Bank of America now expects the Fed to raise interest rates three times in 2026. This marks a reversal from its forecast as recently as last week of no change this year.

The bank projects 75 basis points of tightening across September, October, and December, lifting the benchmark rate toward a 4.25% to 4.50% range. Resilient jobs data and stubborn inflation drove the shift.

Why Bank of America Flipped Its Fed Rate Call

The reversal followed the first meeting led by new Chairman Kevin Warsh, where policymakers decided to leave benchmark interest rates unchanged.

However, nine of the 18 FOMC members now expect at least one rate increase in 2026. In a note published Monday, BofA economist Aditya Bhave said “Warsh’s presser also leaned hawkish,” repeatedly stressing the need to restore price stability and indicating that monetary policy may not be especially restrictive. 

“Perhaps he was strategically hawkish to gain credibility, but we think he’s just buying time until inflation falls or his task forces make the case to stay on hold,” Bhave added. 

Bhave noted that a July rate hike “is in play.” He added the Fed is more likely to wait for additional economic data over the summer before deciding on its next policy move.

Meanwhile, the Fed’s more hawkish stance comes amid persistent concerns about inflation and the labor market’s resilience. Bhave said supply shocks had eroded the central bank’s patience. 

The bank expects core personal consumption expenditures prices, the Fed’s main inflation gauge, to show a 3.5% annual rate, reflecting tariffs and one-off increases.

“Meanwhile, the Fed’s inflation problem has gotten unambiguously worse…The Fed was willing to look through the tariffs, but it is losing patience after the latest round of supply shocks. Also, housing-driven disinflation has now mostly run its course, while other core services remain very sticky,” the analyst added.

Deutsche Bank and The Market Also Leans Hawkish

In a June 19 research note, Deutsche Bank also projected two additional 25-basis-point rate increases this year, with hikes expected in September and December.

“On the hawkish side, there is the potential for the Committee to ​coalesce around a ​July rate hike. On ⁠the dovish side, the recent improvement in energy prices and inflation expectations may more sustainably reduce the urgency to act,” Deutsche Bank noted.

Traders now assign rising odds to each meeting. CME FedWatch data puts the chance of a hike at 72.8% for September, 80.6% for October, and 87.9% for December.

The core PCE report due this week will test how firmly inflation has settled above target.

Source: BeInCrypto