J.P. Morgan's 2026 Rate Hike Call: A Structural Bet Against the Fed's Dovish Pivot

The Federal Reserve's move last week was a textbook dovish pivot. On January 9, it cut its benchmark interest rate by a quarter-point to a range of 3.50% to 3.75%. Yet the action was laced with tension. Three members dissented, including interim governor Stephen Miran, who argued for a larger half-point reduction. More telling was the updated Summary of Economic Projections (SEP), which tilted hawkish by raising its 2026 GDP growth forecast to 2.3% from 1.8%. This divergence signals a committee deeply split on the path ahead.

Against this backdrop, J.P. Morgan's forecast stands in stark contrast. The bank now sees a persistent inflationary environment, with core CPI forecast to remain above 3% in 2026, driven by tariff impacts and fiscal stimulus. This, combined with strong growth, implies a potential 2027 rate hike. The bank's chief economist, Michael Feroli, argues that even a new dovish Fed chair, set to take over in May, will struggle to sway the committee. "We now expect the Fed to hold rates throughout 2026 with the next move to hike later in 2027," Feroli wrote, pointing to a potential quarter-point increase in the third quarter.

The market, however, is pricing in a different story. As of last week, traders were still expecting two rate cuts in 2026. This creates a clear structural bet: J.P. Morgan is wagering that the underlying economic momentum and inflation dynamics will prove too strong for the Fed to maintain its easing narrative. The bank's call hinges on the idea that the Fed's own growth projections, if realized, will challenge the political pressure for faster cuts. In other words, the central bank may be forced to hold rates steady in 2026, setting the stage for a hike that the market is not currently anticipating.

The Inflation Composition: Cooling Core, Sticky Staples

The latest inflation data presents a classic puzzle for policymakers. On one side, the headline numbers show progress. The core Consumer Price Index rose just 2.6% annually in December, matching a four-year low. This cooling core reading, which excludes volatile food and energy, is the metric the Fed watches most closely. It suggests the broad-based price pressures that drove inflation to pandemic highs are finally easing. Yet, the composition of that inflation tells a more complex story, one that tests the sustainability of the disinflation narrative.

The pressure points are clear and concentrated. While core goods prices stagnated, food prices jumped 3.1% annually, accelerating from the prior month. This is not a broad-based increase but a spike in essentials. Staples like ground beef saw prices rise 15.5% and coffee surged 19.8% over the past year. For many households, these are not discretionary luxuries but daily necessities. This persistent pressure on basic groceries creates a tangible cost-of-living squeeze that the headline core figure obscures. As Moody's chief economist Mark Zandi noted, "inflation for staples, necessities, remains elevated."

This creates a structural tension for the Fed. On one hand, the cooling core and weak shelter inflation provide a counterweight that could help pull overall inflation down in 2026. On the other, the sticky nature of food and other tariff-affected goods challenges the idea that disinflation is broad and durable. Economists point to the tariffs levied by President Donald Trump as a key factor pushing up inflation, with one estimate suggesting they have raised the rate by "a little over half a [percentage] point." The muted pass-through to consumers so far-likely because businesses absorbed some costs-may not last indefinitely.

The bottom line is that the disinflation story is incomplete. The Fed's rationale for cutting rates last week hinges on broad-based cooling. But if inflation is being held down by a lagging shelter component while essential goods remain stubbornly high, the path to the 2% target is more fragile. This composition directly informs J.P. Morgan's structural bet. A core CPI that stays above 3% in 2026, driven by these sticky categories, would undermine the Fed's dovish pivot and support the bank's call for a 2027 hike. The data shows progress, but it also highlights the vulnerabilities that could derail it.

The Growth Engine: Acceleration vs. Political Headwinds

J.P. Morgan's structural bet rests on a simple but powerful premise: the economy is set to accelerate in ways that will challenge the Fed's dovish narrative. The bank forecasts accelerating job and GDP growth in 2026, creating a stronger backdrop than the market is pricing in. This isn't a minor uptick; it's a fundamental shift that, combined with persistent inflation, makes a rate cut in 2026 appear structurally unlikely.

