Bank of America has revised its interest rate forecast, now expecting three quarter-point rate hikes from the Federal Reserve in 2026. The shift comes as policymakers show less patience with inflation running above target and as Fed Chair Jerome Powell sends increasingly hawkish signals.
Why BofA Changed Its Outlook
The bank's economists previously projected a slower pace of tightening. But fading tolerance for above-target inflation and Powell's recent comments pushed them to update the call. The central bank has kept rates elevated for months, and recent data suggests price pressures aren't cooling fast enough for the Fed's comfort.
Powell has repeatedly emphasized that the Fed will not hesitate to raise rates again if needed. That stance, combined with stubborn inflation readings, led BofA to conclude that three quarter-point moves are likely next year.
What Markets Are Betting On
Despite the hawkish shift from Bank of America, betting markets see a different short-term path. Polymarket data shows a 73.5% probability that the Fed will hold rates steady at its July meeting. Traders are pricing in a pause, not a hike, for the summer.
That gap between one major bank's long-term forecast and near-term market expectations highlights the uncertainty around the Fed's next moves. The central bank has stressed that decisions will be data-dependent, leaving room for surprises.
The Polymarket odds suggest investors believe inflation could ease enough by July to justify staying put. But BofA's 2026 outlook implies that even if the Fed pauses this summer, the longer-term trend points to higher borrowing costs.
What This Means for Borrowers and Investors
Three rate hikes in 2026 would push the federal funds rate higher than many had anticipated just weeks ago. Mortgage rates, credit card APRs, and business loan costs would all feel the pressure. For stock investors, a more aggressive Fed typically weighs on valuations, especially in growth sectors.
The bond market has already started adjusting. Yields on longer-dated Treasuries ticked up after the BofA forecast circulated. The dollar also strengthened, a typical response to expectations of tighter monetary policy.
One open question is whether other banks will follow BofA's lead. If more major forecasters adopt a similar view, the market's current pricing for 2026 could shift significantly.
