The June 2026 UCLA Anderson Forecast signals that the fresh oil shock driven by the war in Iran and the closure of the Strait of Hormuz has significantly complicated the
After cutting rates in late 2025 to address labor market concerns, the Federal Reserve is now unlikely to implement further reductions in 2026, Clement Bohr, a senior economist with the
Instead, the central bank is expected to maintain steady rates for the remainder of the year as it navigates a renewed inflationary environment, Bohr said. The forecast suggests that policymakers will adopt a wait-and-see approach, closely monitoring the persistence of inflation and the stability of the labor market before making any further moves.
"The U.S. economy had turned the corner from 2025, with the labor market beginning to stabilize (if not grow stronger) and tariff-induced inflation having reached its nadir," Bohr wrote. "Now a war with Iran has created the largest energy price shock since Russia invaded Ukraine, sending inflation rising once again."
The baseline Anderson forecast does not call for recession, but it does anticipate slower growth and higher inflation and a Federal Reserve with little room to cut interest rates.
The urgency of the Fed's dilemma stems from a sharp inflationary spike, according to the forecast.
Headline CPI inflation has climbed from 2.4% to 3.8% over the past two months and is projected to reach a year-over-year peak of 4.5% by the end of 2026.
While the
For the
With war-induced inflation trending upward, the 10-year Treasury rate has pushed above 4.4%, and 30-year fixed mortgage rates have surpassed 6.5%, Bohr wrote.
"As this report was being finalized, signs of a peace deal were again emerging, but the outcome remains unclear," Bohr wrote. "Regardless, the closure of the Strait of Hormuz will already have an adverse impact on the U.S. economy."
The forecast offers no expectation for downward pressure on mortgage rates for the remainder of the year, leaving the housing market constrained as high borrowing costs coincide with supply-side limitations.
Despite these headwinds, the forecast stops short of predicting a recession, identifying a "resilient" national economy buoyed by strong counterweights. A massive surge in artificial intelligence infrastructure investment, expected to hit $700 billion in 2026 — up 50% from 2025 — is acting as a critical buffer, alongside tax cuts and fiscal support.
"Fortunately, due to significant economic support by way of lower interest rates, tax cuts and increasing investment in AI, the U.S. economy is well-positioned to manage this energy shock," Bohr wrote.
While GDP growth is expected to hold at a modest 2.1% in 2026 rather than accelerate, the core challenge remains inflation, which the Fed must now manage without the luxury of easy policy tools, he wrote. As the forecast report notes, the current economic sequence, reminiscent of the 1970s "stagflation" era, leaves the Federal Reserve with little room to maneuver, forcing a high-stakes pause in its interest rate strategy.
While California continues to outperform the U.S. in output and income growth, employment in the state remains weak and uneven, said Jerry Nickelsburg, UCLA Anderson Forecast senior economist and former director.
California is more exposed than the nation to the energy shock in several ways, Nickelsburg said. The state uses a specific low-emissions gasoline that tends to make prices higher than the national average, and it's ports handle cargo that crosses the Pacific on ships that require large amounts of more specific fuel, he said.
He forecasts 5.5% unemployment for California in 2026, falling to 5.1% in 2027.
