Investing.com -- The Fed is still likely to cut rates twice this year, but the need for speed to bring rates down to the neutral level sooner rather than later now appears less urgent as the labor market continues to flex its muscles.
We maintain our view that the FOMC will deal two more rate cuts this year, with 25 basis point reductions at both the November and December meetings," Analysts at Wells Fargo said in a note on Friday.
"Given recent signs of labor market stability, however, a less urgent descent now seems likely, with cuts not as front-loaded and spread across next year as a whole," the analysts said.
Wells Fargo now expects payroll growth to average 128,000 per month in Q4 compared to 105,00º in our prior forecast, though estimates that the upward trend in the unemployment rate since the start of the year is likely to resume, but peak in Q4 at a lower rate.
Strength in the labor market, which has propped up consumer spending, has added steel to the U.S. economy, with real GDP expected to rise at a 3.2% quarterly annualized pace in Q3.
Consumer spending is expected to have expanded 3.2% in Q3, marking the "strongest quarterly pace of the year," the analysts said. As well as confidence in the strength of the labor market, the robust consumer spending is "attributed to households being in a stronger financial position than initially thought, with the saving rate averaging around 5.0% over the past 12 months, higher than the 3.6% originally reported." they added.
Recent inflation data including the September stronger-than-expected consumer price index data signals that the path back to the Fed's 2% inflation target will likely remain bumpy. Core inflation is expected to remain slightly above 2% until the second of 2026, the analyst estimated.
"The benefits of smoother supply chains and cooler demand still have yet to run their course," the analysts said, adding that the overall deflation path remains intact.
The Fed is expected to deliver 125 basis points of cuts to push the central bank's benchmark rate toward neutral - a level that neither supports nor drags on economic growth.
Beyond the two cuts expected for this year, the analyst believe the Fed needs to deliver an additional 125 basis points of easing to push the fed funds target rate closer to neutral territory.
The backdrop of lower rates should continue to support economic activity, Wells Fargo said, particularly sectors that have been the hardest hit by increased borrowing costs, such as real estate and manufacturing.