• Bank of America revised its Fed rate forecast to three hikes in 2026, up from zero.
  • The shift reflects stronger economic data and a more hawkish tone from the Fed under new chair Kevin Warsh.
  • Markets are pricing higher yields, though many investors still expect fewer increases.

Hawkish Turn

Bank of America has flipped its outlook on Federal Reserve policy, now expecting three quarter-point rate hikes this year, according to a note to clients Thursday. The about-face from its prior call of no changes comes as recent data point to a resilient economy and persistent inflation pressures, while the Fed’s new leadership has struck an increasingly hawkish chord.

“Stronger growth and stickier price pressures, combined with Chair Warsh’s focus on inflation credibility, lead us to expect a more aggressive normalization path,” wrote the bank’s U.S. economists. The revised forecast aligns with a growing chorus of Wall Street firms that have ratcheted up their rate expectations in recent weeks.

Market Reaction

Treasury yields climbed on the news, with the two-year note rising 5 basis points to 4.32% in afternoon trading. Futures markets now imply a roughly 60% chance of at least two hikes by year-end, though investors remain split on the pace. “A three-hike scenario is not yet fully priced in,” said a senior trader at a New York hedge fund, speaking on condition of anonymity. “The market still sees a high probability of a pause if growth softens.”

Bank of America’s economists cited several catalysts: robust employment gains, above-target core inflation, and Warsh’s recent remarks signaling a readiness to act. The revised path would lift the federal funds rate to a range of 4.50%-4.75% by December, up from the current 3.75%-4.00%.

Implications for Borrowers and Savers

If realized, three hikes would ripple through the economy. Mortgage rates, already near 7%, could climb further, cooling the housing market. Corporate borrowing costs would rise, squeezing highly leveraged firms. On the flip side, savers would see higher yields on deposits and money-market funds. Banks like Bank of America stand to benefit from wider net interest margins, though loan demand may soften.

Fragile Consensus

The forecast is not set in stone. Some analysts caution that the economy could slow in the second half, prompting the Fed to hold steady. “We’re in a data-dependent phase,” said a former Fed official now at a think tank. “If inflation surprises to the downside, all bets are off.” Bank of America acknowledged that risks are two-sided, but said the balance of evidence currently favors a tightening bias.

We’ll update this piece as new data and Fed commentary emerge.