Signals & Noise: Our case for 3 rate hikes this year
The desk supports the view of three additional 25bp Fed rate hikes in the coming months, as articulated by Aditya Bhave from BofA Global Research. The rationale hinges on persistent labor market strength and elevated core inflation figures, which suggest that current monetary policy remains excessively accommodative. Per the full note , emerging concerns about the softness in CPI data have not deterred BofA from maintaining this hawkish outlook. This position indicates potential upward pressure on the USD as the market begins to price in a firmer trajectory for interest rates amidst skewed inflation fears.
What the desk is arguing
The desk posits that the Fed is likely to implement three consecutive rate hikes in September, October, and December, totaling 75 basis points. This view is supported by the persistent strength seen in the labor market and the continued elevation in core inflation metrics, which signal that the Fed's current stance may be too lax. According to BofA, even with recent CPI softness, the underlying economic fundamentals justify a tighter monetary policy path.
Supporting this stance, various economic indicators reflect an enduring inflationary environment, with core PCE inflation remaining well above the Fed's long-term target of 2%. Current unemployment rates near historical lows, combined with a tight labor market, further bolster the case for rate hikes to temper demand and inflationary pressures. Aditya Bhave's analysis indicates that expectations are not aligned with the economic realities warranting additional tightening.
Counter to this view, one might argue that the softness in CPI and potential geopolitical uncertainties could sway the Fed towards a more cautious approach, reconsidering the aggressive tightening plan. However, BofA's confidence in persistent inflation suggests a rejection of this alternative understanding.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Three 25bp Fed rate hikes are forecasted for September, October, and December, supported by strong labor data.
- 02Core inflation remains elevated, suggesting the current accommodative policy is insufficient.
- 03Recent softness in CPI data is viewed as a temporary anomaly rather than a trend.
- 04Fed Chair Warsh's stance appears hawkish, reinforcing expectations of necessary tightening.
Market implications
Watch for significant movements in USD pairs as the market adjusts to the anticipated rate hikes, particularly as inflation data is released. Key levels to observe will include resistance around 1.08 for EUR/USD ahead of policy announcements, which could reshape trader positioning.
Risks to this view
A reversal in this outlook could emerge if inflation data unexpectedly softens significantly, prompting the Fed to reconsider its hawkish path. Additionally, any geopolitical risk or financial market turbulence that undermines economic confidence may induce a shift in the Fed's rate hike trajectory.
Hello and welcome to Signals & Noise, where strategists and economists from around the globe offer a shorter take on markets and economic matters as part of global research at BofA. I'm Aditya Bhave, Head of U.S. Economics Research at BofA Securities, and we're recording this episode on Monday, July 20, 2026.
Our base case for Fed policy is three 25-basis point hikes this year in September, October, and December. Our reasoning is simple. Relative to 12 months ago, the unemployment rate is roughly flat and core PCE inflation is up around 50 basis points.
Yet, the policy rate is 75 basis points lower. This suggests policy is clearly offside and, honestly, you don't need BAR to see that. Even if much of the inflation overshoot is due to one-off factors such as tariffs and the Iran conflict, we still think it makes sense to reverse the 75 basis points of rate cuts from last fall.
Client pushback against our call generally falls into three categories. First, some clients believe the Fed shouldn't hike because inflation isn't that much of a problem. This argument has gained traction following the soft June CPI trend.
Regarding the sharp drop in headline inflation in June, we would note that our call isn't premised on a sustained surge in energy prices. The issue, in our view, is core inflation. And on the core side, we would caution against placing too much emphasis on a single data point.
After a series of strong core PCE prints from December through May, it would take several months of softer inflation readings for the underlying trend to appear less concerning. Now, the dovish view is that core PCE inflation, the overshoot in core PCE inflation, is largely the result of one-off supply shocks or data distortions. There is some truth to that argument, but it's important to do the math on underlying inflation.
By our estimates, one-off factors such as tariffs and the Iran conflict have added about 80 basis points to the core PCE. So even if those effects were to reverse entirely and no new shocks were to emerge, core PCE inflation would still be running around 2.5%. With labor market risks roughly balanced, that would still call for a restrictive policy stance.
And in our view, the current stance of policy is neutral or perhaps even slightly accommodative. As a result, we think further rate hikes are warranted. Another source of pushback to our view is that while the Fed perhaps should hike, it ultimately won't because Chair Warsh is inherently dovish.
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