Fed Expected to Implement Two More Rate Cuts This Year, but Job Gains Alleviate Urgency

Investing.com — The Federal Reserve is still likely to implement two rate cuts this year. However, the urgency to reduce rates to a neutral level appears to have lessened as the labor market shows resilience.

Analysts at Wells Fargo stated in a note on Friday that their expectation remains for the Federal Open Market Committee (FOMC) to enact two rate cuts this year, with reductions of 25 basis points at both the November and December meetings.

They noted that due to recent signs of labor market stability, the pace of cuts may not be as rapid as previously anticipated and could be spread throughout the next year instead.

Wells Fargo has raised its forecast for payroll growth in the fourth quarter to an average of 128,000 per month, an increase from their earlier estimate of 105,000. They also anticipate that the upward trend in the unemployment rate observed since the beginning of the year will continue, peaking in the fourth quarter at a lower rate than expected.

Strength in the labor market has bolstered consumer spending, contributing to a robust U.S. economy, with real GDP projected to grow at a 3.2% annualized rate in the third quarter. Consumer spending is expected to have increased by 3.2% during this period, marking the strongest quarterly growth of the year. The analysts attribute this robust consumer spending to households being in a more favorable financial position than previously thought, with the savings rate averaging around 5.0% over the past year, higher than the initially reported 3.6%.

Recent inflation data, including stronger-than-expected consumer price index figures for September, indicates that the road to the Federal Reserve’s 2% inflation target may be bumpy. Core inflation is anticipated to remain slightly above 2% until the second half of 2026.

The analysts noted that the benefits of improved supply chains and reduced demand still have yet to fully materialize, although the overall trend toward deflation remains intact.

The Fed is expected to implement 125 basis points of cuts to move its benchmark interest rate toward a neutral level—neither supporting nor hindering economic growth.

In addition to the two cuts anticipated this year, the analysts believe that the Fed will need to provide another 125 basis points of easing to bring the fed funds target rate closer to neutral territory.

The environment of lower rates should continue to stimulate economic activity, particularly in sectors like real estate and manufacturing that have been hardest hit by rising borrowing costs, according to Wells Fargo.