Top economist delivers blunt Fed rate warning for 2026

Top economist delivers blunt Fed rate warning for 2026 Moz Farooque Mon, June 29, 2026 at 2:12 AM GMT+7 6 min read Wall Street was starting to price in a tougher Fed, but EY-Parthenon's top economist Greg Daco feels investors may be looking for the wrong move. The shift began at the Fed's June 17 meeting. According to Reuters, nine of 19 policymakers forecast at least one rate hike by year-end, while the central bank kept rates unchanged at 3.50%-3.75%. Though not a full consensus, it marked a hawkish turn from the prior meeting, when no policymaker had penciled in a hike. Inflation gave the debate even more fuel. According to the Bureau of Economic Analysis, the May PCE report released June 25 showed headline inflation rising 4.1% from a year earlier and core PCE climbing 3.4%. Naturally, Wall Street expected the rate-hike debate to get louder, but in a recent CNBC interview, Daco's arguments cut the other way. He points to a supply-driven problem that higher rates might not be able to fix. EY-Parthenon Chief Economist Greg Daco believes the Fed is likely to keep rates on hold, as the inflation problem has changed. Warsh's first Fed meeting resets interest rate-cut bets Hot May CPI sticks a pin in Fed rate-cut bets Goldman Sachs sends strong message on next Fed rate cut In a recent CNBC interview, Daco said monetary policy is already "slightly restrictive", which means it's already putting some restraint on the economy. He argued, though, that the current inflationary pressures facing the Fed are not primarily driven by overheated demand. Instead, Daco talked about supply pressures. He cited higher energy prices and the strain AI places on limited resources, which are pushing up prices for computers and electronics. Those aren't the sort of pressures the Fed can easily fix with higher interest rates. Consequently, he feels raising interest rates by 25 or 50 basis points wouldn't get the Fed very far. "So I still anticipate that the Fed will hold tight for the time being, even though inflation is twice as high as its main target of 2%," Daco said. The reason is that the economy is still fragile beneath the surface. Daco said Americans remain in an "income squeeze", with after-tax, inflation-adjusted income essentially not growing in May. Hence, a tighter policy could hurt growth without solving the inflation pressures driving prices higher. The Iran war effectively turned energy into a consumer problem, and the damage is still filtering through gas, shipping, travel, and inflation. According to the IEA's March 12 oil report, benchmark crude prices surged by $20 a barrel to $92 after hostilities began on Feb. 28, with the agency citing bigger increases across product markets.According to Axios, citing AAA data on May 20, the national average price of gasoline had climbed to $4.56 a gallon, up 53% since the war started. According to Reuters, Brent later fell to $73.74 on June 24 as tankers restarted movement through Hormuz, but that retreat does not erase the earlier shock to consumers. According to the BEA's June 25 PCE report, May inflation rose 4.1% year over year, while core PCE climbed 3.4%. According to Moody's Analytics economist Mark Zandi, cited by Business Insider, the Iran war has cost the typical U.S. household about $1,000 so far. Daco's argument is that the Fed is up against the wrong kind of inflation with a blunt tool. Higher rates work best when inflation is being driven by excess demand. If households are borrowing heavily, businesses are hiring aggressively, and consumers are bidding up prices, tighter policy can continue to cool spending. However, Daco's point is that this is not the economy the Fed is facing now. He argued that real after-tax income was essentially flat in May, a view backed by an Equitable Growth report, leaving many Americans facing a "gradual erosion in spending power". "If you look at the data for the month of May, you see that income is essentially not growing once you adjust for taxes and inflation, which means that there is a gradual erosion in spending power for many Americans across the country. And that's limiting; that's capping consumer spending growth." Daco's argument for today's pressure being supply-driven is a Fed problem that's a lot tougher to solve. Bumping rates can slow a buyer down, but they cannot produce more oil, add power capacity, or create extra semiconductors overnight. For a useful analogy, think of it like pressing the brake pedal when the real problem is a blocked road. The car slows, but the blockade persists. The consensus among experts is still for a long hold, with now a louder minority warning that hikes are back on the table. According to a Reuters poll published June 26, more than three-quarters of economists expect the Fed to keep rates unchanged at 3.50% to 3.75% through the rest of 2026. Nevertheless, the hawkish tail has grown. In a recent piece I did, I talked about how Bank of America now expect

Top economist delivers blunt Fed rate warning for 2026

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