The market has been drifting toward a more hawkish view of the Federal Reserve. Bank of America is pushing back.
BofA is maintaining its forecast for two Fed rate cuts in 2026, telling clients the central bank will ultimately look past supply-driven inflation, weak wage pressure, and political dynamics rather than hold rates higher for longer.
What BofA’s economist said
U.S. economist Aditya Bhave acknowledged the bank’s recent forecast revisions pointed to slightly softer growth and higher inflation. But he said those changes were not enough to move the needle on the rate outlook.
“We still expect cuts this year given the Fed’s bias to look through supply-driven inflation, little signs of wage pressures, and political pressure,” Bhave wrote in a note.
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BofA sees September as the likely turning point. By then, incoming Fed Chair Kevin Warsh should be in place and have accumulated enough evidence of cooling inflation to build the case for easing. The bank acknowledged risks are tilted toward no cuts at all, but kept its base case intact.
What the Fed’s own data shows
The picture inside the Fed is more complicated. The Fed held rates at 3.50% to 3.75% at its March 18 meeting, adopting a cautious stance as energy prices from the Iran conflict added pressure to the inflation outlook.
The Fed’s March dot plot showed the median projected federal funds rate at the end of 2026 at 3.4%, pointing to just one cut rather than two. The median inflation forecast for the Personal Consumption Expenditures Index, or PCE, was raised to 2.7%. Core PCE, the Fed’s favored inflation measure, was also revised higher. PCE inflation ran at 2.8% year-over-year in February, with core PCE at 3.0%, according to FOMC minutes.
January’s Fed minutes were even more hawkish. Several officials suggested the central bank may need to raise rates if inflation stayed stubbornly high, Bloomberg reported. That marks a significant shift in tone from the rate-cutting consensus of late 2025.
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The consumer spending picture is hazy
On the consumer side, the data is softening. BofA noted that real spending rose just 0.1% in February, with an annualized pace of only 0.8% over the prior three months. Higher energy prices from the Iran war are squeezing household budgets and could further weaken demand in the months ahead.
That dynamic cuts both ways for the Fed. Weaker spending could ease some inflationary pressure over time, giving the central bank more room to cut. But if energy costs keep inflation elevated, the Fed may stay on hold regardless of what is happening to growth.
Bhave flagged this tension separately. “The market response to the oil price spike has been mostly hawkish,” he said. “This could be a mistake,” according to CNBC.
Key figures in the current rate outlook:
- Current fed funds rate: 3.50% to 3.75%
- BofA base case: two 25 basis point cuts in 2026
- Fed dot plot median for end-2026: 3.4% (one cut implied)
- PCE inflation February: 2.8% year-over-year
- Core PCE February: 3.0% year-over-year
- Real consumer spending February: +0.1%
- Unemployment rate February: 4.4%
What this means for rates, investors
The Fed and BofA are not looking at the same chart and reaching the same conclusion. The Fed’s own projections lean toward one cut. BofA sees two. The gap reflects a genuine disagreement about how much weight the central bank will place on supply-driven inflation versus the risk of overtightening into a slowing economy.
For investors, the key variable is Kevin Warsh. His arrival as Fed Chair is expected around May, and how he frames the policy debate could shift market expectations quickly. If Warsh signals comfort with easing once inflation data improves, BofA’s two-cut forecast gains credibility. If he leans hawkish, the market’s one-cut consensus may prove optimistic.
Either way, the Fed’s next few months will be among the most closely watched in years. Rate decisions are never made in a vacuum, and this one will be shaped by an Iran ceasefire of uncertain durability, an energy price shock, and a new leader at the central bank inheriting all of it at once.
Related: JPMorgan has a stark message on the next Fed rate cut
