Wells Fargo analysts predict that the US Federal Reserve will not take aggressive action on interest rates in the near future. While rate cuts are expected this year, they believe that the “higher for longer” rate mentality would have been a major obstacle for stocks in the past. Market participants are relying on the ideas of long-term declining inflation and a Federal Reserve that desires rate cuts but may not have the opportunity to implement them this year.
According to Wells Fargo, the economy and earnings are still growing at a steady pace, which has positively impacted equity markets. The market is currently pricing in one to two rate cuts for this year, a significant decrease from the initial expectations of six to seven cuts at the beginning of the year. Despite these projections, Wells Fargo suggests that rate cuts may take some time to materialize.
While Wells Fargo acknowledges that some rate cuts are expected, they believe that the Federal Reserve will not be too aggressive in its approach. The bank anticipates that the pace of disinflation may slow down temporarily, but they still foresee a slight decrease in the Consumer Price Index inflation as we progress through late summer and fall, which may allow for two rate cuts this year.
Looking ahead to 2025, Wells Fargo has revised its forecast to include only one rate cut, which would result in the fed funds target rate falling within the range of 4.5% to 4.75% by the end of next year. Despite these adjustments, the bank remains cautious about the timing and extent of rate cuts in the current economic landscape.
Wells Fargo’s analysis suggests that while rate cuts are on the horizon, they may not be as aggressive as initially anticipated. The bank highlights the importance of monitoring inflation levels and Federal Reserve policies to gauge the potential impact on equity markets and overall economic stability. Investors should remain vigilant and adapt to changing market conditions as the Federal Reserve navigates the complex task of managing interest rates in the coming months.