The engine for this acceleration is multifaceted. First, there is the direct fiscal stimulus from the One Big Beautiful Bill Act (OBBBA), which is expected to provide a modest boost to the economy through the first half of 2026. This includes tax refunds that will support consumer spending, a key pillar of growth. Second, the bank points to sustained momentum in areas like AI-infrastructure capital outlays and strong corporate earnings, which are likely to keep business investment robust. This combination of policy support and private-sector resilience suggests the economy could expand at a pace that is more durable than the 1.8% GDP growth seen in 2025.

Yet, the most significant risk to this growth trajectory is not economic-it is political. The Fed's independence is under direct assault, creating a volatile headwind that could force a policy pivot regardless of the data. This tension escalated sharply over the weekend when the Fed Chair was subpoenaed by the DOJ over testimony about its building renovations. President Trump, who has repeatedly pressured the central bank to cut rates faster, has used this probe to escalate his feud with Powell. The market's reaction was immediate and severe, sparking a broad sell-off that hit stocks, bonds, and the dollar as traders fretted over the central bank's autonomy.

This episode crystallizes the core vulnerability in the Fed's dovish pivot. J.P. Morgan argues that even a new dovish chair will struggle to sway the committee if growth and inflation data remain strong. But political pressure, as seen in the DOJ probe, introduces a powerful, unpredictable variable. It creates a scenario where the Fed might cut rates not because the economy demands it, but because it is forced to. This is the structural gamble: the bank is betting that the underlying economic momentum will prove too strong for political interference to overcome. If it does, the bank's forecast for a 2027 hike will be validated. If political pressure succeeds, the market's expectation of 2026 cuts could still be realized, making J.P. Morgan's call a costly outlier.

Investment Implications: Navigating the 2027 Hike Trade

The structural bet J.P. Morgan is making has a clear price tag for investors: a potential 25 basis point Fed hike later in 2027. This scenario, which the market is not currently pricing in, implies a specific set of forward-looking catalysts and a strategic tilt for portfolios.

The key catalyst is the persistence of core inflation above 3% throughout 2026. This is not a minor overshoot but a fundamental condition that would challenge the Fed's dovish pivot. The bank's forecast hinges on this dynamic being driven by two forces: the pass-through of tariffs and the impact of fiscal stimulus from the One Big Beautiful Bill Act. If these factors keep core CPI elevated, they create the inflationary environment that would justify holding rates steady in 2026 and setting the stage for a hike in 2027.

Investors must watch two specific developments that could accelerate or delay this disinflation trend. First, the pending Supreme Court ruling potentially affects global tariffs. A ruling that upholds or expands tariff authority would likely cement the inflationary pressure J.P. Morgan anticipates. Conversely, a restrictive ruling could mitigate this risk. Second, the pace of housing market softening is critical. Shelter inflation is a lagging indicator, and a sharper-than-expected decline in rents and home prices would provide a stronger counterweight to sticky goods inflation, potentially making a 2027 hike less likely.

The investment thesis for a 2027 hike implies a clear asset class setup. A hike would signal that the Fed is successfully navigating a soft landing, with growth holding up and inflation being brought under control. This scenario would likely support longer-duration assets, as the hike would be a sign of confidence rather than a reaction to overheating. It would also likely support a stronger dollar, as higher real rates attract capital. For bond investors, this means the period of rising yields could be ending, making high-quality, longer-maturity bonds more attractive. For equities, it would likely favor sectors that benefit from a stable, growing economy and a strong currency.

The bottom line is that J.P. Morgan's call forces investors to look past the immediate market expectation of 2026 cuts. It demands a focus on the structural drivers of inflation and growth, and a readiness for a policy pivot that the consensus is not anticipating. The path to that 2027 hike is not guaranteed, but the catalysts are now clear.