Bank of America (BofA) Global Research forecasts that the Fed will raise interest rates by a total of 75 basis points in 2026. The firm cited resilient economic data and growing expectations of a more hawkish monetary policy under new Fed Chair Kevin Warsh as the rationale for this forecast.
Bofa did not anticipate an interest rate hike in 2026 in its previous forecasts
BofA analysts expect the Fed to raise rates in September, October, and December of this year. The firm’s previous expectation was that there would be no changes to interest rates throughout 2026.
These forecasts diverge from the general expectations of major brokerage firms on Wall Street. The Fed kept its policy rate unchanged at its meeting earlier this month. However, the fact that nearly half of Fed officials indicated they expect a rate hike this year was interpreted as a shift toward a more hawkish stance on monetary policy.
BofA analysts stated in a note, “The June Economic Projections Summary and Warsh’s remarks indicate that the Fed’s reaction function is much more hawkish than we had anticipated.”
They added that the resilience of the labor market and persistent inflation concerns support the likelihood of a Fed rate hike. According to BofA, following three rate hikes this year, the central bank will keep rates steady in 2027.
Analysts assessed, “Inflation is likely to remain sticky. This will prevent the real policy rate from becoming excessively restrictive.”
However, market pricing points to expectations of a more limited rate hike than BofA’s forecast. According to data from LSEG, markets are pricing in a rate hike of approximately 42 basis points for 2026. BNP Paribas and Macquarie are among the few institutions expecting the Fed to raise rates this year.
These hawkish expectations regarding the Fed are also being closely monitored in the gold market. Morgan Stanley noted that ETF demand is critical for gold to reach its $5,200 target in the second half of the year. According to the firm’s analysts, while central bank gold purchases are expected to continue, ETF flows are more sensitive to interest rate expectations, real yields, and the dollar’s trajectory. Morgan Stanley analysts commented, “The missing link is ETF demand. This demand will likely remain sensitive to the Fed’s policy path, real yields, and the dollar.”
Morgan Stanley maintains its optimism regarding gold’s long-term outlook. While it was noted that easing tensions in the Middle East and falling oil prices could alleviate inflation concerns, it was also pointed out that the Fed’s hawkish messaging at its latest meeting has reinforced expectations that interest rates will remain high for a longer period.
