BofA Now Sees Three Fed Rate Hikes in 2026 on Sticky Inflation

Bank of America has flipped its Fed call from a hold to three rate hikes this year, putting the bank well ahead of where the market is currently priced. The hawkish pivot, delivered Monday, tells clients the bank now expects 75 basis points of tightening before the end of 2026, a striking reversal that puts BofA ahead of the market.

What changed at BofA

Economist Aditya Bhave said BofA expects the Fed to raise rates by 25 basis points in each of September, October and December, taking the policy rate to 4.25–4.50%. The bank’s economists reversed a position held as recently as last week after reviewing current conditions and new Fed Chair Kevin Warsh’s comments.

Bhave wrote that the Fed will stay on hold next year, with inflation likely remaining sticky enough to keep the real policy rate from becoming overly restrictive. That effectively pushes any prospect of rate cuts well into the future.

The inflation problem

On inflation, the bank stated that the Fed’s inflation problem has gotten “unambiguously worse,” with core PCE potentially reaching 3.5% in May, nearly 70 basis points above year-ago levels. BofA expects this week’s core PCE print, 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.

“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.”

Warsh sets the tone

Following his first meeting at the helm last week, Warsh referred to the importance of “price stability” about a dozen times, and markets quickly reacted. Bhave noted Warsh repeatedly emphasized the importance of restoring price stability and suggested policy isn’t particularly restrictive.

BofA also revised its read on the Fed’s reaction function, citing June’s Summary of Economic Projections in which nine policymakers forecast hikes even without expecting unemployment to fall, suggesting labor market tightening is no longer a prerequisite for action.

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Where BofA sits versus the market

The call is about 25 basis points more, and three months earlier, than the market, which has priced in two hikes by March 2027, leaving BofA with one of the most hawkish rate calls on Wall Street. Traders are now pricing in at least one hike this year, expected in September, with better than 50% odds of another move in December, according to the CME Group’s FedWatch gauge.

BofA also lifted its second-quarter GDP tracking estimate to 2.8% annualized, driven by a strong May retail sales print alongside upward revisions, hardly the backdrop for a central bank looking to ease. BofA identified a sharp payroll slowdown, soft core PCE prints, or a major equity selloff as the key scenarios that could derail the hiking path.

Options market and stocks to watch

BAC: Watch the bank issuing the call itself. Higher-for-longer rates tend to help net interest margins but a Fed tightening into a slowing economy can also pressure credit.

TLT: Watch long-duration Treasuries. A Fed tightening into a resilient economy pressures bond prices, pushes yields higher and complicates the rate-sensitive corners of an equity market that rallied to records this year.

UUP: Watch the dollar. The U.S. dollar index, tracked by the Invesco DB US Dollar Index Bullish Fund, has historically been one of the biggest beneficiaries of a Fed rate-hike regime.

GLD: Watch gold. Goldman Sachs lowered its gold price target to $4,900 per ounce by the end of 2026, citing delayed Fed cuts and growing market expectations for rate hikes through 2027.

SPY: Watch broad equities, especially long-duration growth names, if the rest of the FOMC echoes Warsh’s tone. For more, see other news.

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