BofA shifts Fed call to rate hikes in December 2026 and March 2027

 Bank of America now expects the Federal Reserve to hike rates twice more, in December 2026 and March 2027, after the central bank held rates steady at its October meeting.

The bank said the Fed’s statement suggests it wants to move slowly, likely at a quarterly pace, because it is unsure how restrictive policy is. BofA kept its terminal rate forecast at 4.25% to 4.5% and expects rates to stay at that level through the end of 2027.

At the press conference, Fed Chair Kevin Warsh pointed to tighter financial conditions as evidence that September’s hike is having the desired effect.

“He didn’t opine on Dec, which was dovish given that markets are pricing a hike,” BofA wrote.

“We think he risks losing relevance unless he’s willing to either guide or surprise markets,” the bank added.

The Treasury curve twist-steepened after the meeting. The two-year yield fell 6 basis points from the start of the press conference, while the 30-year yield rose 4 basis points.

“The very sharp 2s30s steepening reflected a bond market that did not see Warsh as credible on inflation fighting,” BofA said.

The bank retains its view of higher front-end rates and a flatter curve over time. It also sees higher long-end rates raising the risk of cuts to long-dated Treasury supply at the upcoming refunding announcement.

The dollar fell about 0.2% to 0.3% during the meeting. BofA said a slower initial tightening path could ultimately require rates to stay higher for longer, which would support the dollar over time.