Investing.com -- A soft landing remains the most likely scenario, but as the risks of recession and stagflation have increased for the first time since 2022, Wells Fargo (NYSE:WFC) analysts warn that the recent shift in probabilities warrants closer attention.
The outlook is clouded by uncertainty over U.S. trade policy. While Wells Fargo believes that tariffs will eventually recede to about 15% and remain there through 2026, a "modest stagflationary shock” can’t be ruled out.
The analysts anticipate a “bumpy ride for GDP growth this year as consumer and business spending dips in the wake of the pre-tariff spending surge that occurred during Q1 and likely carried into early Q2.”
If, however, the current level of tariffs is sustained, the risk of stagflation or recession would likely rise as consumer prices spike.
For those expecting the Fed to rescue the economy from tariff-driven headwinds, a policy pivot isn’t yet on the cards. However, “a further rise in the stagflation and/or recession probabilities may increase policy uncertainty,” Wells Fargo said. The pivot probability “should be carefully watched in the next few quarters.”