KKR expects the Federal Reserve to raise interest rates again at its December and March meetings.

The Federal Reserve appears to be the most optimistic about the economy since it first start publishing forecasts in 2011, and investors should align themselves accordingly, say strategists at a private-equity giant.

KKR expects the Federal Reserve to raise interest rates in December and then March of next year before holding at 4.375% through 2029, a stance that puts them on the hawkish side of Wall Street forecasts. Henry McVey, chief investment officer of KKR's balance sheet, wrote in a note this week that he believes the tightening cycle is increasingly based on rising GDP and heightened core inflation, which omits food and energy prices.

"Moreover, we think the forces supporting nominal growth remain powerful, including robust capital spending, improving productivity, and heightened geopolitical investment," he said. "The FOMC [Federal Open Market Committee] appears to be acknowledging this resilience as well, with participants showing the lowest level of concern about GDP growth since the Fed began publishing this outlook in 2011."

McVey added that the core personal consumption expenditures price index continues to run closer to 2.5%, and the Fed expects it to remain above target for eight years in a row, further supporting at least two more hikes - despite FOMC members' expectation for just one.

KKR has reacted to the central bank's latest meeting by raising its forecasts for the 10-year Treasury BX:TMUBMUSD10Y, with its yield expected to reach 5.1% by the end of 2026, up from a prior estimate of 5%, and 4.9% by December 2027, an increase from the previous forecast of 4.7%.

The 10-year yield was trading at 4.96% early on Friday.

"We believe long-end investors will continue to demand healthy levels of term premium given elevated nominal GDP growth, large fiscal deficits, and the Fed's willingness to tolerate inflation modestly above 2%," McVey wrote.

"Against this backdrop, we continue to favor assets that participate in nominal GDP growth," McVey said. KKR recommends infrastructure, asset-based finance, opportunistic credit and operational improvement-driven buyouts.

"We also continue to favor non-correlated assets where investors can create value through operational improvement rather than simply relying on falling discount rates," he added.

KKR also lists a number of core themes it sees standing to gain from capital becoming more expensive and as focus increases among companies on productivity. Those areas include productivity and the retraining of employees, energy and grid infrastructure and capital-heavy to capital-light transitions.

-Nora Redmond