Wells Fargo economists now anticipate that the Federal Reserve (Fed) will delay its planned easing of monetary policy due to higher oil prices and persistent inflation pressures [1]. Despite these developments, Wells Fargo still projects a total of 50 basis points (bps) in rate cuts for 2026, to be delivered as two 25 bps reductions at the September and December FOMC meetings [1]. The federal funds rate is expected to remain in restrictive territory compared to the Fed's longer-run estimates, with the current spot rate around 3.625% versus the SEP's median longer-run estimate of 3.125% [1].
The economists note that the Fed faces policy trade-offs, as inflation is re-accelerating while labor markets are gradually cooling, pulling the Fed's dual mandate in opposite directions [1]. As a result, the Fed is expected to exercise 'an abundance of patience,' pushing out the start of easing but maintaining the expectation of 50 bps in cuts this year [1].
Wells Fargo highlights that the labor market remains modestly below full employment and that the recent energy price shock introduces a new downside risk [1]. While higher energy prices could feed into core inflation, this effect may be offset by slower inflation in tariff-sensitive goods [1]. Overall, Wells Fargo believes the next move from the FOMC is more likely to be a cut than a hike, although the risks are skewed toward later and/or less easing [1].
CONCLUSION
Wells Fargo expects the Fed to delay rate cuts in response to persistent inflation and higher oil prices, but still anticipates 50 bps of easing in 2026. The federal funds rate is projected to remain restrictive, with the next policy move likely to be a cut, though timing and magnitude may be affected by ongoing risks. Market participants should prepare for a cautious and patient Fed stance in the coming months.