A tax-refund surge is coming. How JPMorgan expects it to shift economy and markets.

A rush of tax refunds is likely in early 2026, says JPMorgan. - Getty Images

September is around the corner and with that, a Fed meeting that is all-but-assured — judging by market expectations — to deliver an interest-rate cut.

Our call of the day from JPMorgan Asset Management’s chief global strategist David Kelly says a potential rush of U.S. tax refunds coming early in 2026 could present one argument for the Fed to delay.

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Kelly explains that earlier this month, the Internal Revenue Service announced withholding levels will remain the same for the current calendar year, to allow time for implementing the One Big Beautiful Bill Act (OBBBA). It will instead provide guidance and new forms for the 2026 year.

“This seemingly innocuous statement confirms we will see an even larger crop of personal income tax refunds early in 2026 than was anticipated when the OBBBA was passed. These higher income tax refunds should work much like a new round of stimulus checks, adding to consumer demand and inflation pressures early next year,” Kelly told clients in a note on Monday.

His chart shows the refund surge eclipsing anything seen in recent history:- JPMorgan Asset Management

Kelly points to seven big individual OBBBA provisions that retroactively took effect on Jan. 1 — no income tax on tips, overtime or auto loan interest, a bonus deduction for those 65 and over, an increase in state and local tax deduction (SALT) deductions and permanent increases in standard deductions and child tax credits.

As the IRS isn’t changing the withholding schedules, taxpayers will likely recoup those tax breaks in bigger refunds or lower payments when they file 2025 taxes next year, he said.

Read: Investors don’t get many new wins in the tax bill. How to make the best of it anyway.

JPMorgan estimates the IRS could process 110 million refunds for an average $3,743 payment in the current calendar year, assuming two-thirds of retroactive tax breaks are paid via refunds and one-third via lower annual payments.

The difference from the pandemic-era stimulus is that overall, upper-middle-income householders will get more those refunds than lower-middle-income and lower-income households, with the bulk of benefits focused on households in the 50% and 90% income percentiles. As richer households tend to save more than poorer ones, the consumer- spending boost may be less than seen from pandemic stimulus. That also means less spent on consumer basics and a bit more for discretionary spending, Kelly said.

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The overall impact could even impact the coming holiday season, he said. “If consumers are confident that they will be getting bigger refund checks early in the new year, they may be willing to rack up more credit card debt in December providing further near-term support to the economy,” he added.

However, the strategist says these tax refunds will work as “sugar rather than protein.” If consumers use that money quickly — last year the IRS had paid out 80% of refunds by mid-May — then by the third quarter of next year, consumer spending will start to slow and by the fourth, it could slump.

Due to the fading effects of those refunds, Washington could end up offering “yet another round of stimulus to boost demand ahead of the midterm elections,” he said. That’s as the economy will also be contending with the weight of higher tariffs and immigration declines.

For the Fed and investors, here’s the bottom line: While markets are largely penciling in September interest-rate cuts, Kelly said this potential refund “economic sugar rush” could keep growth and above-trend inflation sustained well into next year, which appears a solid argument for the Fed to delay cuts.

Even if the Fed cuts interest rates by 25 basis points as largely expected on Sept. 17, in the short-run growth won’t get much of a boost, meaning the pressure will be on to cut again in October and December.

“If this occurs, in the face of rising inflation and as a refund surge threatens to sustain that higher inflation, investors might doubt the Fed’s commitment to stable inflation, potentially leading to a steeper yield curve, a lower dollar and lower stock prices,” he said.

So how can an investor prepare? Kelly suggests a “greater allocation to international assets denominated in foreign currencies and the importance of having alternative assets with lower correlations to U.S. stocks and bonds.”

The markets

U.S. stocks DJIA have opened mostly flat. The dollar DXY is lower and oil CL00 is under pressure. The U.K. 30-year yield BX:TMBMKGB-30Y hit a 27-year high.

Key asset performance Last 5d 1m YTD 1y S&P 500 6439.32 -0.15% 0.78% 9.48% 14.64% Nasdaq Composite 21,449.29 -0.83% 1.28% 11.07% 21.01% 10-year Treasury 4.304 -0.50 -2.20 -27.20 47.30 Gold 3423.5 1.35% 3.30% 29.71% 34.07% Oil 64.45 2.99% -3.78% -10.32% -16.47% Data: MarketWatch. Treasury yields change expressed in basis points

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