Wells Fargo: Fed to deliver 5 rate cuts through mid-2026

Wells Fargo analysts now project the Federal Reserve will implement five rate cuts through mid-2026, beginning with 25 basis point reductions at each of the next three meetings to bring the federal funds rate to 3.50%-3.75% by year-end, followed by two more cuts in 2025 to a terminal rate of 3.00%-3.25%. This more dovish outlook is primarily driven by a weakening labor market, evidenced by a "measly 29K" three-month average nonfarm payroll growth and a 4.3% unemployment rate, despite core PCE inflation remaining above the 2% target. While recession risks have increased to a 35% probability for the next 12 months, the bank anticipates above-consensus 2.4% real GDP growth beyond 2025, supported by fiscal stimulus and the lagged effects of rate reductions.

Analysis

Wells Fargo analysts have adopted a significantly dovish stance on U.S. monetary policy, forecasting a steady easing cycle with five 25 basis point rate cuts through mid-2026. The projection calls for an aggressive front-loading of cuts, with three reductions anticipated by the end of the current year, pushing the federal funds rate down to a 3.50%-3.75% range. This would be followed by two additional cuts by June 2025, establishing a terminal rate of 3.00%-3.25%. The primary justification for this outlook is a deteriorating labor market, evidenced by a weak three-month average nonfarm payroll growth of just 29,000 and a cycle-high unemployment rate of 4.3%. This economic weakness is seen as a more pressing concern for the Fed than persistent inflation, even with the core PCE deflator remaining elevated at 2.9% YoY. While the bank acknowledges that recession risks have risen to a 35% probability over the next 12 months, it projects an optimistic, above-consensus real GDP growth rate of 2.4% beyond 2025, driven by the lagged effects of monetary easing and fiscal stimulus.

Key Decisions for Investors

• Consider overweighting interest-rate sensitive assets, such as long-duration bonds and growth-oriented equities, to position for the projected steady easing cycle and a terminal rate of 3.00%-3.25% by mid-2026.
• Closely monitor incoming labor market data, as the forecast's primary driver is economic weakness; stronger-than-expected payroll or wage growth would challenge the dovish thesis and likely lead to a repricing of rate expectations.
• Acknowledge the elevated near-term risk from a potential economic slowdown, indicated by the 35% recession probability, which could create market volatility before the projected post-2025 growth acceleration materializes.