Stubbornly high inflation and an aggressive tone from new Chairman Kevin Warsh will lead the Federal Reserve to raise interest rates three times this year, according to Bank of America. In a note Monday, the bank’s economists reversed their position, held as recently as last week. that the central bank would stay on hold this year as it looked through higher prices driven by the Iran war. But after reviewing current conditions and Warsh’s comments last week , that call has changed. The bank expects a report later this week on core personal consumption expenditures prices — the Fed’s main inflation forecasting tool — to show an annual rate of 3.5%, reflecting contributions from tariffs and other “one-off” price increases. Ultimately, it could mean 75 basis points, or three-quarters of a percentage point, in rate increases to the central bank’s benchmark lending rate. “[T]he Fed’s inflation problem has gotten unambiguously worse,” wrote BofA economist Aditya Bhave. “The Fed was willing to look through the tariffs, but it is losing patience after the latest round of supply shocks. Also, housing-driven disinflation has now mostly run its course, while other core services remain very sticky.” The Fed targets inflation at 2% and has missed its goal for five straight years. Prices surged in 2021, ultimately pushing inflation to a 40-year high, which officials largely dismissed as “transitory.” Subsequent aggressive rate hikes helped bring the level off its highs, but the Iran war and President Donald Trump’s tariffs have added another level of complexity to the inflation problem. Following his first meeting at the helm last week, Warsh referred to the importance of “price stability” about a dozen times, and markets quickly reacted. Traders are now pricing in at least one hike this year, expected in September, with better than 50% odds of another move in December, according to the CME Group’s FedWatch gauge. In the lead-up to his Senate confirmation, Warsh had expressed confidence that rates could be cut. But he made no such mention of easier policy at his post-meeting news conference last week. “Chair Warsh’s presser also leaned hawkish. He repeatedly emphasized the importance of restoring price stability and suggested policy isn’t particularly restrictive,” Bhave wrote. “He was also much more circumspect about AI-driven disinflation than in his prior remarks.” “Perhaps he was strategically hawkish to gain credibility, but we think he’s just buying time until inflation falls or his task forces make the case to stay on hold,” Bhave added. Bank of America does leave the door open to other options. While Bhave said a July hike “is in play,” it’s more likely the Fed waits out the summer data to plot its next move. The Fed could also wait until after the November mid-term elections to move. Bhave also left open the possibility of more than 75 basis points of increases, though the bank’s call now is for the Fed to stay on hold in 2027.
