Bank of America warns: $100 oil prices will persist throughout the year, and the Federal Reserve's rate cuts face the risk of being "dashed"

Source: Jin10 Data

The latest warning from U.S. banks states that even if the conflict subsides within a few weeks, the “high oil prices” of $100 per barrel will persist through 2026, bringing a double blow of economic slowdown and high inflation to the global economy…

Analysts from U.S. banks expect that due to the Iran war, U.S. economic growth will slow down for the entire year, inflation will intensify, and oil prices will stay at $100 per barrel, even if the conflict ends within a few weeks.

In a report on Wednesday, Claudio Irigoyen, an economist at Bank of America, and his team wrote: “So far, the ‘gift’ from this war is: mild stagflation.”

Stagflation refers to an economic phenomenon where high inflation coexists with slow economic growth.

These economists stated that although global dependence on oil has decreased, sensitivity to natural gas and fertilizers has increased significantly. This poses major risks to Europe and developing economies.

“Iran war is not an oil shock; it is an energy shock,” Irigoyen wrote.

Economists predict that by 2026, U.S. economic growth will be dragged down by 50 basis points to 2.3%. Currently, they expect the overall U.S. inflation rate in 2026 to rise from 2.8% to 3.6%.

They also lowered the global GDP growth forecast to 3.1% and raised inflation expectations to 3.3%.

Irigoyen wrote: “This aligns with the characteristics of stagflation shocks, where the impact on inflation occurs earlier and more significantly than on GDP growth. This is based on our new baseline forecast that, for the remaining period in 2026, oil prices will stay near $100 per barrel.”

Additionally, this Bank of America analysis assumes that the Iran war will end by the end of this month.

However, Irigoyen wrote that if the conflict escalates and turns into a protracted war, “much higher energy prices, coupled with significant asset price corrections, could drag the global economy into a recession.”

Economists still expect the Federal Reserve to cut interest rates by 50 basis points this year, but the timing of this rate cut has been pushed from summer to fall, and they openly admit that “the risk of these rate cuts ultimately failing is high.”

Wall Street is increasingly delaying expectations for rate cuts, and Goldman Sachs also predicts two rate cuts in the fourth quarter.

Goldman analysts wrote on Wednesday: “The labor market is softening, wage growth has fallen below the level needed to sustain a 2% inflation target, and inflation expectations are currently well-anchored.”

“In this context, a massive oil shock capable of triggering ongoing inflation concerns could also cause significant economic damage, and may even lead to a recession,” they added.

Earlier this week, Federal Reserve Chair Powell stated that inflation expectations are “well-anchored” and that he tends to “disregard any form of supply shocks.” His remarks eased market concerns about an unexpected rate hike later this year.