Bank of America, PGIM See Three Fed Rate Hikes in 2026

Market Consensus Turns Hawkish

After an extended period of rate cut optimism, major institutional players are recalibrating their outlook. According to Bisnow, Bank of America and PGIM, Prudential’s asset management arm, are now predicting three Federal Reserve rate hikes in 2026. This dramatic shift follows persistent inflation data and global disruptions, notably an oil price shock caused by the ongoing war in Iran. Their updated projections underscore a market moving away from earlier expectations of monetary easing toward a scenario of continued tightening—a pivot likely to shape deal strategies and balance sheet planning across commercial real estate through year-end.

Inflation hit 4.2% in May 2026, per government stats, well north of the Fed’s 2% target and the highest since 2023. Rebounding job growth (172,000 jobs added in May) complicates the case for cuts, as the labor market remains strong—not weak enough for emergency easing. Persistent inflation, paired with sectoral labor gains and surging energy costs, has ratcheted up pressure on Fed policymakers and market forecasters alike.

A Post-Crisis Policy Shift

Throughout 2025 and early 2026, CRE investors, lenders, and borrowers expected a Fed pivot. They hoped lower borrowing costs would arrive. That outlook encouraged loan workouts and maturity extensions. Many called the strategy “extend-and-pretend.” Asset owners waited for cheaper debt to rescue troubled deals.

However, inflation gained momentum and rates stayed high. As a result, capital providers pulled back. Lenders grew less patient. They shifted toward risk control and loss absorption. They also reduced their willingness to grant forbearance. Meanwhile, the Fed changed its stance. New Chairman Kevin Warsh led his first meeting in June 2026. He showed little urgency to cut rates.

The Details

According to Bisnow, both Bank of America and PGIM expect three rate hikes in 2026. They forecast increases totaling 75 basis points. The hikes would come in September, October, and December.

Bank of America’s Aditya Bhave said inflation trends have “gotten unambiguously worse.” He pointed to higher energy prices and strong employment data. PGIM’s midyear outlook also expects hikes. It views them as precautionary measures against inflation shocks. The firm has continued deploying capital into select housing deals despite market uncertainty.

Still, both firms expect rates to peak and later decline. PGIM projects three cuts in 2027 and another in 2028. That path would lower terminal rates to 3.375%. Fed governors remain divided. Half of the 18 officials expect hikes this year. Only one expects a cut, according to June’s dot plot.

Inflation and Jobs Complicate Outlook

Persistent inflation remains the main driver behind these forecasts. The oil shock from Iran’s war and a resilient labor market support prices. May 2026 CPI reached 4.2%, its highest level in three years. It also remains well above the Fed’s target.

Labor data supports a hawkish stance. Payroll gains recently exceeded expectations. Job growth remains concentrated in healthcare, hospitality, and government roles. That trend suggests broader economic momentum continues.

PGIM analysts also see pressure from demand-side growth. They highlighted artificial intelligence investments that support business expansion. These forces weaken arguments for rapid monetary relief. They also provide political cover for precautionary tightening. Meanwhile, Chairman Kevin Warsh leads a divided board. Only one of 18 governors expects cuts in 2026. That split highlights uncertainty around future policy.

Why It Matters

Bank of America and PGIM now hold a very different outlook. Just months ago, investors expected at least one rate cut. Instead, expectations have shifted toward tighter policy.

Inflation remains above 4%, while borrowing costs may rise further. CRE operators must revisit financial models and leverage assumptions. Strategies built around cheap refinancing may prove too optimistic. Meanwhile, lenders are speeding up bad debt sales. They are also reducing exposure, according to Bisnow. The extend-and-pretend era appears to be ending.

This shift increases pressure on value-add and transitional assets. Many face near-term maturities as cap rates rise. Sponsors using floating-rate debt or bridge loans may face higher costs. In a market expecting normal rate cycles, inflation suggests a longer adjustment period.

Institutional demand for new lending could stay muted. Risk premiums may rise because of monetary and geopolitical uncertainty. Sponsors should review debt maturities and liquidity plans. They should also strengthen downside protection.

What’s Next

Bank of America and PGIM both expect three rate increases. Investors will focus on FOMC meetings in September, October, and December. Markets will also track inflation and employment reports closely. The Fed still relies heavily on backward-looking indicators.

Unless inflation falls sharply or hiring slows, hikes appear likely. CRE professionals should prepare for that outcome. Current forecasts suggest rates will stay elevated through 2027. Any reversal may not arrive until 2028 or later.

New lending, refinancing, and investment plans must reflect this reality. Investors will likely favor strong sponsors and resilient asset classes while uncertainty persists.