• Wells Fargo forecasts the Federal Reserve will cut rates five times by 25 basis points each, bringing the target range to 3.00%–3.25% by mid-2026.
  • The bank's outlook is driven by a softening labor market, with job growth averaging just 29K in August and unemployment rising to 4.3%.
  • Despite core PCE inflation remaining elevated at 2.9% year-over-year, the bank notes inflation expectations are stabilizing, allowing for a pivot to accommodative policy.

Wells Fargo economists project a significant easing cycle from the Federal Reserve, anticipating five consecutive 25-basis-point rate cuts commencing at the next few meetings. This path would lower the federal funds target range to 3.50%–3.75% by the end of this year, with two additional cuts in March and June of 2026.

The forecast, detailed in a note to clients, hinges on recent economic data pointing to a clear cooling in the labor market. "The momentum has shifted," said a senior economist at the bank who was not authorized to speak publicly. "Job growth is effectively stalling, and the unemployment rate's climb to 4.3% can't be ignored by the FOMC."

Inflation remains the complicating factor. The core PCE price index, the Fed's preferred gauge, was still up 2.9% on a year-over-year basis in the latest reading, stubbornly above the central bank's target. However, Wells Fargo's analysis suggests longer-term inflation expectations are becoming better anchored, providing the necessary runway for policymakers to act. The bank has concurrently raised its probability of a U.S. recession within the next year to 35%.

Market reaction was muted, as the forecast aligns with a growing consensus on Wall Street for a steady dovish turn. Treasury yields ticked down slightly on the news, while futures markets priced in a marginally higher chance of a cut at the next meeting.

Efforts to reach the Federal Reserve for comment were unsuccessful. The outlook contrasts with some more hawkish FOMC members who have recently preached patience, suggesting internal debates over the pace of easing are likely to be heated.

The bank's longer-term view turns more optimistic, forecasting a rebound in GDP growth to 2.4% in 2026 as the cumulative effect of rate cuts and ongoing fiscal stimulus measures work their way through the economy.