Strong US growth, sticky inflation may prompt two more Fed rate hikes in 2026: BofA

Bank of America (BofA) expects the US Federal Reserve to raise interest rates twice more this year, in October and December, as resilient economic growth and persistent inflation pressures could require further monetary tightening, even as policymakers consider slowing the pace of rate hikes.

Bank of America (BofA) expects the US Federal Reserve to raise interest rates twice more this year, in October and December, as resilient economic growth and persistent inflation pressures could require further monetary tightening, even as policymakers consider slowing the pace of rate hikes. In its US Economic Weekly report, BofA said the Fed could risk falling behind the curve if it pauses in October despite continued economic momentum. The report maintained its forecast of two additional rate hikes of 25 basis points each, although recent comments from policymakers suggest the central bank may prefer to move at a quarterly pace.

“The nominal economy is booming, and there is substantial risk that the energy shock will pass through to core and food prices in coming months,” the report said. BofA said a pause would give the Fed more time to assess incoming economic data and determine how far interest rates need to rise. However, it cautioned that slower action could eventually require more hikes.

“If the Fed pauses in Oct, we think the most likely policy path would be two more 25bp hikes, in Dec 2026 and Mar 2027,” the report said. It added that further increases in June and possibly September 2027 could not be ruled out if inflation remained elevated. The report also flagged the risk that inflation could accelerate over the next three months, potentially forcing markets to price in a faster tightening cycle. However, if inflation slows significantly in early 2027, the Fed could stop after one more hike in December.

BofA raised its estimate for US economic growth in the third quarter of 2026 to 3.5 per cent on an annualised quarterly basis, from 2.4 per cent earlier. Strong consumer spending, business investment and spending on artificial intelligence-related infrastructure supported the revision. The bank also raised its fourth-quarter 2026 growth projection to 2.6 per cent from 2.3 per cent. It expects annual average growth of 2.4 per cent in 2026 and 2.3 per cent in 2027.

Inflation remains a key concern. BofA expects core personal consumption expenditure inflation to remain above the Fed's 2 per cent target through 2027, with risks tilted to the upside. The September inflation report and remarks by Fed Chair Warsh at the IMF meetings are likely to provide further clues on the pace of monetary tightening, particularly whether the Fed proceeds with another rate hike in October or delays its next move while assessing incoming data. (ANI)