Fed Rate Hike Fears Return as Inflation Risks Reshape Global Market Sentiment

Institutional investors are becoming increasingly worried about rising inflation risks in the United States, while concerns over slowing economic growth continue to fade. A new Bank of America global FX and Rates Sentiment Survey released on May 15, 2026, shows that resilient economic data is forcing markets to reconsider the possibility of additional Federal Reserve rate hikes.

The survey, which included 60 fund managers overseeing approximately $869 billion in assets, highlights a major shift in investor positioning across global markets. According to Bank of America analysts, investors are now far more focused on upside inflation pressures in the U.S. than on recession or growth slowdown risks.

The latest findings reveal that 28% of respondents believe U.S. economic growth is already properly priced into markets, but inflation risks remain significantly underestimated. This figure doubled from 14% in the previous month, signaling a rapid change in investor expectations. In addition, 25% of fund managers now see the Federal Reserve as the central bank most likely to surprise markets with more aggressive interest rate hikes.

Growing expectations for tighter monetary policy are also affecting bond markets. Investors are reducing confidence in long-duration bond trades and becoming less optimistic about U.S. yield curve steepening strategies. At the same time, strong economic data is boosting bullish sentiment toward the U.S. dollar, with many investors expecting further gains in the Dollar Index.

In Europe, sentiment around the European Central Bank remains divided. While 58% of surveyed investors believe additional ECB rate hikes would help maintain price stability, 31% consider further tightening a policy mistake that could hurt growth.

Emerging market debt sentiment improved modestly in May, particularly for local currency bonds. However, Bank of America warned that ongoing geopolitical tensions could weaken investor confidence. Meanwhile, institutional capital continues shifting away from cash holdings and into risk assets, with long-risk positions and commodities becoming the market’s most crowded trades in 2026.