Wells Fargo Gets Hawkish as "Sticky Inflation" Alters Rate Expectations
2min read Wells Fargo has tempered its previously dovish stance on Federal Reserve monetary policy following recent inflation data that exceeded expectations. Analysts now project a more cautious approach to rate cuts, reflecting the persistence of "sticky" inflation and a recalibration of the Federal Reserve's likely trajectory through 2025.
The key driver of this shift is the November Producer Price Index report, which showed a year-over-year increase of 3.0 percent, above the 2.6 percent consensus estimate.
This uptick adds to concerns that inflation, while slowing, remains elevated and above the Federal Reserve's 2 percent target. Analysts at Wells Fargo emphasized that while inflation has gradually cooled over the course of 2024, the pace has been slower than anticipated, raising questions about the central bank's next moves.
Wells Fargo expects the Federal Open Market Committee to reduce the federal funds rate by 25 basis points at its upcoming December 18 meeting, lowering the target range to 4.50-4.75 percent.
However, the bank cautions that additional easing will likely proceed more cautiously, with rate cuts expected at an every-other-meeting pace in 2024. Analysts forecast 100 basis points of total rate reductions over the next year, including cuts in March, June, and September.
The persistence of inflationary pressures has prompted Wells Fargo to adjust its outlook for the terminal fed funds rate in 2025. While the median estimate remains at 3.625 percent, analysts believe it could rise by 25 basis points and potentially even 50 basis points, depending on future economic data and policy adjustments.
This reflects the possibility that Federal Reserve participants may recalibrate their forecasts to account for recent firm inflation data and other emerging risks.
Despite the cautious tone, Wells Fargo maintains that the Federal Reserve will continue its efforts to gradually unwind restrictive monetary policy. This aligns with the Fed's goal of balancing price stability with economic growth, especially as inflationary pressures persist in areas like goods and energy.
The implications for markets are significant. Slower rate cuts could temper investor enthusiasm, particularly in rate-sensitive sectors such as real estate and technology. However, the gradual pace of easing also underscores the Federal Reserve's commitment to managing inflation expectations and preserving economic stability.
As the Federal Reserve prepares for its final meeting of 2024, all eyes will be on the central bank's commentary regarding the pace of future rate adjustments. The focus will remain on incoming data, including labor market trends and inflation readings, as policymakers navigate a challenging economic landscape marked by persistent inflation and evolving market expectations.
Investors should prepare for a period of heightened volatility as markets digest the implications of a slower rate-cut trajectory. With inflation proving to be more resilient than anticipated, the path forward for monetary policy remains uncertain, demanding careful attention to the interplay of economic data, policy signals, and market sentiment.
