Wall Street Alert: How BofA's Three Rate Hike Expectations Will Reshape Asset Allocation in the Second Half of 2026?

On June 22, 2026, the U.S. Bank Global Research Department released a research report that shook Wall Street. Chief U.S. economist Aditya Bhave and his team officially overturned the previous baseline view of “holding steady this year,” shifting to forecast that the Federal Reserve will raise interest rates by 25 basis points in September, October, and December 2026, totaling a 75 basis point increase for the year, with the federal funds rate target range rising to 4.25%–4.50%. This reversal happened very suddenly—only a week earlier, the bank still believed the Fed would keep rates unchanged.

In the market consensus where mainstream investment banks generally expect rates to stay flat in 2026, Bank of America’s forecast appears particularly aggressive. Deutsche Bank also revised its expectations on June 19, shifting to predict a 25 basis point hike in September and December. However, BofA’s scenario of “three rate hikes, holding steady throughout 2027, and no cuts before 2028” remains the most hawkish among major Wall Street investment banks.

This shift in forecast is not an isolated event. The Federal Reserve’s policy meeting from June 16 to 18 was the first appearance of the new Chair Kevin Warsh since taking office. The signals from the meeting were far more hawkish than market expectations—out of 18 participants (Warsh did not participate in forecasts), 9 projected rate hikes within the year. The Fed also raised its 2026 core PCE inflation forecast from 2.7% to 3.3%, and expects the 2% inflation target to be unachievable before 2028. Warsh repeatedly emphasized “the importance of restoring price stability” at the post-meeting press conference and hinted that current policy “is not particularly restrictive.”

From “Rate Cuts” to “Three Rate Hikes”: Why BofA Has Turned 180 Degrees

BofA’s significant revision of its forecast is mainly based on a reinterpretation of the Fed’s “reaction function.” The reaction function refers to the central bank’s decision rule for adjusting monetary policy based on economic data changes. BofA believes that the Fed’s policy logic has undergone a structural change.

On the employment front, Bhave’s team pointed out that downside risks in the labor market have “dissipated.” Currently, the U.S. unemployment rate is roughly the same as in May 2025, when the federal funds rate was 75 basis points higher than now, and the Fed had no intention of cutting rates at that time. This comparison reveals a key fact: the employment pressures that previously drove rate cuts no longer exist at the current interest rate levels.

On inflation, BofA’s wording is more direct—“The Fed’s inflation problem has unambiguously worsened.” The bank expects the May core PCE annual rate could reach 3.5%, nearly 70 basis points higher than the same period last year. The factors driving inflation are becoming more diversified: tariffs, recent supply shocks, and housing-driven disinflation effects are largely exhausted, while core services inflation outside housing remains high and sticky. BofA forecasts that even once one-off factors subside, core PCE will still hover around 2.5% by the end of 2027.

Deeper changes are also evident in the Fed’s policy framework. In the June dot plot, none of the nine officials projecting rate hikes expected the unemployment rate to fall by the end of the year—meaning rate hikes are no longer contingent on labor market tightening. Warsh’s comments on “AI-driven disinflation” at the press conference also showed a more cautious attitude than before. BofA’s analysis suggests Warsh might be building market credibility through hawkish rhetoric or waiting for a clear decline in inflation or internal policy consensus to form.

BofA also listed four scenarios that could interrupt the rate hike path: a sharp weakening of non-farm payrolls in summer, core PCE remaining below expectations for several months, a significant stock market decline, or a shift in Warsh’s policy stance. Additionally, BofA does not rule out the possibility of an early rate hike in July but believes the Fed is more likely to wait for summer data before acting, possibly delaying the first hike until December after the mid-term elections.

Market Follow-up: CME FedWatch Expectations Jump

BofA’s report is not an isolated market view. The CME FedWatch tool has captured the full transition of market expectations from the June FOMC meeting to now.

Before the June FOMC, the market priced in only a 29.6% chance of a rate hike in September. After the meeting, this shot up to 72.3%. As of June 23, CME FedWatch shows the probability of a 25 basis point hike in September has risen to 52.2%, and a 50 basis point hike to 21.4%. The latest data indicates the probability of rates remaining unchanged in September has fallen to 29.8%, while the probabilities of a 25 or 50 basis point hike are 50.6% and 19.6%, respectively. The market is pricing in nearly an 85.5% chance of a rate hike in December, far above the 61% before the June FOMC.

Overall, the market is pricing in about 41.2 basis points of total rate hikes for 2026—meaning it has not fully incorporated BofA’s forecast of a 75 basis point increase but has shifted significantly away from expectations of no hikes this year. This convergence of expectations itself has transmission effects on asset prices.

Chain Reaction in Asset Allocation: From U.S. Stocks to Crypto Markets

If BofA’s forecast proves correct, bond, equity, and interest-sensitive assets will face substantial pressure. After the June FOMC, U.S. stocks, U.S. Treasuries, and precious metals markets all declined, with the dollar index back above 100.

On June 23 (Tuesday), the three major U.S. stock indices all fell. The S&P 500 dropped 1.44% to 7,365.46 points, the Dow Jones Industrial Average fell 0.09% to 51,666.84 points, and the Nasdaq Composite declined 2.21% to 25,587.04 points. Tech stocks led the decline: Nvidia down 4.15%, TSMC down 6.62%, Tesla down 5.79%, Wuzhi Semiconductor down 5.76%, and Intel down 6.15%. The 10-year U.S. Treasury yield rose to 4.50%, and the 2-year yield was 4.16%. BofA’s research team also warned that the bubble risk indicator for the Nasdaq 100 is approaching a critical level of 0.8—generally indicating significantly increased tail risks on both ends in the short term.

