Bank of America says its forecast of two more 2026 rate hikes might not be enough to push inflation back to the Fed's 2% target. The bank still expects quarter-point hikes in October and December, on top of the September increase, but warns persistent supply shocks could force a harder choice between prolonged above-target inflation and a recession.
Bank of America isn't backing away from its forecast for two more Federal Reserve rate hikes this year, according to a client note obtained by TheStreet. The bank is now asking whether even 75 basis points of additional tightening will be enough to bring inflation back to the Fed's 2% target.
BofA said the hikes would look better in hindsight if equities and long-end rates rally, the economy holds up, and inflation moves back to target. The bank continues to call for two more quarter-point rate hikes in October and December.
Fed delivered a hawkish September hike
The FOMC voted 12-0 on Sept. 16 to raise the Federal Funds Rate by 25 basis points to a range of 3.75% to 4%, a move widely expected by traders. Fed policymakers signaled another hike could come before year-end, and possibly more, if inflation from energy shocks and Iran War-related uncertainty doesn't ease.
The quarterly dot plot showed a median year-end funds rate of 3.6%, consistent with one more 25-basis-point hike. Sixteen of 18 participating policymakers expect at least one additional increase before the end of the year.
BofA rejects the policy-mistake argument
BofA disagrees with dovish-leaning analysts who argue the Fed is making a policy mistake by raising rates. The note said Fed Chairman Kevin Warsh's monetarist view treats robust nominal growth as a reason to slow the velocity of money through hikes, and the bank said the data support reining in nominal growth.
Warsh served as a Fed governor from 2006 to 2011 and built a hawkish reputation there before reaffirming his commitment to taming inflation at Jackson Hole last month. On Sept. 17 he reinforced that message, and according to BofA's note: "the job is not done."
Three hikes may still fall short
The CME Group FedWatch Tool puts the odds of another quarter-point hike at 55.4% for Oct. 28 and the probability of at least one more hike by Dec. 9 at 89.6%. BofA said there is a risk that 75 basis points of hikes in 2026 won't be enough to bring inflation back to target, particularly if supply-driven pressure from the Iran conflict runs deeper than its base case assumes.
That would leave the Fed choosing between accepting a few more years of above-target inflation or pressuring demand harder than in the past, risking a recession. Either path, the note said, would tarnish Warsh's legacy.
Source: TheStreet
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