Key Takeaways:
BofA Global Research now expects the Federal Reserve to raise interest rates three times this year, a sharp reversal from its prior call for no change.
BofA Global Research expects the Federal Reserve to deliver 75 basis points of rate hikes in 2026, abandoning its prior call for no change as a resilient labor market and hawkish signals from new Chair Kevin Warsh reshape the policy outlook.
"June Summary of Projections and Warsh's comments indicate that the Fed's reaction function is much more hawkish than we thought," BofA analysts said in a note dated Monday.
The brokerage now forecasts hikes in September, October and December, taking the fed funds rate from its current 3.5%-3.75% range higher by year-end. The call puts BofA at odds with the broader market, where LSEG data shows traders pricing just 42 basis points of tightening for 2026. The divergence has pushed the US Dollar Index to a 13-month high near 101.46, while the yen slid to 161.55 per dollar — levels that have prompted Tokyo to warn of intervention.
If BofA's forecast proves correct, it would mark the first rate-hiking cycle since 2023 and compound headwinds for risk assets already reeling from a tech-stock rout. The Fed's updated projections show the median policy rate rising to 3.8% in 2026 from a prior estimate of 3.4%, with 9 of 18 voting members now backing at least one hike this year. Markets see just a 0.7% probability of a cut by June, according to the CME FedWatch tool.
The hawkish repricing stems from inflation that has proved stickier than anticipated. The Fed's June Summary of Projections lifted its 2026 inflation forecast to 3.6% from 2.7%, while core inflation expectations rose to 3.3% from 2.7%. A 3.8% jump in energy prices accounted for more than 40% of April's CPI increase, though gasoline costs have since eased on tentative progress in US-Iran negotiations over the Strait of Hormuz.
Warsh, who replaced Jerome Powell as Fed chair this month, has stressed that returning inflation to the 2% target remains the central bank's top priority — a message that surprised markets expecting a more accommodative stance under the Trump appointee. The last time the Fed's dot plot shifted this sharply in a single quarter was in September 2022, when the median rate projection for the following year jumped by a full percentage point, triggering a 6% selloff in the S&P 500 over the subsequent month.
The dollar's rally has been the most immediate cross-asset consequence. The greenback surged to a 13-month high as investors piled into the currency on rate-hike bets and safe-haven demand amid global equity volatility. The euro extended its decline against the dollar, pressured by the widening monetary policy divergence between the Fed and the European Central Bank. BNP Paribas and Macquarie are among the other brokerages that expect the Fed to begin hiking this year, though they remain in the minority.
BofA expects the central bank to hold rates steady through 2027 after this year's three increases. "Inflation is likely to remain sticky, keeping the real policy rate from becoming overly restrictive," the analysts said. The next Fed meeting is scheduled for July 28-29, where markets will watch for any shift in the statement's forward guidance.
This article is for informational purposes only and does not constitute investment advice.
