Wells Fargo analysts anticipate significant changes to the Federal Reserve's monetary policy, projecting two 50 basis points (bps) rate cuts at the Federal Open Market Committee (FOMC) meetings on September 18 and November 7.
This prediction marks a substantial shift from earlier forecasts due to emerging economic indicators, with recent data prompting worries about the economy.
The bank said the FOMC has largely succeeded in its mission to return inflation to its 2% target.
However, "recent data suggest the risks to the 'full employment' part of the Fed's dual mandate are rising," they wrote in a note Monday, highlighting that payroll growth has decelerated, and unemployment is increasing, signaling potential labor market vulnerabilities.
Currently, the stance of monetary policy is quite restrictive, notes Wells Fargo, writing: "As measured by the real fed funds rate, the stance of monetary policy is quite restrictive at present."
The bank argues that the FOMC needs to revert to a neutral policy stance swiftly to prevent a cycle of labor market weakness leading to reduced spending and further labor market deterioration.
By mid-2025, Wells Fargo forecasts that the target range for the federal funds rate will fall to 3.25-3.50%, aligning with what many observers consider a neutral rate. They anticipate a series of cuts, including a 25 bps reduction in December, followed by an additional 25 bps cuts at the January, March, and June meetings in 2025.
The bank explains that the urgency for these aggressive cuts stems from the need to prevent economic downturns.
"The FOMC needs to get back to a 'neutral' stance of policy quickly or else it risks a vicious circle of labor market weakness."
With inflation nearing the target and the labor market showing signs of softness, Wells Fargo believes the FOMC will start this transition to a neutral rate as soon as possible.