Hopes for rate relief from the Federal Reserve that permeated the start of the year have largely faded, and two investment management giants have updated their projections to include a steep move in the other direction.

Bank of America and PGIM, an arm of Prudential Financial, updated forecasts this month to include three rate hikes this year that they believe the central bank will need to tamp down inflation driven by the oil price shock brought on by the war in Iran.

The shift in opinions is also reflected in Fed projections from this month’s meeting where central bankers signaled that their benchmark rate was unlikely to slide in 2026.

Fed forecasting has become especially difficult as politics has increasingly pushed its way into the central bank’s corridors. Chairman Kevin Warsh, a former Fed governor who turned into a critic of the central bank’s expansive interventions in the economy, led his first meeting this month, which resulted in a unanimous vote to hold rates.

President Donald Trump nominated Warsh in January, when there were expectations that inflation would cool and the Fed would eventually cut rates in the back half of the year, and the president has publicly and frequently called on the Fed to cut rates. But the central bank’s dual mandate for price stability is being challenged by stubbornly high, and rising, inflation while the job market continues to grow.

The labor market is “somewhere between stabilization and acceleration,” and inflation will likely be pushed higher in the near term by the demand-side boom created by artificial intelligence, PGIM analysts wrote in its midyear global market outlook published earlier this month.

“Our sense is that there will be political cover if the rate hikes are framed as a ‘precautionary’ solution to supply-side inflation and to recent volatility in long-term Treasuries,” the PGIM analysts wrote. “We expect the Fed to reverse these hikes relatively quickly with three rate cuts in 2027 and one additional cut in 2028 for a terminal rate of 3.375%.”

Commercial real estate investors and operators have been betting on rate cuts that haven’t come for more than two years, with widespread loan modifications giving the period the moniker extend-and-pretend. But banks and other lenders have grown less willing to wait and are instead shedding bad debt and eating losses.

Inflation hit 4.2% in May, the highest reading in three years and far off the Fed’s 2% target, as the war in Iran continued to keep energy costs elevated. Meanwhile, the economy added 172,000 jobs over the same period, outpacing expectations but posting highly concentrated gains in healthcare, hospitality and local government.

Fed governors' projections have also shifted throughout the year, with June's forecasts indicating that half of the 18 governors expect rates to rise, while eight believe they will remain flat and one projects a cut.

Bank of America updated its forecast to include 75 basis points of interest rate hikes this year in an analyst note from Aditya Bhave on Monday, with the hikes to come in September, October and December. Sticky inflation is expected to keep rates flat at the elevated rate in 2027 before the Fed begins to make cuts, he wrote.

“The Fed's inflation problem has gotten unambiguously worse,” Bhave wrote.

Warsh leaned more hawkish than expected on inflation in comments after the Fed’s decision this month, and an aggressive central bank could move to raise rates next month, he wrote.