Bank of America thinks the Federal Reserve has just kicked off a hiking spree heading that will continue for the rest of its meetings through yearend.
In a note on Friday, the bank said it expects the Fed to hike interest rates two more times in 2026, following September’s 25 basis-point hike.
Markets are pricing in one more rate hike in 2026 as the most likely outcome, eyeing an increase at the December meeting.
BofA unpacked a couple of reasons the market may get more hikes than it’s expecting. One is simply that the economy remains strong, supporting the view that inflation could be stubborn. Inflation has remained sticky, with CPI at 3.4% year-over-year the last two months.
But the second is that hikes have actually appeared to become “politically expedient” for Fed chair Kevin Warsh, the bank said, despite President Donald Trump’s insistence that the Fed slash rates.
Hikes allow the Fed to cap long-term bond yields after rising oil prices and the Treasury’s buyback program spooked investors about the prospect of further inflation. Surging yields on assets like 10-year and 30-year Treasurys had started to weigh on equity prices. So a hawkish Fed at the moment appears to be a boon for markets and lends credibility to Warsh, the bank said.
“Fed hikes looked politically challenging a few months ago, but they increasingly seem like an opportunity for Chair Warsh to burnish his legacy,” Aditya Bhave, US economist at the bank, wrote in the note.
On the September hike, Bhave added: “For one, the rate hike alleviates concerns that Warsh is not politically independent. Additional increases would end that conversation for good. For another, by hiking at just his third meeting as Fed Chair, Warsh can absolve himself of the inflation problem, while also taking credit for any disinflation in coming months.”
After three consecutive rate hikes to end 2026, Bhave said that policy adjustments would see an extended pause.
Neil Dutta, the head of economics at Renaissance Macro Research, also said Warsh may be even more serious than some investors are anticipating.
Dutta said on Friday that, despite Warsh’s disdain for forward guidance, he gave clues about his hawkish views on monetary policy at Wednesday’s meeting.
For example, Warsh warned that high commodity prices signal inflationary pressure. He also mentioned a “timelier” return to 2% inflation and described the hike as removing just a “dose of accommodation.”
This leads Dutta to conclude that “we’re closer to the beginning than the end” of the Fed’s hiking cycle.
He added that “there is a reasonable chance that Warsh keeps going until something in the economy goes awry,” and that in his first stint at the Fed, Warsh “has been willing to let the labor market slide to achieve the inflation side of the mandate. His actions to date tell me he is willing to do it again.”
