Wells Fargo analysts suggest that the recent rate cut by the Federal Reserve marks the start of a series of reductions that could unlock more significant market potential throughout 2025.
In a recent client report, the bank highlighted that the main takeaway should not be the magnitude of the cut but the overall direction of monetary policy.
Last week’s 50 basis point (bps) cut took many investors by surprise, despite the fed funds futures market indicating a 58% chance of such a move.
“What has been crucial to note over the last two months is not just the size of the initial cut, but the fact that the September policy meeting initiated what is likely to be an extended period of Fed rate reductions that could continue well into next year,” stated Wells Fargo in their report.
The bank expects that these rate decreases will play a significant role in supporting economic growth and stabilizing the job market.
Additionally, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, reinforced this view by suggesting that several more rate cuts may be necessary to provide the necessary economic support.
“We anticipate that the Fed will opt for additional 25 bps reductions during the remaining Federal Open Market Committee (FOMC) meetings this year in November and December, leading to a total reduction of 100 bps in 2024,” added Wells Fargo.
However, the timing and extent of rate cuts for 2025 remain unclear.
Although a slowdown in the U.S. economy is projected towards the end of 2024, Wells Fargo does not expect it to lead to a recession.
Instead, the bank foresees a moderate economic deceleration, with the impact of the rate cuts becoming more evident in early to mid-2025. This easing of monetary policy is anticipated to have a positive effect on growth and support corporate earnings, as roughly 35% of revenues for the S&P 500 are derived from international markets.
Summing up, Wells Fargo concluded: “The recent rate cut is just the beginning of a potential series of reductions that could unlock broader market opportunities in the upcoming year.”
