Tax Refunds Could Be a Reason for the Fed to Hold Off on Rate Cuts
With September fast approaching, markets are widely expecting the Federal Reserve to deliver an interest-rate cut at its upcoming meeting. But according to JPMorgan Asset Management’s chief global strategist David Kelly, there’s a new wrinkle: a wave of tax refunds in early 2026 that could give the Fed reason to delay.
Earlier this month, the IRS announced that withholding levels would remain unchanged for the current calendar year while it implements the One Big Beautiful Bill Act (OBBBA). That means bigger refunds when taxpayers file their 2025 returns, thanks to seven major retroactive provisions—such as no tax on tips and overtime, larger deductions, and expanded child tax credits.
Kelly estimates the IRS could issue around 110 million refunds next year, averaging $3,743. While this resembles a round of stimulus checks, the effect may skew differently: middle- to upper-income households stand to benefit the most, and they tend to save more than spend.
Still, many consumers may boost holiday spending in anticipation of those refunds, adding fuel to the economy in the near term.
The strategist likens the impact to “sugar rather than protein.” Most of the money will hit households quickly—80% of refunds were paid out by mid-May last year—but the boost could fade by late 2026, potentially setting the stage for slower growth and even more government stimulus ahead of the midterms.
For the Fed, this matters because higher refunds could keep demand and inflation running above trend well into next year. If the central bank cuts rates in September as expected, it may face pressure to cut again in October and December.
But doing so against a backdrop of rising inflation risks undermining its credibility, steepening the yield curve, weakening the dollar, and hurting U.S. equities.
Kelly’s advice to investors: consider diversifying into international assets and alternative investments with lower correlations to U.S. stocks and bonds.
