Wells Fargo analysts anticipate the Federal Reserve will start a gradual easing cycle, implementing five interest rate cuts through mid-2026.
In a note, the bank projected the Fed would “cut the federal funds rate by 25 bps at each of its next three meetings, pushing the target range down to 3.50%-3.75% by year-end.” The analysts also expect two additional quarter-point reductions at the March and June meetings next year, which would bring the terminal rate to 3.00%-3.25%.
The softer outlook is largely tied to labor market weakness. “The U.S. labor market is in a precarious position, in our view, and this is the primary driver of our more dovish monetary policy outlook,” Wells Fargo wrote. They cited a “measly 29K” three-month average in nonfarm payroll growth for August, along with a cycle-high unemployment rate of 4.3%.
Inflation remains a limiting factor. The note highlighted that “the core PCE deflator is up 2.9% year-over-year” and that prices for goods continue to keep inflation “stubbornly above the central bank’s 2% target.” Still, Wells Fargo emphasized that inflation expectations “generally have been well-behaved of late.”
The bank also warned that the probability of a U.S. recession has “ticked higher,” estimating a 35% chance of a downturn in the next 12 months.
Looking beyond 2025, Wells Fargo struck a more positive tone, forecasting “an above-consensus 2.4% Q4/Q4 growth rate for real GDP next year” as fiscal stimulus and the delayed effects of prior rate cuts begin to support the economy.
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