Federal Reserve Watch: Change of call: Fed to hike 75bp this year

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Federal Reserve Watch: Change of call: Fed to hike 75bp this year

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Federal Reserve Watch

Change of call: Fed to hike 75bp this year

Hawkish data & hawkish reaction function point to hikes 22 June 2026

We now expect three 25bp Fed hikes this year, in September, October, and December. Economics

This would take the policy rate to 4.25-4.5%. We were skeptical of the need for cuts in United States

2025. Both the data and our updated read of the Fed’s reaction function suggest it will US Economics

reverse those cuts in short order. We think the Fed will stay on hold next year. Inflation BofAS

is likely to remain sticky, keeping the real policy rate from becoming overly restrictive. Aditya Bhave

US Economist

Labor market: dissipating downside risks BofAS+1 646 855 9929

Powell framed last year’s 75bp cutting cycle as “risk management,” due to the slowdown aditya.bhave@bofa.com

in the labor data. At the time, we argued that consumer resilience would likely put a floor See Team Page for List of Analysts

under the labor market. The pickup in job growth this year suggests the downside risks

to labor that the Fed was concerned about have dissipated (Exhibit 1). The u-rate is flat PCE: personal consumption

vs. last May, when rates were 75bp higher and the Fed wasn’t ready to cut (Exhibit 2). expenditure

Inflation: just bad presser: press release

Meanwhile, the Fed’s inflation problem has gotten unambiguously worse. Core PCE could SEP: Summary of Economic

reach 3.5% in May, nearly 70bp higher than it was a year ago. The pickup has been partly Projections

due to tariffs and other one-offs. 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 u-rate: unemployment rate