NextFin News - Michael Feroli, the chief U.S. economist at J.P. Morgan, has broken sharply with the Federal Reserve’s policy trajectory, warning that interest-rate cuts may be entirely off the table through the remainder of 2026. The forecast follows the Federal Open Market Committee’s (FOMC) decision on March 25 to maintain the benchmark federal funds rate at a range of 3.50% to 3.75% in an 11-1 vote. While the central bank’s own "Summary of Economic Projections" continues to signal a path toward easing, Feroli argues that a toxic combination of "sticky" inflation and the geopolitical shock of the Iran War has fundamentally reshaped the macroeconomic landscape.
Feroli, a veteran economist known for a pragmatic, data-dependent approach that often aligns with institutional caution, now finds himself in a more hawkish camp than many of his peers. His current stance reflects a belief that the Fed is trapped in a "stagflationary" corner where slowing growth no longer provides the traditional cover for rate cuts. This perspective is currently a minority view on Wall Street; while many analysts have scaled back the number of expected cuts for 2026, few have gone as far as J.P. Morgan in predicting a total freeze on policy easing. The divergence highlights a growing debate over whether the U.S. economy has entered a new regime of structurally higher costs that the Fed’s traditional models fail to capture.
The primary catalyst for this shift is the outbreak of the Iran War, which has sent energy prices surging and added what Feroli describes as a "whole new wrinkle" to the inflation outlook. Before the conflict, the Fed was already grappling with a "low-hire, low-fire" labor market where the unemployment rate had ticked up to 4.4%, yet wage pressures remained stubbornly high. The addition of a massive supply-side shock in the oil markets has effectively neutralized the Fed’s ability to respond to weakening labor demand. Under U.S. President Trump, the administration’s focus on domestic industrial policy and trade tariffs has also contributed to a floor under prices that complicates the central bank's 2% inflation target.
Data from the March FOMC meeting underscores the tension within the central bank. While the majority voted to pause, Governor Stephen Miran provided a notable dissent, voting for a 25-basis point cut to address signs of economic cooling. This internal friction suggests that the "higher for longer" mantra is facing its toughest test yet. If the labor market continues to soften—evidenced by the recent settlement into an equilibrium of slower demand—the political and economic pressure on the Fed to pivot will intensify. However, Feroli maintains that as long as inflation risks remain tilted to the upside by external shocks, the Fed’s hands are effectively tied.
The J.P. Morgan thesis rests on the assumption that the "dual mandate" of price stability and maximum employment is now in direct conflict. In previous cycles, a cooling economy would lead to a rapid decline in consumer prices, allowing the Fed to support the labor market. In 2026, the persistence of service-sector inflation and the volatility of energy costs mean that the Fed may be forced to tolerate higher unemployment to prevent an inflationary spiral. This scenario remains a "tail risk" for many other investment banks, such as Goldman Sachs or Morgan Stanley, which generally still anticipate at least one or two "insurance cuts" later this year if growth dips below 1.5%.
Ultimately, the path of interest rates will depend on whether the current growth slowdown is a precursor to a deeper recession or merely a return to a pre-pandemic trend. Feroli’s warning serves as a stark reminder that the "soft landing" narrative is increasingly fragile. With the federal funds rate held at its highest level in years and the geopolitical environment remaining volatile, the margin for error for the Fed has narrowed to its thinnest point since the start of the tightening cycle. The market is now forced to weigh the possibility that the era of cheap money is not just on pause, but has been permanently sidelined by a more turbulent global order.
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