BofA Global Research expects the Federal Reserve to implement a rate hike in January 2027. Economists said, "After October CPI, the Fed looks further behind the curve on inflation." They added that the central bank can no longer afford to raise rates at a quarterly pace due to rising inflation.
Synopsis
BofA Global Research anticipates that the Federal Reserve will implement a rate hike in January 2027. This adjustment follows the unexpectedly high Consumer Price Index report for October. Expectations of a 25-basis-point increase are supported by increasing inflation driven by various factors. Other banks like Goldman Sachs and Deutsche Bank have also revised their forecasts in light of recent data.
BofA Global Research said on Friday it now expects the Federal Reserve to deliver an additional 25-basis-point increase in January 2027, on top of its prior forecast of hikes in December and March, after a hotter-than-expected October CPI reading boosted bets on higher borrowing costs.
"After October CPI, the Fed looks further behind the curve on inflation," said economists at BofA, led by Aditya Bhave, adding that the central bank can no longer afford to raise rates at a quarterly pace.
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Data earlier this week marked a third consecutive monthly upside surprise in inflation, solidifying bets on a December Fed hike, with markets pricing in an 89.7% chance of a 25-basis-point hike and a 10.3% chance of a 50 bp move, per CME FedWatch Tool.
Inflation has been rising on the back of higher oil prices amid the Iran war, US President Donald Trump's import tariffs, resilient consumer demand and strong AI-related investment.
The Fed raised its benchmark interest rate to a 3.75%-4.00% range in September, marking its first hike in three years.
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Hawkish comments from Fed policymakers earlier this week also underscored expectations for further policy tightening. Fed Governor Christopher Waller has suggested a 25-basis-point hike next month and a larger increase if price pressures accelerate.
"The Fed might delay or skip the last hike if there's a soft patch in the data or significant tightening in financial conditions," BofA strategists said.
However, a surge in wage inflation or large annual price resets could push the policy rate above 5%, they added.
Goldman Sachs and Deutsche Bank similarly revised their Fed outlooks after this week's CPI data, with Goldman now forecasting hikes in December and March, and Deutsche Bank expecting hikes at each of the Fed's next three meetings.
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