Bank of America Global Research has updated its Federal Reserve outlook, adding a 25-basis-point rate hike in January 2027 to its projections. The bank now anticipates three rate increases in total: in December 2026, January 2027, and March 2027.

The revised forecast comes with the federal funds target range standing at 3.75%–4.00% and the effective federal funds rate at 3.88%. The federal funds rate is the Federal Reserve's benchmark policy rate, which shapes short-term borrowing costs across the US economy; a 25-basis-point adjustment corresponds to a move of 0.25 percentage points. Decisions on the rate are made by the Federal Open Market Committee, the central bank's policy-setting body, at scheduled meetings held roughly eight times a year. If the projected path were fully realized, the three 25-basis-point moves would lift the target range from 3.75%–4.00% to 4.50%–4.75% by March 2027, filtering through to rates on mortgages, auto loans, credit cards, and savings products.

According to the bank's research team, the update follows the latest economic indicators, which show consistent inflation and robust employment figures. The revised path implies a higher terminal policy rate than previously expected — the level at which the Fed would stop adjusting rates — and the report notes that market participants are likely to interpret the forecast as a signal of a more aggressive approach by the Fed in response to persistent inflation pressures.

What to Watch

The Federal Reserve's upcoming statements and economic projections could provide further insight into the likelihood of additional rate hikes. Significant changes in key economic indicators, such as inflation and employment data, will be closely monitored, as they could influence the Fed's policy decisions.

Comments from Federal Reserve officials, particularly regarding their assessment of inflationary pressures and broader economic conditions, will also be crucial in shaping expectations for future rate adjustments.