Top Economist Daco Warns Fed May Hike in 2026

Nine of 19 Federal Reserve policymakers projected at least one rate hike before year-end, according to the central bank's June 17 projections. Markets had been pricing a softer path. The dot plot shifted aggressively.

Greg Daco, chief economist at EY-Parthenon, said markets may be focusing on the wrong timeline. The risk, he argued, is not 2025 but 2026 – when inflation persistence could force the Fed to raise rates again.

Daco pointed to sticky services inflation and wage growth that is not cooling fast enough. A 2026 rate hike would reverse the easing cycle before it fully takes hold, he said.

The implication for bond markets is direct. Short-dated Treasuries would face upward pressure. Long-end yields could steepen if the market prices a higher terminal rate. Daco said the market is not pricing this risk, leaving growth stocks and gold vulnerable.

Growth stocks, particularly in tech, are sensitive to long-end yields. A higher-for-longer path compresses valuations. Gold, which benefits from lower real rates, would face headwinds if the Fed tightens.

The next test for the Fed narrative comes with the June jobs report, due July 5. A strong employment number would reinforce the hawkish case and keep the 2026 hike on the table. Our earlier analysis of the June jobs report showed how a strong print could reshape the rate path.

The Fed meets next on July 29-30.