Two rate hikes expected in back half of 2026; inflation persistent until 2028 (with Romaine Bostick, Katie Greifeld)

Diane Swonk expects two rate hikes in the back half of 2026. She sees service sector inflation as persistent, driven by higher-income spending and the World Cup. She does not see inflation returning to 2% until 2028. The last Fed cut was too much. She expects a reopening of the Strait of Hormuz by end of June, but notes supply chain shocks beyond energy are affecting emerging markets.

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Diane Swonk 9.0

Two rate hikes expected in back half of 2026; inflation persistent until 2028 (with Romaine Bostick, Katie Greifeld)

yields

We do see two rate hikes in the back half of the year.

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no reliable edge (random outcomes)

5/8/2026 11:20:03 PM	medium term cautious up	21 days later	+1.47%	+0.74%
1/9/2026 9:18:34 PM	medium term cautious down	21 days later	+2.10%	-1.05%
11/14/2025 9:03:18 PM	short term up	7 days later	-2.30%	-2.30%

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Asks how the new Fed Chair Kevin Warsh will bring together a board of diverging opinions, given the bond market pricing in a rate hike for 2026.

Katie Greifeld
Diane Swonk

Diverging opinions are certainly diverging in the area of wanting rate hikes. Some presidents are talking about a rate hike sooner rather than later. That is a major shift.

I think they'll give them some grace period over the summer, but we do see two rate hikes in the back half of the year.
Asks if the uptick in inflation is tied to Iran and whether a resolution would bring rates down.

Romaine Bostick
Diane Swonk

We expect a reopening of the Strait of Hormuz by the end of June, but this is more than an energy shock—it's a supply chain shock affecting emerging markets (rubber gloves in Thailand, garment production in Bangladesh).

Even though headline inflation may crest soon, there will be lingering inflation, and the biggest issue is the service sector, which is accelerating.
Asks how much impact a Fed rate hike would have on the types of price pressures described.

Katie Greifeld
Diane Swonk

It's going to take a while to get rid of this inflation. We don't see inflation getting back down to 2% until we get into 2028, even with rate hikes.

Inflation will cool enough before then to allow them to start cutting again, but that's a different scenario than we were looking at at the end of last year. The last cut by the Fed was too much.

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