Updated version 1 - Bank of America incorporates a Fed rate hike in January into its forecast, stating that quarterly hikes are no longer sufficient.

The updates include background information and analyst comments

Reuters, November 13 - BofA Global Research said on Friday that, given October CPI data (link) coming in stronger than expected and raising market expectations for higher borrowing costs, the institution now expects the Federal Reserve to raise rates by 25 basis points in January 2027. Previously, it had predicted hikes in December and March.

“After the release of the October CPI data, the Fed appears to be further behind the curve on tackling inflation,” said the team of BofA economists led by Aditya Bhave, adding that the Fed can no longer sustain a pace of quarterly rate hikes.

Data released earlier this week showed that inflation has surpassed market expectations for the third consecutive month, further solidifying market expectations for a Fed rate hike in December. According to the CME FedWatch tool, markets are currently pricing in an 89.7% probability of a 25-basis point hike and a 10.3% probability of a 50-basis point increase.

Inflation continues to climb, driven by higher oil prices from the Iran conflict, import tariffs imposed by U.S. President Donald Trump, strong consumer demand, and investments related to artificial intelligence.

The Federal Reserve (link) raised its benchmark interest rate to a range of 3.75%–4.00% in September, marking its first hike in three years.

Earlier this week, hawkish comments from Federal Reserve policymakers also reinforced market expectations of further policy tightening. Fed Governor Christopher Waller (link) has hinted that a 25-basis point hike may come next month, and if inflationary pressures intensify, the hike could be larger.

“If economic data show signs of weakness or financial conditions tighten significantly, the Fed may delay or skip the final rate hike,” BofA strategists said.

However, they added that if wage inflation surges or if there are significant annual price adjustments, the policy rate could rise above 5%.

Goldman Sachs (link) and Deutsche Bank (link) also adjusted their Fed expectations following this week's CPI data. Goldman Sachs now predicts hikes in December and March, while Deutsche Bank expects the Fed to raise rates at each of the next three meetings.

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