Powell's final months mark pivotal period for US monetary policy, Wells Fargo analysts say

• Wells Fargo forecasts two 25 basis point rate cuts in March and June, bringing the federal funds rate to 3%-3.25%, followed by a prolonged pause
• Unemployment at 4.4% remains above estimates of the natural rate, while core CPI has cooled to 2.6% from above 3% earlier in 2025
• Analysts warn the 'window for additional cuts is starting to close' due to expected fiscal stimulus, easing financial conditions, and potential economic growth firming through spring and summer

Summary

Wells Fargo analysts identify early 2026 as a critical juncture for US monetary policy as Federal Reserve Chair Jerome Powell approaches the end of his term amid policy divisions and mounting external pressure.

Labor Market and Inflation Trends

The unemployment rate declined to 4.4% in December but remains above long-run natural rate estimates, indicating persistent labor market slack. Private sector job growth has approached zero in recent months. On inflation, core CPI eased to 2.6% year-over-year in December from above 3% earlier in 2025, showing encouraging progress. While PCE inflation improvement has been less dramatic, analysts believe underlying disinflation trends remain intact despite 2025 tariff impacts.

Policy Outlook

Wells Fargo maintains its base case forecast of two 25-basis-point rate cuts at the March and June FOMC meetings, followed by an extended pause with the federal funds rate settling at 3%-3.25%. However, analysts warn "the window for additional cuts is starting to close" due to expected fiscal stimulus, easing financial conditions from previous cuts, and potential growth from lower tariffs.

Key Risks

The analysts note risks are "increasingly skewed toward later and/or fewer rate cuts this year" as economic growth is expected to strengthen through spring and summer. If labor market or inflation data runs hotter than expected, the Fed may maintain current policy unchanged. The incoming Fed chair may face heightened scrutiny from both the FOMC and the Trump administration, adding uncertainty to future policy direction.

Analysts emphasize that restrictive policy appears unwarranted based on labor conditions alone, though the overall economic outlook may limit additional easing.