Bank of America Calls for Three Fed Hikes in 2026 as Sticky Inflation and Hawkish Policy Shift Take Hold

Bank of America now forecasts that the U.S. Federal Reserve will raise interest rates three times in 2026, signaling a significant shift from a rate-cutting to a rate-hiking stance.

This change is driven by persistent inflation, especially from energy costs, a resilient labor market, and a new, more hawkish leadership at the Fed.

The market narrative has pivoted from anticipating rate cuts to considering the possibility of rate hikes, effectively reversing the easing cycle that began in late 2025.

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Bank of America has adjusted its forecast, now expecting the Federal Reserve to implement three interest rate hikes in 2026, a call that reflects a major shift in the economic landscape.

The ground for this hawkish turn was prepared at the Fed's June policy meeting. While the interest rate was held steady, the new 'dot plot' revealed that many policymakers were already anticipating at least one hike this year. This meeting, led by new Chair Kevin Warsh, marked a clear departure from the previous 'easing bias,' fundamentally changing the conversation from "how many cuts?" to "are hikes coming?"

So, what's driving this change? There are three main reasons. First, inflation has proven to be much stickier than anticipated. Headline inflation, measured by the CPI, has re-accelerated, largely due to rising energy costs linked to geopolitical tensions like the conflict in Iran. At the same time, core inflation, which excludes volatile food and energy prices, remains stubbornly above the Fed's 2% target. Second, the U.S. labor market remains surprisingly strong. With consistent job growth and low unemployment, there is little pressure on the Fed to cut rates to stimulate the economy. Third, geopolitical instability, particularly disruptions in the Strait of Hormuz, has pushed oil price forecasts higher, creating persistent inflationary pressure that the Fed cannot ignore.

This potential hiking cycle is essentially a reversal of the policy easing that occurred in late 2025. The Fed had cut rates three times, creating a buffer that it may now have to reclaim to combat renewed inflation. The market has already started to react, with Treasury yields rising in response to the Fed's tougher stance.

In essence, BofA's call is a logical conclusion based on recent data and the Fed's own signals. The combination of persistent inflation, a solid job market, and external price shocks has shifted the central bank's focus. The upcoming inflation reports will be critical in determining whether these 'insurance' hikes become a reality.

FOMC (Federal Open Market Committee): The committee within the Federal Reserve that is responsible for making key decisions about interest rates and the growth of the U.S. money supply.
Hawkish: A term used to describe a monetary policy stance that favors higher interest rates to control inflation, even at the risk of slowing down economic growth.
Core Inflation: A measure of inflation that excludes volatile items like food and energy prices. It is often considered a better indicator of underlying long-term inflation trends.