Wells Fargo Upgrades U.S. GDP Forecast, Eyes Federal Reserve Rate Cut in May

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In its latest economic outlook report for February 2024, Wells Fargo paints a cautiously optimistic picture of the U.S. economy, buoyed by upgrades to GDP forecasts and closely monitoring anticipated Federal Reserve actions.

The report from one of the biggest main street lenders in the U.S. adjusts expectations for U.S. GDP growth, signalling stronger economic momentum than previously anticipated.

"We now forecast real GDP will be about 1.4% higher by the fourth quarter of this year relative to Q4-2023, which is up from a 0.8% gain in our January forecast," the analysis reveals.

This upgrade underscores a growing confidence in the economic recovery, particularly in the manufacturing and residential investment sectors.

"The economy may be on the cusp of a recovery in manufacturing, and residential investment activity also looks to be finding a bottom," the report suggests, indicating pivotal improvements.

Above: Non-farm employment, thousands of employees, average quarterly change.

Despite the brighter economic outlook, Wells Fargo emphasises the critical role of Federal Reserve policies in shaping future growth trajectories. The report points to the Fed's cautious stance as a significant factor in ongoing economic uncertainty. "Fed patience will cause economic uncertainty to continue," it notes, highlighting the delicate balance the central bank seeks to maintain between stimulating growth and controlling inflation.

Wells Fargo economists project that the Federal Reserve will likely begin easing monetary policy by mid-2024, with the first rate cut expected in May.

"We still anticipate the first rate cut to come in May; though if we are off by a meeting, risks are skewed toward June rather than March, in our view," the note states, providing insights into the anticipated timeline for policy adjustments.

This expectation aligns with recent comments from Fed Chair Powell, advocating for patience in rate cut decisions to ensure inflation targets are sustainably met.

The labour market is another area of focus, with the report highlighting stronger-than-expected hiring momentum. This has led to an upgraded near-term payroll forecast, with an anticipated modest rise in the unemployment rate to 3.9% by the end of 2024.

Inflation trends also receive an optimistic assessment, with Wells Fargo predicting a continued downward trajectory. The report adjusts its inflation outlook slightly, expecting a deceleration in core PCE inflation to around 2.2% by year-end, slightly below previous forecasts.

While the report conveys a sense of optimism, it also acknowledges potential economic headwinds, such as tighter credit access and a slowdown in nonresidential construction spending.

Nevertheless, the overarching message is one of resilience and gradual improvement, with the U.S. economy poised for moderate growth in the face of uncertainties.