Bank of America has dramatically revised its outlook on Federal Reserve policy, now forecasting three 25-basis-point interest rate increases in 2026. The bank expects the moves in September, October, and December, a sharp reversal from its previous call for rates to remain unchanged through the year. The U-turn reflects renewed inflation pressures and a more hawkish stance under new Fed Chair Kevin Warsh.
According to BofA economist Aditya Bhave, “The Fed’s inflation problem has gotten unambiguously worse.” Core PCE inflation, the Fed’s preferred gauge, is projected to hit 3.5% year-over-year, well above the 2% target. The conflict with Iran has added supply-side shocks that the central bank is no longer willing to tolerate, and fading disinflation from housing costs is removing a key pillar of price moderation.
Markets are absorbing the shift: CME FedWatch now shows over 50% probability of a second rate hike in December. BofA’s base case also includes no rate cuts until 2028, contrasting with Citi’s forecast of three quarter-point cuts starting in October 2026 and extending into January 2027. JPMorgan Asset Management, meanwhile, expects rates to stay stable through the year.
The hawkish pivot comes as Warsh signals a less predictable communication style. He has already used his first meeting to stress price stability repeatedly and has launched a review of the Fed’s forward guidance tools. Deutsche Bank’s Matthew Luzzetti noted that the new chair appears to be putting the post-2008 transparency trend “in reverse,” reminiscent of Alan Greenspan’s era when policy shifts often surprised markets.
