Wells Fargo said in a recent report that a less restrictive monetary policy could significantly impact U.S. growth prospects by stimulating various economic sectors and easing some of the current economic pressures.
According to the bank’s latest U.S. economic outlook report, the Fed is expected to cut interest rates by 50 basis points at its September meeting and then another 50 basis points in November. The shift is expected to bring the federal funds rate down to a range of 3.25% to 3.50% by mid-2025, which many consider a neutral rate.
The labor market, which has shown signs of weakness, is the main area where people will feel the impact of less restrictive policy. The report says that “wage growth has slowed markedly, and unemployment is rising faster than expected,” and notes that the latest jobs report “shook the world and reset expectations for the rest of the year and beyond.”
Nonfarm payrolls are now forecast to average 116,000 jobs per month over the next 12 months, down from 209,000 in the previous 12 months. A looser monetary policy is expected to help stabilize the labor market by supporting job creation and preventing further increases in the unemployment rate.
Consumer spending is another crucial area likely to benefit.
“We have revised our consumer expectations downward and now expect real personal consumption spending to slow materially towards the end of this year and early next year before rebounding in the second half of next year amid less restrictive monetary policy,” the report said.
Lower interest rates are expected to lower borrowing costs, thereby encouraging consumer spending and supporting economic growth. Despite the expected slowdown in income growth, consumer fundamentals and the Fed’s aggressive monetary easing should keep spending growth positive.
The housing market is also likely to see positive effects from lower interest rates. Expectations point to an upward revision in residential investment prospects, driven by recent declines in mortgage rates and expectations of further rate cuts next year.
“We have revised our housing forecasts downward in light of recent declines in mortgage rates and expectations of further interest rate easing next year,” Wells Fargo economists wrote. This should boost buyer demand, builder confidence and overall residential investment, although some near-term weakness is still expected due to the current economic environment.
Inflation, which has been a focus of the Fed, is expected to ease, with the core PCE price index expected to rise 2.6% year-over-year in the fourth quarter of 2024, reflecting a balance between goods and services inflation.
Wells Fargo said, “Upward pressure on prices continues to ease as growth in input costs, including labor, slows and weak demand makes it difficult for companies to raise prices.”
In general, less restrictive monetary policy is seen as a necessary step to support the economic expansion that has been underway since mid-2020.