BofA adds January Fed hike to forecast, says quarterly pace no longer enough

BofA Global Research ​said on Friday it now expects the ​Federal Reserve to deliver an ‌additional 25-basis-point ​increase in January 2027, on top of its prior forecast of hikes in December and March, after a hotter-than-expected October CPI reading ‌boosted bets on higher borrowing costs.

"After October CPI, the Fed looks further behind the curve on inflation," said economists at BofA, led by Aditya Bhave, adding that the central bank can no longer ‌afford to raise rates at a quarterly pace. Data earlier this week marked a third consecutive ‌monthly upside surprise in inflation, solidifying bets on a December Fed hike, with markets pricing in an 89.7% chance of a 25-basis-point hike and a 10.3% chance of a 50 bp move, per CME FedWatch Tool.

Inflation has been rising ⁠on ​the back of higher ⁠oil prices amid the Iran war, US President Donald Trump's import tariffs, resilient consumer demand and strong AI-related investment. The ⁠Fed raised its benchmark interest rate to a 3.75%-4.00% range in September, marking its first hike in three ​years.

Hawkish comments from Fed policymakers earlier this week also underscored expectations for further policy ⁠tightening. Fed Governor Christopher Waller has suggested a 25-basis-point hike next month and a larger increase if price pressures accelerate. "The ⁠Fed ​might delay or skip the last hike if there's a soft patch in the data or significant tightening in financial conditions," BofA strategists said.

However, a surge in wage inflation ⁠or large annual price resets could push the policy rate above 5%, they added. Goldman Sachs and ⁠Deutsche Bank similarly ⁠revised their Fed outlooks after this week's CPI data, with Goldman now forecasting hikes in December and March, and Deutsche Bank expecting hikes at each ‌of the Fed's ‌next three meetings.