Wells Fargo Analysts Predict Two 50 bps Rate Cuts by Fed; Economic Indicators Spark Concerns
In a surprising turn of events, Wells Fargo analysts are forecasting two 50 basis points (bps) rate cuts at the upcoming Federal Open Market Committee (FOMC) meetings on September 18 and November 7. This prediction represents a notable departure from previous expectations, driven by emerging economic signals that have raised red flags about the state of the economy.
According to the bank, the FOMC has largely accomplished its goal of bringing inflation back to the desired 2% target. However, recent data has raised alarms about the employment aspect of the Fed's dual mandate, with slowing payroll growth and rising unemployment indicating potential vulnerabilities in the labor market.
Wells Fargo points out that the current monetary policy stance is quite restrictive, as evidenced by the real fed funds rate. The bank argues that a shift to a neutral policy stance is necessary to prevent a cycle of labor market weakness leading to reduced spending and further deterioration in employment conditions.
Looking ahead to mid-2025, Wells Fargo anticipates that the target range for the federal funds rate will drop to 3.25-3.50%, aligning with what is considered a neutral rate by many experts. They expect a series of rate cuts, starting with a 25 bps reduction in December, followed by additional cuts at the January, March, and June meetings in 2025.
The urgency for these aggressive cuts, according to the bank, stems from the imperative to avert economic downturns. Failure to transition to a neutral policy stance swiftly could result in a downward spiral of labor market weakness, posing significant risks to the overall economy.
With inflation hovering near the target and signs of softness in the labor market becoming apparent, Wells Fargo believes that the FOMC will kickstart the transition to a neutral rate as soon as possible to mitigate potential risks and stabilize the economy.
In conclusion, these projected rate cuts by the Fed could have a significant impact on various aspects of the economy, including borrowing costs, investment decisions, and overall economic growth. It is crucial for individuals and businesses to stay informed about these developments and adjust their financial strategies accordingly to navigate potential challenges and capitalize on opportunities that may arise.