BofA and Deutsche Bank Adjust U.S. Rate Hike Expectations for 2026

Kevin Warsh, the next Federal Reserve Chair [Photo: Reuters]

Bank of America (BofA) and Deutsche Bank have revised their projections for U.S. Federal Reserve interest rates from a freeze to an increase this year. This change follows a hawkish shift within the Fed after the June Federal Open Market Committee (FOMC) meeting and a perceived weakening in inflationary trends.

On June 22, Reuters reported that BofA expects the Fed to raise its benchmark interest rate by 25 basis points (1 basis point = 0.01 percentage points) in September, October, and December. This would total a 75 basis point increase for the year, making it the most aggressive forecast among major investment banks.

BofA assessed that the Fed's stance has become "much more hawkish than expected," citing the June FOMC statement and remarks from Kevin Warsh, the incoming Fed Chair.

Inflation trends also support the rate hike outlook. BofA anticipates that the core Personal Consumption Expenditures (PCE) price index will rise by 3.5% year-over-year in May, approximately 70 basis points higher than a year ago. This suggests that the Fed, which previously viewed price increases due to tariffs and supply shocks as temporary, may lean towards further tightening.

Deutsche Bank also projected in a report on June 19 that the Fed would raise rates by 25 basis points in both September and December. However, they noted that if energy prices and inflation expectations continue to decline, the urgency for rate hikes may lessen. Conversely, if inflationary pressures increase, an early hike in July could be possible.

The Fed had previously held the benchmark interest rate steady at 3.50% to 3.75% during the June FOMC meeting. However, the latest dot plot revealed that nine of the 19 policymakers expect a rate hike this year, with six of them advocating for more than two increases. This marks a significant shift from the March dot plot, which showed no expectations for rate hikes this year.

The market is also reflecting the likelihood of rate hikes. According to market research firm LSEG, the average expected increase in the Fed's rate futures market is approximately 41.2 basis points, indicating that the possibility of more than one rate hike is largely priced in.

Both BofA and Deutsche Bank predict that after raising rates this year, the Fed will maintain a steady stance in 2027. Some securities firms, including BNP Paribas and Macquarie, have joined the outlook for rate hikes this year, reinforcing the view that the Fed's next move may be further tightening rather than cuts.

* This article has been translated by AI.

AJP