BofA's Moynihan sees three Fed hikes in 2026 as inflation stays sticky

Bank of America Chief Executive Brian Moynihan expects the Federal Reserve to raise interest rates three times this year, in September, November and December, to bring inflation that ran at 3.7 percent in June back under control.

"If it goes better than, like last month, it went down better than people thought, then I'm sure they would change that expectation," Moynihan said in a CNBC interview. "But right now, they think that three hikes gets the Fed in a place that they can have the inflation tamed."

The Commerce Department's Personal Consumption Expenditures Index, the Fed's preferred gauge, rose 3.7 percent on an annualized basis in June, while core PCE, which strips out food and energy, climbed 3.3 percent, up 0.1 percent on the month. The Fed held its target range at 3.5 percent to 3.75 percent at last week's meeting on a 9-3 vote, with three officials dissenting in favor of a 25-basis-point increase.

Three consecutive hikes would mark a sharp reversal from the easing path markets had priced earlier this year, pressuring growth stocks that trade on future earnings while leaving the AI capital-expenditure boom largely intact, in Moynihan's view. The next policy decision comes Sept. 15-16, with CME FedWatch data showing a 56.9 percent probability of a quarter-point increase.

Inflation Seen Settling in the 'Mid-2s' by 2027

Moynihan expects price growth to settle in the "mid-2s" by the end of 2027 before gradually easing into the Fed's 2 percent long-term target. He attributed the recent pickup in inflation to tariffs and the ongoing war, both of which he said are now fading as drivers of price pressure. "If you look at the issues of inflation rolling through the economy, it was mitigating and then popped back up because of the impact on prices from tariffs, impact on prices from the war, and that's coming back down," he said.

The last time the Fed confronted inflation running this far above target, it delivered a series of 75-basis-point hikes through 2022 that pushed the fed funds rate to a two-decade high. This cycle, officials have signaled a more gradual path, with Minneapolis Fed President Neel Kashkari saying the Fed should begin moving in small steps from September rather than risk an entrenched inflation problem. "I would rather get going now in small steps than wait till later, then we have a really entrenched inflation problem and have to raise rates aggressively," Kashkari said.

Kashkari was one of three dissenters at last week's meeting, joined by Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, all of whom preferred a 25-basis-point increase. Fed Governor Lisa Cook, who voted to hold, said she is "ready to act" if she does not see sustained signs of inflation easing, while Kansas City Fed President Jeff Schmid said the current policy stance is not restrictive enough given price pressures.

AI Capex Seen Resilient to Higher Rates

Moynihan said further rate increases are unlikely to meaningfully affect the short-term financing companies use to fund data center and AI infrastructure projects. He added that returns on data center investments are strong enough for companies to absorb higher borrowing costs across long-term bonds as well, suggesting the AI investment cycle does not depend on a low-rate environment.

Markets have begun to price the tightening path. CME FedWatch data shows a 56.9 percent probability of a 25-basis-point hike in September, 53.2 percent in October and 43.7 percent in December, broadly in line with Moynihan's three-hike forecast. The SPDR S&P 500 ETF rose 0.02 percent, the Invesco QQQ Trust fell 0.37 percent and the SPDR Dow Jones Industrial Average ETF gained 0.8 percent, while the iShares 20+ Year Treasury Bond ETF edged up 0.13 percent.

This article is for informational purposes only and does not constitute investment advice.