• Bank of America (BAC) reaffirms its call for a quarter-point Fed rate hike on October 28, even as markets price in only a 20% chance.
  • The bank warns that persistent inflation and robust economic activity could push core PCE inflation to 3.4% by year-end, justifying further tightening.
  • The Fed's September minutes show most officials see another increase likely appropriate by year-end, but the timing remains disputed.

Bank of America is sticking to its contrarian forecast: a Federal Reserve rate hike on October 28, even as market-implied odds hover near 20%. In a Monday research note, the bank reiterated its view that September's elevated inflation reading strengthens the case for tightening now, preserving the option for another increase in December.

The call comes amid a broader debate over the pace of monetary policy. The Fed already restarted its hiking cycle with a unanimous quarter-point increase at its September 15-16 meeting, lifting the benchmark rate to 3.75%-4.00%. Minutes from that meeting indicated most participants considered another increase likely appropriate by year-end, though they stopped short of committing to October.

Market pricing tells a different story. As of October 19, futures markets implied an 83% probability of a pause this month, with roughly an 88% chance of a hike by December. That gap underscores the disagreement over timing rather than direction.

Inflation Data Strengthen the Case

The Labor Department reported that September consumer prices rose 3.7% year-over-year, up from 3.4% in August. Core CPI, which excludes food and energy, increased 2.6%. Bank of America's economics team raised its estimate for September's monthly core PCE increase to 0.32% from 0.22%, citing strong nominal activity that allows businesses to pass higher energy costs into other prices.

The bank's warning that core PCE could "plausibly" reach 3.4% by year-end describes a risk scenario, not a published forecast. The Fed officially targets PCE inflation, which tends to run slightly below CPI.

"The inflation risks justify moving sooner rather than later," a person familiar with the bank's thinking said, speaking on condition of anonymity. "Waiting until December risks falling behind the curve."

Fed officials have acknowledged upward pressure on prices. The September minutes cited resilient consumption, robust AI-related investment, and energy disruptions as factors sustaining demand and costs. Officials judged inflation risks skewed upward while labor-market risks had become more balanced.

The decision will come six days before the U.S. midterm elections, adding a layer of political sensitivity. Some economists argue that waiting until December would allow more data and avoid the appearance of political influence. The Fed has repeatedly said its decisions are based solely on economic conditions.

A Trillion-Dollar Bank in the Spotlight

Bank of America's stance carries weight given its scale. The second-largest U.S. bank by assets reported third-quarter revenue of $30.0 billion, up about 3% year-over-year, with net interest income climbing 8% to $16.4 billion. Reported net income was $6.9 billion, or $0.91 per share, dragged down by a $1.2 billion regulatory settlement related to anti-money-laundering failures. Excluding that penalty, earnings would have been approximately $8.1 billion, or $1.08 per share.

CEO Brian Moynihan and CFO Alastair Borthwick remain in their roles, according to the October 14 earnings materials. The bank spent more than $200 million on remediation efforts during the quarter and assigned thousands of employees to the work.

Beyond the bank's own forecast, the broader economic picture remains mixed. The 10-year Treasury yield hovered around 5.07% early on October 19, keeping long-term financing conditions tight. KeyCorp (KEY) CEO Christopher Gorman noted strong commercial order books and continued investment plans among clients benefiting from the AI expansion, suggesting that higher rates may not deter all capital spending.

Some analysts warn that the Fed's aggressive tightening could weigh disproportionately on credit-dependent households and small businesses. Others, including former Chicago Fed President Charles Evans, have called for clearer communication on how higher rates will reduce inflation without causing a sharp rise in unemployment.

Bank of America's forecast may be out of step with the market, but it is not without supporters. Mohamed El-Erian, a prominent economist, has cautioned that investors may be pricing too many hikes for next year, while agreeing that October hike odds should remain low. The bank's call ultimately hinges on whether the Fed prioritizes inflation risks over the desire for more data.

As one trader put it, "The market is saying 'show me' to the Fed. BofA is saying 'just do it.'"

The Fed's September PCE data are scheduled for release on October 29—one day after the decision—meaning the committee will not have that official inflation reading when it votes.

Correction: An earlier version of this article misstated the probability of a October rate hike. It is approximately 20%, not 15%.