Investing.com – The Fed still has the potential to cut interest rates twice this year, but the need for speed to lower interest rates to neutral levels more quickly now appears less urgent as the labor market continues to weaken.
“We maintain our view that the FOMC will make two more rate cuts this year, with cuts of 25 basis points at the November and December meetings,” analysts at Wells Fargo said in a note on Friday.
“However, given recent signs of stability in the labor market, a less urgent cut now seems likely, with cuts that are less large and spread over next year as a whole,” the analysts said.
Wells Fargo now forecasts average wage growth of 128,000 per month in Q4 compared to 105,00º in our previous forecast, although it estimates that the upward trend in the unemployment rate since the start of the year will likely continue, but peak in Q4 4 at the same time. lower level.
Strength in the labor market, which has supported consumer spending, has strengthened the US economy, with real GDP expected to increase by 3.2% quarterly and annually in Q3.
Consumer spending is expected to increase 3.2% in the third quarter, marking “the strongest quarterly pace of the year,” analysts said. In addition to confidence in the strength of the labor market, strong consumer spending “is driven by households being in a stronger financial position than previously thought, with the average savings rate around 5.0% over the past 12 months, higher than 3.6 % originally reported.” they added.
Recent inflation data including stronger-than-expected September consumer price index data signal that the path back to the Fed’s 2% inflation target will likely remain bumpy. Core inflation is expected to remain slightly above 2% through the second of 2026, analysts estimate.
“The benefits of smoother supply chains and lower demand have yet to pay off,” analysts said, adding that the overall deflation path remains intact.
The Fed is expected to cut 125 basis points to push the central bank’s benchmark interest rate towards neutral – a level that neither supports nor drags down economic growth.
Beyond the two cuts expected this year, analysts believe the Fed needs to provide an additional 125 basis points of easing to push the Fed’s interest rate target closer to neutral territory.
The backdrop of lower interest rates will continue to support economic activity, Wells Fargo said, particularly sectors most impacted by rising borrowing costs, such as real estate and manufacturing.
