The Fed is fed up with inflation and will bring down the hammer with a series of rate hikes this year, reversing earlier cuts, BofA says
The Federal Reserve has tolerated inflation above its 2% target for five years as it navigated a series of shocks, but analysts at Bank of America said that patience is coming to an end. In a note on Monday, Bof A changed its forecast and predicted the Fed will raise rates by a quarter point three times this year, lifting the benchmark rate to 4.25%-4.5% from the current 3.5%-3.75% range. The bank’s previous base case was for rates to remain steady through the year. But last week’s Federal Open Market Committee meeting, where half of policymakers predicted rate hikes, as well as new Fed Chairman Kevin Warsh’s surprisingly hawkish remarks prompted analysts to change their view. The Fed kept rates on hold last week, and BofA sees it doing the same next month. Then the first increase should come in September, the bank predicted, followed by another in October and December, reversing the last cut made last year, when the central bank lowered the federal fund by 0.25 percentage points on Dec. 10, 2025. Since then, the economic landscape changed dramatically. In the fall, the Fed cut rates as job data weakened while anticipating President Donald Trump’s tariffs would only have short-term impact on inflation. But the labor market strengthened this year, and Trump’s Iran war sent oil prices soaring. “Meanwhile, the Fed’s inflation problem has gotten unambiguously worse,” BofA said. “Core PCE could reach 3.5% in May, nearly 70bp higher than it was a year ago. The pickup has been partly due to tariffs and other one-offs. The Fed was willing to look through the tariffs, but it is losing patience after the latest round of supply shocks. Also, housing-driven disinflation has now mostly run its course, while other core services remain very sticky.” The note highlighted Fed policymakers’ forecasts that showed several expecting rate hikes even though the unemployment rate isn’t seen falling. That upended BofA