Key facts
- Bank of America and PGIM now predict three Federal Reserve interest rate hikes in 2026.
- The hikes are attributed to persistent inflation, exacerbated by the war in Iran and AI-driven demand.
- Fed projections indicate no rate cuts are expected in 2026.
- Inflation reached 4.2% in May, significantly above the Fed's 2% target.
- Bank of America specifically forecasts 75 basis points of hikes in September, October, and December.
Hopes for interest rate relief from the Federal Reserve have diminished, with two major investment management firms, Bank of America and PGIM, now projecting three rate hikes for the remainder of the year. This shift reflects concerns over persistent inflation, driven by factors including the ongoing war in Iran and demand-side pressures from artificial intelligence.
Federal Reserve projections from its June meeting also indicate a hawkish outlook, with central bankers signaling that benchmark rates are unlikely to decrease in 2026. Fed Chairman Kevin Warsh, in his first meeting leading the central bank, presided over a unanimous decision to hold rates steady. Despite President Donald Trump's public calls for rate cuts, the Fed faces a dual mandate of price stability and employment growth, with inflation proving stubbornly high.
PGIM analysts anticipate that the Fed will frame these potential hikes as a 'precautionary' measure against supply-side inflation and recent Treasury market volatility. They expect the Fed to reverse these hikes relatively quickly, with three rate cuts projected for 2027 and an additional cut in 2028, leading to a terminal rate of 3.375%.
Bank of America's forecast, detailed by analyst Aditya Bhave, includes 75 basis points of interest rate increases spread across September, October, and December. Bhave noted that the Fed's inflation problem has 'unambiguously worse,' and Warsh's hawkish comments post-meeting suggest a possibility of a rate increase as early as the next month. Inflation stood at 4.2% in May, significantly above the Fed's 2% target, while the economy added 172,000 jobs, exceeding expectations.