employment, however, have led some Fed officials to keep clear of rate hike discussions,” Feroli said. Generally, the Fed is seen as more likely to cut rates only if the labor market weakens significantly or if the economic fallout from higher energy prices becomes more severe.
All in all, the interest rate outlook for 2026 will largely depend on how the Middle East conflict plays out. “Most participants at the March FOMC meeting concluded it was too early to determine how the Iran conflict would impact the economy or the appropriate stance of monetary policy, but indicated they felt policy was ‘well-positioned’ to respond to future events,” said Michael Hanson, senior economist at J.P. Morgan. “That suggests the current holding pattern by the FOMC is likely to continue, in line with our own forecast for the Fed’s policy stance this year.”
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