On Friday, Wells Fargo (NYSE:WFC) forecasted that the Federal Reserve will implement a modest easing of monetary policy, anticipating a 25 basis point (bps) rate cut in the upcoming week. This prediction follows a recent analysis of labor and inflation data, which suggested mixed signals for the economy.
The employment report from last week showed an acceleration in hiring for August, but also included downward revisions to prior data. This combination of factors has left the possibility open for the Federal Reserve to consider either a 25 bps or a 50 bps cut at its next meeting. However, Wells Fargo believes the central bank will opt for the more conservative reduction.
Inflation data released this week has provided some additional insight, with the core Consumer Price Index (CPI) for August rising by 0.3% month-over-month, exceeding consensus forecasts. This marks the sharpest increase in prices over the last four months.
The main contributors to this uptick were persistent service prices, which saw the most significant monthly increase since April, driven by both non-housing and housing services. Travel-related costs, in particular, experienced a rise, while private sector rents continued to show signs of a slowdown.
Despite August's inflationary increase, which Wells Fargo views as potentially an anomaly rather than a new trend, the firm suggests that the Federal Open Market Committee (FOMC) may still proceed with caution. The nature of the price growth, which has been relatively stable, could influence the FOMC's decision-making process.
In their "Interest Rate Watch" report, Wells Fargo acknowledges the possibility of a 50 bps reduction but maintains that the Fed is more likely to initiate this cycle of easing with a 25 bps cut. The bank's analysis indicates a preference for a gradual approach to monetary policy adjustments in response to the current economic indicators.
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