Overview
Bank of America has updated its outlook for Federal Reserve policy, projecting three additional quarter-point rate increases this year and an extended period without cuts thereafter. The scenario, outlined by analyst Aditya Bhave, would lift the federal funds rate to a 4.25-4.50% range after hikes of 25 basis points in September, October and December.
Why BofA adjusted its view
Bhave said the bank now expects the Fed to "stay on hold next year," arguing that inflation is likely to remain sufficiently sticky to prevent the real policy rate from becoming overly restrictive. That assessment represents a reversal of BofA's earlier position, which had been more skeptical about the need for sustained tightening and had expected cuts sooner. BofA now regards those previous expectations for rate reductions as premature.
Labor market signals
On labor, Bhave noted that downside risks have "dissipated," pointing to an unemployment rate that is flat compared with last May, a period when the policy rate was 75 basis points higher. This stability in the labor market figures into BofA's view that the Fed will continue to prioritize price stability.
Inflation trajectory
Inflation concerns underpin the bank's shift. BofA wrote that "the Fed's inflation problem has gotten unambiguously worse," highlighting the potential for core PCE to reach 3.5% in May - a level roughly 70 basis points above where it stood a year earlier. That upward pressure on underlying inflation is central to the call for further hikes and a prolonged pause rather than near-term easing.
Fed reaction function and policymaker signals
BofA also revised its read on the Fed's reaction function after examining June's Summary of Economic Projections. The bank pointed to a split in policymakers' views, noting that nine officials projected additional hikes even without forecasting a fall in unemployment. That, BofA says, indicates the Fed may not require further labor market tightening as a precondition for action.
Reinforcing that interpretation, Bhave referenced Fed Chair Kevin Warsh's press conference, saying the chair "repeatedly emphasized the importance of restoring price stability and suggested policy isn't particularly restrictive."
Risk scenarios that could change the path
BofA identified several developments that could derail the bank's baseline hiking trajectory: a sharp payroll slowdown, softer-than-expected core PCE readings, or a major equity selloff. Any of those outcomes could prompt a reassessment of the need for additional rate increases.
This outlook implies higher-for-longer policy settings, with implications across bond and equity markets, credit conditions, and sectors sensitive to interest rates and inflation.