BNP Sees Fed Hiking Twice More as Inflation Overshoots Through 2028

The forecast rests on a split economy rather than broad strength. BNP describes growth as "K-shaped": investment tied to optimism about artificial intelligence and spending by the wealthiest households, buoyed by historically high stock market valuations, are doing the heavy lifting. That composition helps explain why the economy has absorbed tariff and energy shocks with growth near potential while price pressures persist. The bank also cites above-trend productivity growth and an improving labor market that it expects to pull unemployment down toward 4.0%.

Inflation is the constraint. BNP attributes the overshoot largely to higher oil prices and tariffs, though it says the tariff impact has been less significant than expected. A 25-basis-point hike, the unit the Fed typically uses, raises the target range by a quarter of a percentage point. Two such moves from the current setting would put the range at 4.25%–4.50%, a level the bank frames as a response to shifting price and employment risks rather than a return to aggressive tightening.

The currency call follows from the rate path. BNP expects Fed hikes to offset structural headwinds and support the dollar temporarily, with EUR/USD targeting 1.14 by end-2026 before a structural downtrend resumes toward 1.20 by end-2027. It flags political and fiscal risk as a possible weight on the euro next year. Against the yen, the bank sees continued but slower USD/JPY appreciation, arguing the Bank of Japan remains behind the curve despite its own hikes. Sterling is expected to find relative support from a modest fiscal risk premium under the new Labour government and resilient growth.

The mechanism matters for anyone holding rate-sensitive assets. If inflation holds near 3.5% while growth stays above trend, the Fed has little room to ease, and the bank's path implies policy stays restrictive for longer than a single hike would suggest. The clearest test of the view is the inflation data: a faster decline in price pressures, particularly from oil, would undercut the case for the December and January moves. A sharper growth slowdown would do the same. Conversely, continued overshoot would reinforce the bank's expectation of a higher-for-longer range and a firmer dollar into end-2026.