Bank of America has sharply changed its forecast for Fed policy and now expects three rate hikes in 2026. Just a week ago, the bank assumed the regulator would keep the rate unchanged until the end of the year.
The new scenario envisions tightening by 75 basis points. According to the bank, the Fed could raise rates in September, October, and December, bringing the range to 4.25–4.50%.
Forecast Changed After Warsh’s First Meeting
The revision came after the first Fed meeting under the leadership of Kevin Warsh. The regulator left the rate unchanged, but the rhetoric of the new chair and updated expectations within the committee turned out to be tougher than the market anticipated.
Now 9 out of 18 FOMC members expect at least one rate hike in 2026. For investors, this is a significant shift: the Fed no longer looks like a regulator simply waiting for the right moment to cut rates.
Bank of America economist Aditya Bhave noted that Warsh’s press conference had a more hawkish tone. The new Fed chair repeatedly spoke about the need to restore price stability and made it clear that current policy may not be as restrictive as previously thought.
The Fed Is Losing Patience Over Inflation
The main reason for the forecast revision is inflation. Bank of America believes the problem for the Fed has become noticeably worse due to persistent price growth and new supply shocks.
Bhave expects the core personal consumption expenditures index, one of the Fed’s main inflation indicators, to show an annual pace of around 3.5%. The figure is influenced by tariffs and one-off price spikes.
Previously, the regulator was willing to look through some of the tariff effect. Now, according to the bank, the Fed’s patience is running out. Disinflation through housing has nearly run its course, while other services remain too sticky in price.
July Is Not Ruled Out Either
Bank of America’s base scenario assumes three hikes in the fall and December. But Bhave does not rule out that the Fed could start earlier.
According to him, a July hike remains possible. However, it is more likely that the regulator will wait for additional summer data before taking the next step.
This makes the upcoming reports especially important. The market will be watching inflation, employment, consumer spending, and signals about how much tariffs and energy prices are feeding into the broader basket.
The Labor Market Gives the Fed Room
Another factor in favor of tighter policy is a resilient labor market. If employment remains strong, the Fed has more room to fight inflation.
A weak labor market usually forces the regulator to act more cautiously. But if the economy withstands high rates, the argument for a pause becomes less convincing.
For markets, this is an unpleasant combination. Inflation is not falling fast enough, and employment does not give the Fed a clear reason to soften its tone. In such an environment, rate expectations quickly shift upward.
Deutsche Bank Also Expects Hikes
Bank of America is not the only major bank taking a more hawkish view of the Fed. Deutsche Bank, in a note dated June 19, also forecast two 25-basis-point hikes this year.
According to its estimate, rates could rise in September and December. The bank allows that the committee could unite around a July move if inflation risks intensify.
At the same time, Deutsche Bank leaves room for a softer scenario. Improved energy prices and lower inflation expectations could reduce the urgency for new hikes. But for now, the market is increasingly pricing in a hawkish outcome.
Traders Are Quickly Repricing Meetings
The futures market has already started pricing in high odds of new Fed moves. According to CME FedWatch, the probability of a hike in September is estimated at 72.8%.
For October, the figure rises to 80.6%, and for December—to 87.9%. These numbers show that the tightening scenario no longer looks marginal.
This is an important reversal. Not long ago, the market was more often discussing when the Fed would start cutting rates. Now the basic question is changing: how many times can the regulator raise them by year-end.
Why This Matters for Markets
Rate hikes usually worsen conditions for risky assets. The higher the cost of capital, the stronger the competition from cash instruments and bonds.
For stocks, this means pressure on company valuations, especially in the tech sector. For bitcoin and the crypto market, it is also a negative backdrop because liquidity becomes more expensive and investors are more likely to cut volatile positions.
If the Fed does move to three hikes, the market could face a new repricing. Especially if inflation stays above target and Warsh’s rhetoric continues to sound hawkish.
The Main Test Lies Ahead
The upcoming report on the core personal consumption expenditures index will be an important test for the new forecast. If the figure confirms persistent inflation, the arguments for rate hikes will strengthen.
If the data turns out softer, some expectations may ease. But after the reversal by Bank of America and Deutsche Bank, it is now harder for the market to ignore the risk of tightening.
As a result, the Fed has once again become the main source of uncertainty. Investors are waiting not only for the rate decision but also to see how far the new regulator head is willing to go against market expectations.
What Comes Next?
The coming months will depend on inflation and the strength of the economy. If core prices remain sticky and the labor market does not start to weaken, the Fed will have arguments for raising rates.
For markets, this means the expensive liquidity scenario could last longer. Stocks, cryptocurrencies, and other risky assets will be sensitive to every new report on prices and employment.
The main takeaway is simple. Bank of America no longer expects a Fed pause in 2026. The bank is pricing in three rate hikes, and the market is quickly moving in the same direction. If inflation confirms this scenario, rates will once again become the main source of pressure for risky assets.
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