BofA Sees Three Fed Rate Hikes Before Extended Policy Pause
Bank of America has significantly changed its Federal Reserve outlook. The bank now expects three interest rate increases totaling 75 basis points in 2026.
After completing those hikes, BofA believes the Fed will keep borrowing costs unchanged throughout the following year. As a result, any potential rate cuts appear increasingly distant.
BofA Predicts Three Consecutive Rate Increases
BofA analyst Aditya Bhave expects the Federal Reserve to raise rates by 25 basis points at each of its September, October and December meetings.
This would lift the federal funds target range to between 4.25% and 4.50%.
Bhave also expects policymakers to leave interest rates unchanged throughout 2027. Persistent inflation could prevent the inflation-adjusted policy rate from becoming excessively restrictive.
Bank Reverses Its Previous Fed Outlook
The latest forecast represents a major shift in Bank of America’s monetary policy expectations.
BofA previously questioned whether the Federal Reserve needed to maintain such a restrictive stance. However, the bank now believes that its earlier skepticism was premature.
Stronger labor-market conditions and worsening inflation have changed the economic outlook.
Labor-Market Risks Have Declined
BofA believes the downside risks facing the US labor market have faded.
The unemployment rate remains unchanged compared with May of the previous year. At that time, interest rates were 75 basis points higher than their current level.
This suggests that the labor market has remained resilient despite restrictive borrowing costs.
Consequently, Federal Reserve officials may feel more confident about raising rates without causing a sharp increase in unemployment.
Inflation Creates a Bigger Problem for the Fed
Bank of America warned that the Federal Reserve’s inflation challenge has become significantly more serious.
The bank estimates that core Personal Consumption Expenditures inflation could reach 3.5% in May.
That would place the Fed’s preferred underlying inflation measure almost 70 basis points above its level from one year earlier.
Persistent price pressures could therefore justify additional monetary tightening.
Fed No Longer Requires a Stronger Labor Market to Raise Rates
BofA also revised its interpretation of how Federal Reserve officials respond to economic data.
The bank highlighted the Fed’s June Summary of Economic Projections. Nine policymakers forecast higher interest rates even though they did not expect unemployment to decline.
This suggests that further labor-market tightening is no longer necessary before the central bank takes action.
Instead, continued inflation alone may be enough to support additional rate increases.
Kevin Warsh Emphasizes Price Stability
Federal Reserve Chair Kevin Warsh reinforced the bank’s hawkish interpretation during his latest press conference.
According to Bhave, Warsh repeatedly stressed the need to restore price stability.
He also indicated that current monetary policy may not be particularly restrictive.
These comments strengthened expectations that the Federal Reserve could raise interest rates again rather than begin cutting them.
What Could Prevent the Fed Rate Hikes?
Bank of America identified several developments that could stop the projected tightening cycle.
A sharp slowdown in payroll growth could make policymakers more concerned about employment.
Unexpectedly weak core PCE inflation readings could also reduce the need for higher rates.
Finally, a major stock market decline could tighten financial conditions enough to discourage the Federal Reserve from proceeding with further increases.
Without one of these developments, BofA expects the Fed to complete three rate hikes before entering an extended policy pause.