Crypto assets were also not spared. As of June 24, Bitcoin traded around $62,546, down 2.1% in 24 hours and down 4.9% for the week. Bitcoin briefly fell below $62,000 before a slight rebound, but resistance formed around $63,000. Ethereum performed worse, trading at $1,662, down 3.7% in 24 hours and 7.2% for the week. ETH/BTC fell to 0.027, hitting a near two-year low—last seen at the beginning of 2023.

The total crypto market cap dropped to approximately $2.12 trillion, down 2.65% from the previous day’s high. The total liquidation in 24 hours was $21.2k, with longs accounting for $2.54B (94%), and ETH liquidation at $2.4B, exceeding BTC’s $774 million. The concentrated liquidation of leveraged longs further amplifies downward pressure.

The correlation between crypto assets and tech stocks was reaffirmed in this sell-off. The correction in Asian-led semiconductor stocks caused the Nasdaq to fall 2.21%, dragging crypto assets down in tandem—both tend to move synchronously during market sentiment shifts. Higher interest rate expectations increase the opportunity cost of holding interest-free assets like cryptocurrencies and compress valuation multiples for risk assets.

Rebuilding the Allocation Logic: Three Scenario Paths

Based on BofA’s forecast framework, asset allocation in the second half of 2026 should consider the following three scenarios:

Scenario 1: BofA’s forecast materializes (three rate hikes, totaling 75 basis points). The federal funds rate rises to 4.25%-4.50%. In this scenario, the dollar index could further strengthen, and the U.S. Treasury yield curve may flatten. For crypto assets, macro liquidity tightening implies continued suppression of risk appetite. Historical data shows that during Fed tightening cycles, Bitcoin’s correlation with the Nasdaq tends to increase—both are liquidity-sensitive assets. However, structural narratives in crypto markets (such as ETF fund flows and increased institutional allocations) may partially hedge against macro headwinds.

Scenario 2: Market pricing takes a middle path (one to two rate hikes, 25–50 basis points). This aligns more closely with the current market pricing (about 41.2 basis points). Under this scenario, asset prices may adjust more mildly, but the expectation gap itself will generate volatility—any unexpectedly strong economic data could trigger re-pricing of positions.

Scenario 3: The rate hike path is interrupted (sharp weakening of employment data or unexpectedly low core PCE). BofA admits this possibility. If such a scenario occurs, assets previously under pressure from rate hike expectations could see a phased rebound. However, BofA emphasizes that its baseline assumption is that the Fed will keep rates unchanged throughout 2027, and any rate cuts are not expected until 2028.

Conclusion

BofA’s forecast of three rate hikes signals a systemic re-pricing of the Fed’s policy path on Wall Street. The transition from “rate cuts” to “holding steady” and then to “three hikes”—the speed of this expectation shift itself has transmission effects on asset prices.

For crypto market participants, the macro logic is shifting from “liquidity easing beta rallies” to “structural differentiation during tightening cycles.” Bitcoin’s narrative as “digital gold” may gain relative advantage during risk-off sentiment—its recent two-year low against ETH/BTC reflects this capital flow. But a higher interest rate environment also raises the opportunity cost of holding interest-free assets, resetting risk asset valuation anchors.

The key in the coming months lies in the cross-validation of two variables: whether inflation remains sticky as BofA predicts, and whether the employment market can remain resilient under rate hike expectations. Until data clarifies, markets may remain highly volatile. Investors should build scenario-based allocation frameworks rather than betting on a single direction.

FAQ

Q1: How many rate hikes does BofA forecast for the Fed in 2026? What are the specific dates?

BofA expects the Fed to raise rates by 25 basis points in September, October, and December 2026, totaling 75 basis points for the year, with the federal funds rate rising from the current 3.50%-3.75% to 4.25%-4.50%. After completing these hikes, BofA expects rates to remain unchanged throughout 2027, with cuts not starting until 2028.

Q2: What are the market-implied probabilities of rate hikes according to CME FedWatch?

As of June 24, CME FedWatch shows a 29.8% chance of no change in September, a 50.6% chance of a 25 basis point hike, and a 19.6% chance of a 50 basis point hike. The probability of a rate hike in December is nearly 85.5%, far above the 61% before the June FOMC.

Q3: How does BofA’s forecast differ from the market consensus?

BofA’s “three hikes totaling 75 basis points” is the most aggressive among major investment banks. The overall market is pricing in about 41.2 basis points of hikes for 2026, significantly below BofA’s forecast. Most brokerages previously expected rates to stay flat in 2026.

Q4: What does the rate hike expectation mean for crypto assets?

Higher interest rates increase the opportunity cost of holding interest-free assets like cryptocurrencies, suppressing risk appetite. As of June 24, Bitcoin traded around $62,546, down 2.1% in 24 hours, and Ethereum was at $1,662, down 3.7%. The ETH/BTC rate fell to 0.027, a two-year low, reflecting capital flow into “digital gold” assets amid tightening expectations.

Q5: What factors could interrupt the Fed’s rate hike path?

BofA points out four scenarios: a sharp slowdown in summer non-farm employment, core PCE remaining below expectations for several months, a significant stock market decline, or a shift in Warsh’s policy stance. It also does not rule out an early rate hike in July but believes the Fed is more likely to wait for summer data or delay the first hike until after the November mid-term elections.