US private equity firm KKR has raised its forecast for long-term Treasury yields, signaling that the Federal Reserve will keep its benchmark rate elevated above previous expectations. The revision stems from concerns voiced by Fed Chair Warsh regarding persistently high inflation. KKR now projects the 10-year Treasury yield to close the year at 5.1%, up from its earlier estimate of 5.0%, and to end 2027 at 4.9%, compared to a prior forecast of 4.7%.

The firm anticipates the Fed will implement another rate hike in December, followed by an additional increase in March of next year. KKR now expects rates to remain at these levels until early 2029, extending its previous timeline which had assumed a hold through 2028. The team, led by Henry McVey, Head of Global Macro and Asset Allocation, wrote, "We continue to believe that in an environment of elevated nominal growth, substantial fiscal deficits, and persistent capital competition, investors at the long end of the curve will demand considerable term premium."

Following Wednesday's rate increase, traders have ramped up bets on further Fed action, with market pricing now suggesting three additional 25-basis-point hikes over the next twelve months. Despite Warsh's cautious approach in refraining from committing to future moves, he reiterated his dissatisfaction with inflation trends and emphasized the central bank's commitment to price stability. The KKR team noted that the Fed no longer expects inflation to return to its 2% target before 2029. "In our view, a mildly restrictive rate, combined with lingering inflation and resilient nominal growth, supports a 'higher for longer' policy stance."

Wall Street Turns Hawkish, Betting the Fed's Hiking Cycle Isn't Over

The Federal Reserve voted unanimously on Wednesday to raise its benchmark rate by 25 basis points, lifting the target range to 3.75%-4.00%, marking the first hike since July 2023. Chair Warsh described the move as "removing a dose of accommodation" and reiterated that inflation remains "too high and has persisted for too long." In the aftermath, major Wall Street banks nearly uniformly revised their expectations for further tightening, with disagreements centering only on the pace and magnitude.

The most aggressive stance comes from Bank of America Global Research, which projects 25-basis-point hikes in both October and December, totaling 50 basis points for the remainder of the year and bringing the year-end rate to 4.25%-4.50%. It stands as the only major bank forecasting two more hikes within the year. Goldman Sachs similarly bets on October, expecting one more 25-basis-point increase this year to 4.00%-4.25%. Having previously believed the tightening cycle had concluded after September, Goldman's reversal is notable, citing a more hawkish-than-expected dot plot, an upward revision to the neutral rate, and Warsh's language about "only removing a degree of accommodation."

JPMorgan, Morgan Stanley, Nomura, HSBC, Barclays, Deutsche Bank, BNP Paribas, Macquarie, and UBS all expect the next hike to occur in December, with a year-end target range of 4.00%-4.25%. Morgan Stanley Chief US Economist Michael Gapen revised his full-year forecast to include three hikes in total, including the latest one, stating bluntly: "If you don't even think your policy is restrictive, and oil prices aren't going to fall on their own, then you've got work to do." Citigroup stands as the outlier, maintaining its prediction of no further hikes this year and keeping rates at 3.75%-4.00%.

Cross-Institutional Views Also Point to 'Higher for Longer' Rates

James Egelhof, Chief US Economist at BNP Paribas, stated that the two hikes this year "are likely just the beginning of a prolonged tightening cycle." Gregory Peters, Chief Investment Officer at PGIM Fixed Income, remarked that unless inflation data shifts course, "it's hard to see how they wouldn't continue hiking next month." Notably, the late-October meeting falls near the midterm elections, a politically sensitive period, prompting many institutions to view December as the more viable next window for action. The core variable driving divergence remains oil prices and geopolitical risks: if the energy shock from the Iran situation persists, the hiking path could accelerate; if oil retreats, this round of action more closely resembles a "preventive hike." Most institutions believe Warsh's commitment to fighting inflation has moved from rhetoric to action, and the process of rebuilding the Fed's credibility is only just beginning.