The Federal Reserve is on track to begin a steady rate-cutting cycle, according to Wells Fargo analysts, who expect five quarter-point reductions between now and mid-2026.
In a report published Wednesday, the bank projected the Fed will lower the federal funds rate by 25 basis points at each of its next three meetings, which would bring the target range down to 3.50%–3.75% by the end of 2025. Two additional cuts are forecast for March and June of next year, taking the rate to 3.00%–3.25%.
Wells Fargo said its more dovish outlook is being driven primarily by signs of stress in the labor market. “The U.S. labor market is in a precarious position, in our view,” the analysts wrote, pointing to a three-month average of just 29,000 new nonfarm jobs in August and a 4.3% unemployment rate, the highest of the current cycle.
Inflation remains a complicating factor. Core PCE inflation is still running at 2.9% year-over-year, above the Fed’s 2% target, with goods prices in particular keeping pressure on overall inflation. Still, Wells Fargo noted that inflation expectations “generally have been well-behaved of late.”
The bank also cautioned that recession risks have risen, assigning a 35% chance of a downturn in the next 12 months.
Beyond that near-term caution, Wells Fargo sees brighter prospects. By late 2025, the bank expects the economy to regain momentum, forecasting 2.4% GDP growth in 2026 as fiscal stimulus and the effects of lower borrowing costs flow through.
