Bank of America Warns Fed May Need Additional Rate Increases to Tame Inflation

Bank of America is maintaining its baseline forecast for two additional Federal Reserve interest rate hikes before the end of the year, while questioning whether cumulative monetary tightening will be sufficient to bring inflation back to the central bank's 2% target. In a client research note reported by Yahoo Finance (https://finance.yahoo.com/economy/policy/articles/bofa-drops-stunning-warning-fed-171700996.html), the Wall Street bank raised doubts over whether even 75 basis points of total rate increases in 2026 will curb persistent price pressures.

The analysis follows the Federal Open Market Committee's unanimous 12-0 decision on Sept. 16 to lift the benchmark Federal Funds Rate by 25 basis points to a target range of 3.75% to 4.00%. The action represented the Fed's first interest rate increase since January 2023, driven by inflation pressures fueled by energy costs linked to the war in Iran and broader geopolitical shocks. The central bank has missed its 2% inflation target for five and a half years.

Accompanying the decision, the Fed's quarterly Summary of Economic Projections dot plot indicated a median year-end funds rate of 3.6%, consistent with one additional quarter-point increase. Sixteen of 18 participating policymakers signaled expectations for at least one more rate hike before the year concludes. BofA noted that the policy statement dropped language attributing inflation strictly to supply disruptions, while economic projections pointed to stronger growth, higher inflation, and a lower unemployment rate.

Bank of America pushed back against dovish market analysts who view further tightening as a policy mistake. Applying Fed Chairman Kevin Warsh's monetarist framework, the bank argued that robust nominal growth requires policy tightening to slow the velocity of money. Warsh, who previously served as a Fed governor from 2006 to 2011 and reinforced a hawkish stance at Jackson Hole, reaffirmed on Sept. 17 that the central bank's inflation mandate is not yet finished.

According to the CME Group FedWatch Tool, market pricing reflects a 55.4% probability of a 25-basis-point increase at the Fed's Oct. 28 meeting and an 89.6% probability of at least one additional hike by Dec. 9. Bank of America continues to project quarter-point hikes at both the October and December meetings.

While some economists argue that underlying inflation is nearing 2% once tariff and energy shocks subside, Bank of America observed that underlying inflation has hovered around 2.5% for several quarters. The bank warned that if supply-side inflation from the Iran conflict persists beyond current baseline expectations, the Fed could face a difficult choice between accepting prolonged above-target inflation or tightening demand enough to trigger an economic recession.