Bank of America Sees Three Fed Rate Hikes in 2026

Bank of America is going against the grain. The bank now expects the Federal Reserve to raise interest rates three times this year, a sharp reversal from its prior call for the Fed to stay on hold through 2026.

What BofA is calling for

Bank of America economists predicted the Fed will raise rates by a quarter point three times this year, lifting the benchmark rate to 4.25%–4.5% from the current 3.5%–3.75% range.

The bank now sees three consecutive quarter-point increases at the September, October, and December meetings. That is 75 basis points of tightening in the back half of the year.

Why the reversal

Stubbornly high inflation and an aggressive tone from new Chairman Kevin Warsh will lead the Federal Reserve to raise interest rates three times this year, according to Bank of America. In a note Monday, the bank's economists reversed their position, held as recently as last week.

The bank expects a report later this week on core personal consumption expenditures prices — the Fed's main inflation forecasting tool — to show an annual rate of 3.5%, reflecting contributions from tariffs and other “one-off” price increases. BofA economist Aditya Bhave described the inflation problem as “unambiguously worse.”

Do you want to see how to make more plays? Do you want to find gains yourself?

Unusual Whales helps you find market opportunities through our market tide, historical options flow, GEX, and much, much more.

Create a free account here to start conquering the market with Unusual Whales.

How it stacks up against the market

BofA is an outlier. By year-end, the most likely scenario at 44.1% is for one rate hike, according to the CME FedWatch tool. The odds of two hikes trail behind at 30.6%, followed by unchanged rates at 19%. Meanwhile, the odds of three hikes sit at a slim 6.2%.

Furthermore, BofA also has the lowest 2026 S&P 500 (SPX) price target on Wall Street. It expects the benchmark index to finish the year at 7,100, implying downside of 8% from current levels.

The bigger picture

Energy costs tied to the Iran war have added to the pressure, and roughly half of Fed officials have now indicated that rate increases could be appropriate in 2026. BofA is effectively betting the hawks win the internal Fed debate.

The central bank has an inflation target of 2%, although BofA doesn’t expect that goal to be met until 2028. It expects inflation to fall to the mid-2% range by the end of 2027 before easing down to 2% the following year.

Options market and stocks to watch

If BofA is right, the market repricing would be significant. Watch these names:

BAC — the source of the call itself; net interest income benefits from higher rates but credit risk rises.

TLT — long-duration Treasuries would take the hit if the curve reprices toward 4.25–4.50% policy rate.

SPY — with BofA modeling 7,100 on the S&P, watch for hedging flow into index puts.

XLF — banks broadly benefit from higher-for-longer, but watch loan demand and deposit betas.

XHB — homebuilders are the most rate-sensitive corner of the market; mortgage rates would climb with any hike path.

Track other news and rate-sensitive flow as the September FOMC approaches.

Want more market intelligence? Create your free Unusual Whales account for options flow, market tide, GEX, and the full toolkit.