BofA now sees another Fed rate increase in January 2027 after hot inflation data

what happened

In a note on Friday, BofA Global Research moved its forecast to include a further quarter-point increase by the Federal Reserve in January 2027, on top of its earlier calls for hikes in December and March. The revision followed October inflation figures that ran above forecasts and pushed up bets on tighter policy. Reuters reported that this was the third straight monthly upside surprise in inflation.

CME FedWatch pricing gave an 89.7% probability to a quarter-point increase in December and a 10.3% chance of a half-point move. The Fed lifted its target range to 3.75%-4.00% in September, its first hike in three years. Governor Christopher Waller has floated a 25bp move next month, with a larger step possible if price pressures build.

BofA cautioned that the central bank could skip its final hike if data soften or financial conditions tighten sharply. A jump in wages or large annual price resets, however, could lift the policy rate above 5%. Goldman Sachs and Deutsche Bank also revised their Fed outlooks after the CPI release.

why it matters

For markets, the revised path keeps pressure on Treasuries, since higher expected rates push yields up and prices down. It also supports the dollar and weighs on equities, particularly rate-sensitive growth stocks. Inflation has been fed by costlier oil linked to the Iran war, tariffs and firm consumer demand.

market impact

Treasuries and the dollar: higher rate expectations weigh on bonds and support the USD

• ▼US Treasuries pressure down — higher rate expectations lift yields and push bond prices lower
• ▲US dollar pressure up — rising Fed rate expectations make dollar-denominated assets more attractive
• ▼US stocks pressure down — higher borrowing costs weigh on valuations, especially for growth companies

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