Firm Pushes Fed Rate Cut Expectations Into 2027
Wolfe Research strategist Stephanie Roth has become more cautious on risk assets, saying the current divergence between rising bond yields and relatively stable equity markets may not be sustainable for much longer.
In a weekend research note, Roth said the firm has revised its Federal Reserve outlook and now expects any potential rate cuts to be delayed until the second half of 2027.
She argued that markets are increasingly sending conflicting signals, with bond investors pricing in a prolonged period of elevated inflation while equities continue to reflect optimism about the economic outlook.
According to Roth, “something eventually has to give.”
Three Scenarios Could Bring Yields Lower
Wolfe outlined three possible developments that could ease upward pressure on yields: slowing economic growth, a meaningful decline in equities that sparks broader risk aversion, or President Donald Trump ultimately deciding to scale back tensions with Iran.
Still, the firm warned that none of those outcomes would likely provide a favorable backdrop for markets.
Wolfe believes the third scenario has probably not yet occurred, while the first two would likely damage investor sentiment toward risk assets.
“Our bias is that rates likely continue repricing higher until either growth weakens, equities begin to crack more materially, or Trump reaches his pain threshold and takes a deal with Iran,” Roth commented.
Inflation Concerns Continue to Intensify
Roth said inflation expectations continue to move higher as markets respond to the Iran conflict, ongoing artificial intelligence investment and stronger demand tied to memory-related technology spending.
In Wolfe’s view, the Federal Reserve remains “a long way from being able to calm markets.”
Bond Market Weakness Spreads Globally
The latest selloff in global bonds accelerated on Friday after stronger-than-expected Japanese producer price data renewed concerns over persistent inflation pressures.
The move later spread to the U.K., where political uncertainty also weighed on sentiment, before extending into broader fixed-income markets worldwide.
Treasury yields rose by as much as 12 basis points, with some maturities reaching recent highs.
Fed Officials Strike More Hawkish Tone
Roth said Federal Reserve policymakers are becoming increasingly focused on inflation risks.
“Fed officials appeared increasingly concerned about the outlook. Among voting members, the mix skews slightly dovish, but even then the messaging has converged to inflation upside risks,” stated Roth. “Regional presidents have led the way in voicing their inflation worries, but a few governors, including Michael Barr and Chris Waller, have begun striking a similar tone.”
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