Wells Fargo: Fed Likely to Hold Rates Steady Amid Signs of Economic Slowdown
The U.S. economy is showing signs of slowing, but the Federal Reserve is still expected to keep interest rates unchanged at its July meeting, according to analysts at Wells Fargo.
In the first quarter, real GDP shrank by 0.5%, a decline largely influenced by a surge in imports as businesses rushed to secure goods ahead of higher tariffs introduced by the Trump administration. Since imports are subtracted in GDP calculations, this increase weighed down overall output.
However, Wells Fargo strategists noted that real final sales to private domestic purchasers — a key measure that includes consumer spending and business investment — rose by nearly 2% in the same period. They argued that this suggests the reported GDP decline overstated the actual weakness in early 2025.
Looking ahead, the analysts forecast 1.8% GDP growth for Q2, but cautioned that this may paint an overly optimistic picture. Imports are projected to have dropped sharply, by about 25%, which would mechanically boost GDP. Yet, underlying indicators point to ongoing weakness: consumer spending is expected to increase just 1.3%, while business and residential investments are likely to fall by 0.6% and nearly 5%, respectively. Labor market data also point to a mild slowdown, with slower growth in private payrolls.
Uncertainty around the economic outlook is a key reason the Fed is likely to maintain its current policy stance. Despite political pressure from President Trump to lower rates, the Fed appears inclined to wait.
Minutes from the June FOMC meeting showed only a few officials supported an immediate rate cut, while most preferred holding off until later in the year, anticipating that tariff-related inflation will be limited and short-lived.
As a result, Wells Fargo expects the Fed to keep rates steady at 4.25%–4.5% following its July 30–31 meeting, especially as inflation remains above the central bank’s target.
Still, if inflation from tariffs proves to be modest and the labor market continues to weaken, Wells Fargo anticipates the Fed could begin cutting rates in September, with follow-up reductions in October and December, totaling 75 basis points by year-end.
