Influenced by the resilience of the U.S. economy and the more hawkish stance of new Fed Chair Kevin Warsh, BofA Global Research and Deutsche Bank now both expect the Fed to raise rates this year.
This marks a shift from their previous 'rates unchanged' forecasts.
Bank of America said Monday it expects three 25bp hikes in September, October, and December, raising the benchmark from 3.5%-3.75% to 4.25%-4.5%. This is the most aggressive rate hike forecast among major global investment banks.
Deutsche Bank predicted in a June 19 report two 25bp hikes, in September and December.
The dual forecast shift follows the Fed holding rates steady last week, but nearly half of Fed policymakers indicated they expect rate hikes this year.
The more hawkish outlook comes amid a strong U.S. labor market and escalating inflation concerns.
The Fed has held rates unchanged for four consecutive meetings this year, with the last rate cut in December 2025.
Last fall, the Fed cut rates amid weak employment data, expecting President Trump's tariffs to have only a short-term inflationary impact. But the economic landscape has shifted dramatically since, with a stronger labor market and surging oil prices due to the U.S.-Iran war.
BofA analysts noted: 'The June economic projections and Warsh's comments suggest the Fed is far more hawkish than we expected.'
'The Fed's inflation problem has clearly worsened,' BofA said. 'The core PCE price index for May likely rose to 3.5%, nearly 70bp higher than a year ago. The rebound is partly due to tariffs and other one-off factors. The Fed had preferred to overlook tariff impacts, but after the latest supply shock, patience is wearing thin. Moreover, the housing-driven inflation slowdown has largely ended, while inflation in other core services remains stubborn.' BofA added.
Deutsche Bank sees two-sided risks to its rate hike forecast.
'On the hawkish side, the FOMC could reach a consensus on a July hike; on the dovish side, recent improvements in energy prices and inflation expectations could more persistently diminish the urgency for action,' the bank said.
LSEG data shows the market now expects about 41.2bp of rate hikes this year. More Wall Street banks surrender.
Recently, the chorus calling for Fed rate hikes has grown louder. Before Warsh's first meeting last week, Citadel Securities strategists warned that as inflation broadens and becomes stickier, the likelihood of the Fed restarting hikes in September is increasing, with a possible 75bp hike this year. PGIM expects three hikes.
Facing a more hawkish-than-expected Fed, more Wall Street banks are surrendering and shifting stance. Goldman Sachs Vice Chairman and former Dallas Fed President Rob Kaplan also said last week that the Fed may need to hike as early as September if inflation remains high.
Some investment banks including BNP Paribas and Macquarie also expect rate hikes this year.
Clearly, the group of Wall Street banks predicting rate hikes this year is growing. However, most global banks still expect no change.
BofA and Deutsche analysts also expect the Fed to hold rates unchanged through 2027. Deutsche further predicts rate cuts starting in 2028, with 25bp cuts in March and June.
