Key facts
- Bank of America expects the Federal Reserve to hike interest rates two more times in 2026.
- The market is currently pricing in one additional rate hike in 2026.
- Persistent inflation and political expediency for Fed Chair Kevin Warsh are cited as reasons for the forecast.
- Inflation has remained sticky, with CPI at 3.4% year-over-year for the past two months.
- Aditya Bhave, US economist at Bank of America, wrote that hikes appear politically expedient for Fed Chair Warsh.
- Neil Dutta, head of economics at Renaissance Macro Research, believes Warsh is serious about hawkish monetary policy.
Bank of America has broken ranks with market consensus by forecasting two additional interest rate hikes by the Federal Reserve in 2026. This projection follows the central bank's 25 basis-point increase in September. While markets are largely anticipating just one more hike by the end of 2026, Bank of America's economists point to persistent inflation and the perceived political advantages for Fed Chair Kevin Warsh as reasons for their more hawkish stance.
Inflation has shown resilience, remaining at 3.4% year-over-year for the past two months. According to Aditya Bhave, a US economist at Bank of America, rate hikes may have become "politically expedient" for Chair Warsh. He suggests that such actions could help cap long-term bond yields, which have been spooked by rising oil prices and the Treasury's buyback program, thereby easing concerns about further inflation and bolstering the Fed's credibility. Bhave noted that hiking rates early in Warsh's tenure could allow him to distance himself from the current inflation problem while taking credit for future disinflation.
Neil Dutta, head of economics at Renaissance Macro Research, echoed the sentiment that Warsh may be more hawkish than anticipated. Dutta highlighted Warsh's recent comments warning about inflationary pressures from high commodity prices and his description of the September hike as merely removing "a dose of accommodation." This suggests to Dutta that the Fed's hiking cycle may be closer to its beginning than its end, and that Warsh might continue raising rates until the economy shows significant signs of weakness, potentially prioritizing inflation control over labor market stability, as he has done in the past.