Bank of America believes that a strong US labor market report in June could push markets to increase their bets on three interest rate hikes in 2026, given the continued strength of the US economy and the Federal Reserve's tough stance on inflation.
The bank expects US non-farm payrolls to rise by about 110,000 jobs in June.
The bank added that any positive surprise in the jobs report, due to be released on Thursday, could push investors closer to its current forecast, which predicts the Federal Reserve will implement three consecutive interest rate hikes during 2026.
Bank of America noted that the first-ever decline in unemployment benefit claims, along with a strong reading of the ADP private sector jobs report, supports the prospect of good employment growth in June.
A slowdown in hiring remains a possibility.
Despite this positive outlook, the bank warned that a slowdown in the labor market remains a possible scenario.
He explained that the strong rise in employment in the entertainment and hospitality sectors during May was probably driven by seasonal factors, such as the World Cup or Memorial Day holiday in the United States.
He added that if Memorial Day holiday is the most influential factor, employment data could return to slowing down during June, after this temporary effect has passed.
The performance of the US labor market is one of the most important indicators that the Federal Reserve relies on in charting the course of monetary policy, as continued stronger-than-expected employment could revive concerns about continued tightening of monetary policy, which could put pressure on high-risk assets.
Bank of America and Deutsche Bank defy market expectations
In a related context, both Bank of America and Deutsche Bank expect the Federal Reserve to raise interest rates during 2026, based on the continued strength of the US economy and the adoption by the new Fed chairman, Kevin Warsh, of a more hawkish approach to monetary policy.
This forecast represents a clear shift compared to their previous estimates, which predicted that interest rates would remain unchanged, and it also contradicts the expectations of the majority of global financial institutions, which still expect interest rates to remain stable throughout the year.
Bank of America expects the Federal Reserve to raise interest rates by 25 basis points at its September, October and December meetings, making it the most hawkish of the major global financial institutions.
Deutsche Bank, however, predicted in a research note dated June 19 that the Federal Reserve would implement only two interest rate hikes, by 25 basis points, at its September and December meetings.
What prompted the banks to change their forecasts?
These new projections came after the Federal Reserve kept interest rates unchanged at its last meeting, but nearly half of the members of the monetary policy committee indicated that they now expect interest rates to rise during the year.
The two banks believe that the increasing strength of the labor market and continued inflationary pressures have reinforced the tendency of monetary policymakers to tighten, which raises the likelihood of further interest rate hikes.
Bank of America analysts said the economic summary of the June forecast, along with comments from Federal Reserve Chairman Kevin Warsh, showed that the central bank's response to inflation had become more hawkish than expected.
Despite its expectation of an interest rate hike, Deutsche Bank believes the scenario remains open to multiple possibilities. The bank explained that the most hawkish scenario involves the possibility that members of the Monetary Policy Committee will agree to implement the first rate increase at their July meeting if economic data continues to show strong economic activity and rising inflationary pressures.
Conversely, he noted that continued improvement in energy prices and lower inflation expectations may reduce the urgency for further tightening, giving the Federal Reserve more room to wait.
