What Would a Less Restrictive Monetary Policy Mean for the Growth Outlook?

A less restrictive monetary policy could have a significant effect on the growth outlook in the United States by boosting various economic sectors and easing some current economic pressures, according to a recent report from Wells Fargo.

The bank’s latest U.S. Economic Outlook indicates that the Federal Reserve is anticipated to lower interest rates by 50 basis points during its September meeting, followed by another 50 basis points reduction in November. This shift is expected to bring the federal funds rate to a range of 3.25% to 3.50% by mid-2025, which is widely regarded as a neutral rate.

The labor market, already showing signs of weakening, is expected to be particularly affected by a less restrictive monetary policy. The report notes that “payroll growth has slowed markedly, and unemployment is rising faster than expected,” and mentions that the latest jobs report has “shaken up expectations for the remainder of the year and beyond.”

The new forecast predicts that nonfarm payroll gains will average 116,000 per month over the next year, a decrease from 209,000 in the previous year. A softer monetary policy is expected to stabilize the labor market by fostering job creation and mitigating further increases in unemployment.

Consumer spending is another critical area likely to benefit from these developments. The report states, “We have revised our consumer forecast, expecting real personal consumption expenditures to slow significantly at the end of this year and the beginning of next year before rebounding in the second half of next year due to a less restrictive monetary policy.”

Lower interest rates are projected to decrease borrowing costs, encouraging consumer spending and supporting economic growth. Despite a predicted slowdown in income growth, strong consumer fundamentals and the Federal Reserve’s aggressive easing measures are expected to keep spending growth positive.

The housing market is also poised to see positive impacts from reduced interest rates. The forecast indicates an upward revision in residential investment, fueled by recent declines in mortgage rates and expectations of further rate reductions next year. Economists at Wells Fargo noted that this should enhance buyer demand, builder confidence, and overall residential investment, although some near-term weakness is still anticipated given the current economic climate.

Inflation, a key concern for the Fed, is expected to taper off. The core personal consumption expenditures price index is projected to rise by 2.6% year-over-year in the fourth quarter of 2024, reflecting a balance between goods and services inflation. Wells Fargo emphasizes that “upward pressure on prices continues to ease as input cost growth, including labor, has moderated, and declining demand is making it more challenging for businesses to raise prices.”

In summary, a less restrictive monetary policy is viewed as essential for sustaining the economic expansion that has been underway since mid-2020.