"Stagflation" is coming! Bank of America: The Federal Reserve is expected to cut interest rates by 50 basis points this year, and oil prices will stay around $100 throughout the year.

The latest forecast from a Bank of America analyst: Due to the Iran conflict, the global economy will face a scenario of slowing growth and rising inflation, and international oil prices will stay at elevated levels of around $100 per barrel throughout the year—even if this conflict ends within a few weeks.

In a research note published on Wednesday, Bank of America economists Claudio Irigoyen and his team wrote: “As of now, the consequences of this conflict will be mild stagflation.” Stagflation refers to an economic phenomenon where inflation rises while growth slows at the same time.

Bank of America economists said that although the world’s reliance on oil has decreased, sensitivity to natural gas and fertilizers has increased significantly. This poses major risks to Europe and emerging market economies.

“An Iran war is not merely an oil shock—it’s an energy shock,” Irigoyen wrote.

The economists lowered their forecast for U.S. economic growth by 50 basis points to 2.3%, and expected the country’s overall inflation rate in 2026 to reach 3.6%, higher than the prior forecast of 2.8%。。

From a global perspective, the economists cut their 2026 global growth forecast to 3.1% and raised their global inflation forecast to 3.3%.

Irigoyen noted that this aligns with the characteristics of a stagflation shock. Based on a new baseline scenario, the bank forecasts that oil prices will remain near $100 per barrel for the rest of 2026.

Bank of America’s analysis assumes that the war will gradually come to a close by the end of this month.

However, Irigoyen wrote that if the conflict escalates and continues, “a sharp rise in energy prices, combined with a sharp pullback in asset prices, may drag the global economy into a recession.”

The Federal Reserve is expected to cut rates by 50 basis points this year

Bank of America economists still expect the Federal Reserve to cut rates by 50 basis points this year, but the timing of the cuts has been pushed back from summer to autumn, and they acknowledge that “the risks of these rate cuts not being realized are very high.”

Wall Street’s expectations for Fed rate cuts are being pushed back further and further. Goldman Sachs is also betting on the Fed cutting rates twice this year, with both cuts occurring in the fourth quarter.

“The labor market is cooling; wage growth is below levels consistent with the 2% inflation target; and long-term market inflation expectations remain stable,” Goldman analysts wrote on Wednesday. “Against this backdrop, an oil shock sufficient to raise concerns about persistent inflation will likely cause substantial economic losses and could trigger a recession.”

On Monday, Fed Chair Jerome Powell said that in the context of the energy shock arising from the U.S.-Iran conflict, the Fed is inclined to keep interest rates unchanged and temporarily “ignore” the impact of this shock. These comments eased market concerns about Fed rate hikes later this year.

(Source: Caixin)