Top economist warns Fed may need to hike rates in 2026
EY-Parthenon's Greg Daco warns markets may be underestimating the risk of a Fed rate hike in 2026, as inflation remains sticky and policymakers signal a hawkish tilt.
A top economist is warning that the Federal Reserve may need to raise interest rates in 2026, challenging the market's current expectations of a prolonged pause. Greg Daco, chief economist at EY-Parthenon, argues that investors are focusing on the wrong move — instead of anticipating rate cuts, they should be preparing for the possibility of a hike.
The warning comes after the Fed's June meeting, where the central bank held rates steady at 3.50%-3.75% but nine of 19 policymakers projected at least one rate hike by year-end. That marked a hawkish shift from the prior meeting, when no official had penciled in a hike. The debate has been fueled by sticky inflation: the May PCE report showed headline inflation at 4.1% year-over-year and core PCE at 3.4%, both well above the Fed's 2% target.
For interest rate traders, the key takeaway is that the Fed's dot plot and rhetoric are increasingly pointing to a tightening bias. If inflation does not moderate further, the central bank may be forced to act, which would upend the current market pricing of rate stability. Traders can monitor real-time rate quotes on NowPrice to track shifting expectations. Looking ahead, the next major data point will be the June CPI report due in late July, as well as the Fed's July meeting where updated economic projections will be released. A sustained move above 4% in core PCE could accelerate the hawkish repricing across the yield curve.