Wall Street Divided: Will The Fed Hike Rates In 2026?

Rate hike odds have surged since last week’s FOMC meeting, reshaping global asset pricing, yet Wall Street’s top banks hold starkly conflicting outlooks on whether the Federal Reserve will deliver additional tightening before year-end.

The Fed left its benchmark policy rate unchanged at the 3.50%-3.75% range, though roughly half of all voting policymakers pencilled in at least one rate increase for 2026. Markets interpreted the gathering as firmly hawkish, triggering a sweeping repricing of the US monetary policy trajectory.

Major institutions have rapidly revised their rate forecasts over the past several sessions:

· Bank of America shifted its outlook on June 22, projecting three rate hikes this year, the most aggressive call among all mainstream global investment banks, citing a notable deterioration in inflation prints.

· Deutsche Bank updated its analysis on June 19, forecasting two 25bp rate increases before the end of 2026.

UBS economists push back against the market’s hawkish repricing, arguing investors have overestimated the odds of Fed tightening. While traders have aggressively priced in further policy restraint across major central banks, UBS deems such expectations overblown. The bank’s baseline scenario holds that the Fed will keep rates on hold for the remainder of 2026, with an easing cycle set to kick off in early 2027.

Released June 22, UBS’s research note highlighted key shifts in last week’s official statement: policymakers removed language signalling a bias toward potential cuts. Fed Chair Kevin Warsh emphasised inflation has run above the official 2% target for five consecutive years, describing sustained elevated prices as a severe burden on household finances.

The updated dot plot delivered a sharp hawkish tilt, with around half of committee members seeing at least one additional hike by December. The bond market reacted instantly: two-year Treasury yields climbed, and futures traders fully priced in a rate increase at the October FOMC gathering.

Investors will zero in on this week’s critical inflation print to validate the Fed’s hawkish stance. The May Personal Consumption Expenditures (PCE) Price Index — the central bank’s preferred inflation gauge — will act as a pivotal test. Market participants will scrutinise core PCE data for evidence that price pressures are cooling following prior energy-driven shocks.

UBS added the Fed’s hawkish signal is less aggressive than surface-level readings suggest. Consistent unimpeded shipping through the Strait of Hormuz would ease the risk of energy prices fuelling persistent inflation, a dynamic that should soften the hawkish tilt seen in future dot plot projections.

Many of the most hawkish public outlooks stem from non-voting regional Fed officials. The five cross-cutting task forces launched by Warsh will complete comprehensive policy reviews by year-end, which likely leaves the FOMC reluctant to implement major rate adjustments before those findings land.

During the post-meeting press conference last Wednesday, Warsh formally unveiled a sweeping comprehensive policy review and five dedicated working groups covering Fed communications, balance sheet management, data sourcing frameworks, productivity and labour market dynamics, and inflation assessment methodologiesFederal Reserve Board of Governors.

“Our baseline forecast calls for the Federal Reserve to maintain steady interest rates through the rest of 2026, with rate cuts set to commence in early 2027. We believe markets have overpriced tightening risks for the Fed and other major central banks. Against this backdrop, we recommend allocations to high-quality short and intermediate-duration bonds to lock in attractive yields.”

— UBS Global Wealth Management, June 22 Research Note

UBS is not the only Wall Street institution betting the Fed’s next policy move will be a cut. Citi’s team expects three rate reductions: one in October 2026, a second in December 2026, and a third in January 2027.

Even so, hawkish rate calls have grown louder across Wall Street following the Fed’s surprisingly restrictive June meeting.

Lindsay Rosner, Head of Multisector Investments at Goldman Sachs Asset Management, issued a fresh warning over the near-term policy path.

“There is a meaningful, 50% probability that the Federal Reserve will deliver a rate hike at the July meeting. The upcoming inflation reports, particularly the PCE release, stand as the critical catalyst that could push policymakers to act.”