A resilient labor market and sticky inflation have pushed the next move further out on the calendar—and even raised the faint possibility of a hike.

The case for near-term interest-rate relief is fading. According to recent economic research from Goldman Sachs, the Federal Reserve is now unlikely to lower borrowing costs at all this year, with the next cuts pushed out to June and December of 2027. That marks a notable delay from the earlier expectation of moves in December 2026 and March 2027. The driving force behind the revision is simple: the U.S. economy keeps refusing to cool on schedule.

Chief U.S. economist David Mericle points to data that has come in stronger than anticipated in recent months, with hiring picking up impressively. When job growth is robust, the urgency to stimulate the economy with cheaper money evaporates. The Fed cuts rates to support a weakening labor market; it has little reason to act when payrolls are expanding.

A labor market that won't break

Unemployment tells much of the story. The jobless rate stood at 4.3% in May, and the latest projection sees it ticking up only slightly to 4.4% by year-end—a meaningful upgrade from a prior forecast of 4.6%. Growth is still expected to run somewhat below potential in the second half of the year, partly because higher oil prices are weighing on household spending. But a labor market that loosens this gently does not, in the analysis, generate "a sense of urgency to lower the funds rate."

In other words, the economy is slowing just enough to keep inflation in check eventually, but not so fast that policymakers feel compelled to intervene. That leaves the Fed comfortable standing still.

Inflation: stubborn now, softer later

The bigger obstacle to cuts is prices. Core personal consumption expenditures (PCE) inflation—the Fed's preferred gauge—was running at 3.3% year-over-year in April, well above the central bank's 2% target. Three forces are keeping it elevated: the lingering effects of tariffs, higher oil prices and other consequences of conflict in the Middle East, and surging demand tied to artificial intelligence.

While tariff effects should begin to fade, the combined weight of these pressures is expected to hold core PCE inflation above 3% throughout 2026. The most natural path for the Federal Open Market Committee, the research suggests, is to wait until those forces dissipate before easing.

The longer-term picture is more encouraging. The fundamental drivers of inflation already look softer: wage growth is running about half a percentage point below the pace consistent with 2% inflation, and leading indicators of rent growth remain very low. If no fresh supply shocks intervene, inflation is expected to drift back toward 2% in 2027—conveniently, just as the projected cuts arrive.

Could the Fed actually hike?

One striking shift is that a rate increase, while still unlikely, is now somewhat more plausible than before. Historically, the Fed has avoided raising rates in response to oil shocks that seemed unlikely to fuel sustained inflation, and there is little sign yet that the war-driven price pressure is broadening out. But Fed commentary has turned more hawkish, with several officials acknowledging that hikes are possible if inflation worsens. A stronger economic starting point also lowers the bar, since it reduces the risk that a hike would later look like a costly mistake.

The bottom line

The baseline forecast still calls for two cuts next year, bringing the fed funds rate to a terminal level of 3%–3.25%, down from 3.5%–3.75% today. Yet there are "mixed feelings" about even that. With fiscal policy and financial conditions unusually loose, an argument exists for holding the rate where it is—especially if booming AI investment demand justifies keeping policy tighter for longer. A flat path, with no cuts at all, is treated as a plausible alternative to the baseline.

Much of this ambiguity traces back to the "neutral rate"—the theoretical level at which monetary policy neither stimulates nor restrains the economy. That figure is inherently fuzzy, which leaves room for the perceptions of individual committee members to shape decisions. The case for patience is reinforced by the fact that most policymakers still describe the current stance as only mildly restrictive and continue to envision gradual normalization once inflation eases. A longer pause, on this logic, simply buys more time for solid economic performance to confirm that rates are already in roughly the right place—reducing the pressure to move soon.

For markets, the takeaway carries an extra twist: this probability-weighted view sits not only below the baseline but meaningfully below what traders are currently pricing in. Investors betting on imminent relief may be disappointed. The era of waiting, it seems, is far from over.