Signals & Noise: Updating the Outlook—Growth Up and Policy Tightening Ahead

Hello, and welcome to Signals and Noise, where strategists and economists from around the globe offer a shorter take on markets and economic matters as part of global research and law. I'm Claudio de Gorda, Head of Global Economic Research at Bank of America Global Research, and we are recording this episode on Thursday, June 25, 2026. Today, I want to focus on changes to forecasts we made with our mid-year updates, as well as our Fed call, which is more hawkish than consensus.

First, let me start with the big picture. We mark up our growth forecast and mark down our inflation forecast relative to our April forecast right after the downward start. For the global economy, we now expect 3.2% growth for 2026, 3.5% growth for 2027, and 3.3% growth for 2028.

For inflation, we now expect 3% for 2026, 2.4% for 2027, and 2.5% for 2028. But lower headline inflation is not enough to trigger easier monetary policy. In fact, we now expect the Fed to hike 75 basis points this year.

Higher U.S. rates will tighten global financial conditions, and this will represent an important test for the global economy. So now, let me highlight three key insights from our report. The first one is the impact of the Iran deal.

The Iran war represented a stagfationary shock for the global economy, disproportionately impacting energy importers such as Europe, Japan, and China relative to the U.S. Back in April, we reduced our growth forecast and increased our inflation forecast to reflect that shock. Now, on the back of the deal, which is somewhat fragile in nature, our commodities team reduced their forecast for energy prices, and now they expect oil prices to average $72 per barrel in the second half of this year.

But we haven't fully reversed the stagfationary shock. In other words, some permanent damage is already done to the global economy. The second insight has to do with the relative growth performance across countries.

More than the peace deal, the main driver of the upward revision to global growth this year is the AI-driven export cycle in Asia, while lower oil prices boost growth mildly in developed markets in 2027. Among developed economies, we continue expecting the U.S. to outperform Europe, U.K., and Japan, as cheaper gas and AI-related capex will likely drive a strong second half of this year. In China, there are no changes on the surface, but strong exports keep saving the day amid domestic demand weakness and rebalances is elusive.

The third highlight is related to our new Fed call, as we now expect 75 basis point of hikes starting in September. Let's start with the health of the U.S. economy to understand our call. We are seeing a more robust labor market dynamics, which could lead to more wage pressures, while inflation dynamics have deteriorated.

While some would offer partly to blame, and tariffs should soon roll off, most of the FOMC seems to be losing patience after five years of high inflation, and more importantly strong inflation persistence in core measures, in particular core services. This change of call is not related to the war, and more a consequence of too much accumulated policy stimulus and the perceived change in the Fed's reaction function. In addition, we think that from a strategic perspective, Chairman Walsh's hawkish comment on the last FOMC makes sense since, if in the new framework there will be more discretion, less transparency and less forward guidance, hiking rates from the outset can help build credibility and use that discretion going forward without de-anchoring inflation expectations.

So to wrap up, the Iran deal looks fragile and the drop in energy prices will not translate into a full reversal of the stagfationary shock introduced by the war. The US will continue outperforming other developed economies, and the AI-driven export cycle in Asia is the most important positive delta in our broad forecasts. Finally, a combination of a robust labor market, inflation persistence and a more hawkish Fed justify our out-of-consensus hawkish call on the Fed.

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