Bank of America forecasts three 25-basis-point Federal Reserve rate increases in September, October, and December, abandoning a prior forecast that rates would remain unchanged through the year. The bank's economics team projects the federal funds rate will rise to 4.25%-4.5% due to deteriorating inflation conditions under new Fed Chair Kevin Warsh. BofA economist Aditya Bhave stated the Fed's inflation problem has gotten "unambiguously worse," with core PCE potentially reaching 3.5% in May, nearly 70 basis points higher than a year ago. The shift reflects persistent price pressures that have frustrated policymakers despite prior disinflation trends.
Bank of America Abandons Prior Rate Forecast
Bank of America's economics team made the forecast this week, reversing a projection held as recently as the prior week that the Fed would leave rates unchanged. The bank now anticipates three consecutive quarter-point increases at the September, October, and December meetings, which would lift the federal funds rate to a range of 4.25% to 4.5%.
BofA economist Aditya Bhave stated: "The Fed's inflation problem has gotten unambiguously worse. 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."
Bhave added that housing-driven disinflation has now mostly run its course, while other core services remain "very sticky."
Core PCE Inflation Projected to Reach 3.5% in May
Bank of America argued that the disinflation that helped cool prices in prior years has largely ended. Bhave wrote that "housing-driven disinflation has now mostly run its course, while other core services remain very sticky," pointing to persistent price pressures.
Fed Chair Kevin Warsh referred to "price stability" roughly a dozen times following his first meeting as chair, a repetition markets interpreted as a hawkish signal. At the June 17 meeting, the Federal Open Market Committee held the benchmark rate at 3.5% to 3.75% but indicated further increases could be warranted.
Energy costs tied to the Iran war have added pressure. Roughly half of Fed officials have indicated rate increases could be appropriate in the year. Bank of America's forecast assumes the hawkish faction will prevail in internal debates.
Higher Rates Present Headwind for Bitcoin and Digital Assets
Higher interest rates are generally a headwind for bitcoin and other digital assets because when safe-haven yields rise, investors have less incentive to hold non-yielding, higher-volatility assets, and liquidity tends to drain from speculative markets. Some analysts have questioned whether the Fed will move as aggressively as Bank of America projects, citing risks to growth and employment.
FAQ
What did Bank of America forecast for Fed rate policy?
Bank of America forecasts three 25-basis-point Federal Reserve rate increases in September, October, and December, which would lift the federal funds rate to 4.25%-4.5%. The bank abandoned a prior forecast that rates would remain unchanged.
Why does Bank of America expect the Fed to raise rates?
BofA economist Aditya Bhave stated the Fed's inflation problem has gotten "unambiguously worse," with core PCE potentially reaching 3.5% in May, nearly 70 basis points higher than a year ago. The bank cited persistent price pressures, tariffs, supply shocks, and energy costs tied to the Iran war as contributing factors.
