Bank of America Calls Three Fed Rate Hikes in 2026 as US Stocks Sell Off

Bank of America's economics team published a sharply revised Federal Reserve outlook on Monday, forecasting three 25-basis-point hikes in 2026, in September, October, and December, taking the federal funds rate to a range of 5.25% to 5.50% by year-end. The bank had until last week forecast no changes to US rates through the year.

The revision followed the June 17 Federal Open Market Committee meeting, where half of policymakers projected at least one hike before year-end, and Federal Reserve Chair Kevin Warsh delivered unexpectedly hawkish remarks in his first press conference in the role. Bank of America's economics team described the inflation outlook as "unambiguously worse," citing persistently elevated energy costs tied to the Middle East conflict, a resilient labor market, and evidence that companies are passing on higher input costs to consumers.

May nonfarm payrolls came in at 172,000 jobs, more than double the consensus forecast, reinforcing the view that demand remains strong enough to absorb higher borrowing costs.

What the Markets Did

US equities sold off Tuesday as the BofA note landed and a secondary shock arrived from Asian trading overnight. South Korea's chip-heavy KOSPI index fell nearly double digits, pulling semiconductor stocks lower across European and US sessions.

Nasdaq Composite fell 2.21% and the S&P 500 dropped 1.44%. The Russell 2000 declined 0.96%. Volatility surged: the Cboe VIX climbed 12.79% to 19.49.

Losses were sharpest in technology:

• Micron Technology (MU): -11.4% to $1,074.60
• Taiwan Semiconductor Manufacturing (TSMC): -5.2% to $443.35

What It Means for Portfolios

A three-hike cycle from the Federal Reserve by December changes the calculus for multi-asset investors across several dimensions.

Bond prices fall as yields rise. US 10-year Treasury yields, already elevated, would move higher with each successive decision, extending losses for fixed income holders and pressing mortgage rates further. Technology and growth equities face headwinds from a higher discount rate, which mechanically reduces the present value of future earnings. Tuesday's 2.2% decline in the Nasdaq illustrates that dynamic at work.

Bank of America's core argument is that markets have been underpricing the probability of a hawkish Fed surprise. The bank warns that the reset in rate expectations challenges one of the central pillars of the 2025-2026 equity rally: the assumption that monetary easing was still ahead.

Equity-to-bond rebalancing is among the scenarios portfolio managers are now modelling. Investors tracking multi-asset portfolios in real time will need to account for the changing relationship between equity valuations and fixed income yields as rate expectations shift.

What to Watch

The September FOMC meeting is the first live decision point. Between now and then, markets will track:

• US PCE inflation data for May and June, the Federal Reserve's preferred gauge
• Oil price developments, with Iran peace negotiations currently holding Brent below $100 per barrel
• Further labor market data that could reinforce or undermine BofA's three-hike thesis