Bank of America has flipped its outlook on Federal Reserve policy, now forecasting three quarter-point rate increases in 2026 — a total of 75 basis points. The bank's economists expect hikes in September, October and December, a sharp reversal from their earlier view that the Fed would hold rates steady all year.
A Sharp Reversal in Outlook
Just weeks ago, Bank of America projected no changes to the federal funds rate in 2026. But resilient jobs data and stubborn inflation have forced a rethink. The revised forecast puts the central bank on a path to tighten policy in the second half of the year, starting with a likely move in September.
Bank of America economist Aditya Bhave said a July rate increase is “in play,” though the Fed is expected to wait for more economic data before committing. The first meeting chaired by new Chairman Kevin Warsh ended with no rate change, but the internal debate has clearly shifted. Nine of 18 FOMC members now expect at least one rate increase in 2026, according to the latest dot-plot projections.
Why the Fed Might Move
The bank’s economists see core PCE inflation running at a 3.5% annual rate, driven by tariff effects and one-off price increases. That’s well above the Fed’s 2% target and keeps pressure on policymakers to act. “The labor market remains too tight for comfort,” Bhave noted, pointing to recent payroll figures that surprised to the upside.
The Fed has been cautious, but the data keeps coming in hot. With inflation proving sticky and job growth still solid, the case for a rate hike builds each month. Bhave emphasized that the July meeting remains a live option, though the September date looks more probable given the Fed’s preference for a clear run of data.
Wall Street and Global Central Banks
Bank of America isn’t alone in revising its outlook. Deutsche Bank also expects two additional 25-basis-point rate increases in 2026, in September and December. The CME FedWatch tool assigns a 72.8% probability of a hike in September, rising to 80.6% in October and 87.9% in December. Traders are clearly pricing in a tightening cycle.
That trend mirrors a broader global shift. In May 2026, among 52 central banks worldwide, exactly half raised rates and half cut — ending a two-year stretch where more central banks were cutting than raising. The era of easy money may be fading, at least for now.
What happens next depends on the data. The Fed has made clear it wants to see sustained progress on inflation before moving. If core PCE stays above 3%, a July hike becomes harder to ignore. For now, markets are betting on September.
