The Federal Reserve is set to embark on a steady easing cycle, delivering five rate cuts through mid-2026, according to Wells Fargo analysts.
In a note on Wednesday, the bank projected that the Fed “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.” Two further quarter-point cuts are expected at the March and June meetings next year, which would bring the terminal rate to 3.00%-3.25%.
The softer outlook is driven largely by a weakening labor market. “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.
The analysts pointed to a “measly 29K” three-month average in nonfarm payroll growth in August and a fresh cycle-high unemployment rate of 4.3%.
Inflation, however, remains a constraint. The note highlighted that “the core PCE deflator is up 2.9% year-over-year” and that prices for physical goods are keeping inflation “stubbornly above the central bank’s 2% target.”
Still, Wells Fargo stressed that inflation expectations “generally have been well-behaved of late.”
The bank warned that recession risks have “ticked higher,” assigning a 35% probability of a U.S. downturn in the next 12 months.
But beyond 2025, Wells Fargo struck a more optimistic tone, forecasting “an above-consensus 2.4% Q4/Q4 growth rate for real GDP next year” as fiscal stimulus and the lagged effects of rate cuts filter through.
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