PGIM expects the Federal Reserve to raise interest rates three times this year, taking a contrarian view as sticky inflation and resilient growth reshape the policy outlook.

The asset manager said its base case for the US economy is overheating, with above trend growth and inflation still running above the Fed’s 2% target. 

PGIM pointed to AI driven investment, strong consumer spending, fiscal stimulus, and a firm labor market as forces keeping the economy hotter than expected.

The call marks a sharp shift from earlier expectations for rate cuts this year. PGIM said the Fed may need to tighten policy to rebuild inflation credibility after missing its target to the upside for more than five years.

The view is more aggressive than current market pricing. Traders have moved away from cut expectations and now see a higher chance of a rate hike, but not a full three move tightening cycle this year.

PGIM expects the Fed to reverse the hikes relatively quickly, with three rate cuts in 2027 and one more in 2028, bringing the terminal rate to 3.375%.

The forecast lands as new Fed Chair Kevin Warsh prepares for his first policy meeting this week. The Fed is widely expected to keep rates unchanged at 3.50% to 3.75%, but the bigger question is whether officials begin to validate the market’s shift toward higher rates.