BNP Paribas Forecasts Three Fed Rate Hikes Starting December, Citing Underpriced Inflation Risk

The Quick Take

• BNP Paribas expects three Federal Reserve rate hikes starting in December, reflecting its view that US inflation risks are being underpriced by the market.
• The BNP forecast stands as a hawkish outlier versus consensus, which currently prices in Fed rate cuts through 2026.
• BNP's US rates strategy head cites inflation risks embedded in current macro dynamics as the basis for the rate hike thesis.

BNP Paribas's forecast of three Federal Reserve rate hikes beginning in December 2026 represents a significant departure from the prevailing consensus, which has been pricing in rate cuts rather than increases. The conviction behind BNP's position—articulated by Guneet Dhingra, head of US rates strategy—centres on inflation risks that BNP believes the bond market is structurally underpricing. If BNP's thesis is correct, the implications for fixed-income markets are severe: current long-duration Treasury positions priced on the assumption of Fed easing would suffer substantial mark-to-market losses, and the yield curve would steepen abruptly as short-term rates rise while long-term rates reflect the inflation-premium reality.

The market implications extend well beyond bonds. Three Fed rate hikes starting December would represent a policy pivot that invalidates the current equity market multiple expansion thesis, which assumes a stable-to-declining rate environment through 2026-2027. US growth stocks—particularly in AI, cloud, and technology—are most sensitive to discount rate increases, as their valuations are heavily weighted toward future cash flows that are compressed by higher rates. Emerging market currencies and equities, including the Indian Rupee and Nifty, would face capital outflow pressure as US dollar carry trade returns improve with rate hikes, pulling global capital back toward dollar-denominated assets.

The key event to watch is the next US CPI report—if inflation surprise to the upside and exceed 3.5% core CPI, BNP's hawkish thesis would gain immediate market traction and force a rapid repricing of Fed Funds futures. The November 2026 FOMC meeting statement, which precedes BNP's December hike call, will be a critical leading indicator of whether the Fed is even internally debating hikes versus cuts. The macro variable is the US labour market: sustained wage growth above 4% combined with sticky services inflation is the condition that would force the Fed to abandon its current bias toward accommodation and execute the hikes BNP is forecasting.

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