What would less restrictive monetary policy mean for the growth outlook?

A less restrictive monetary policy could significantly impact the U.S. growth outlook by stimulating various economic sectors and alleviating some of the current economic pressures, Wells Fargo said in a recent report.

According to the bank’s latest U.S. Economic Outlook report, the Federal Reserve is expected to cut rates by 50 basis points at its September meeting, followed by another 50 basis points in November. This shift is anticipated to lower the federal funds rate to a range of 3.25%–3.50% by mid-2025, which many consider to be a neutral rate.

The labor market, which has shown signs of weakening, is a primary area where the impact of a less restrictive policy will be felt. The report highlights that “payroll growth has slowed markedly, and unemployment is rising faster than expected” and notes that the recent jobs report “shook up the snow globe and reset expectations for the rest of the year and beyond.”

The forecast now sees nonfarm payroll gains averaging 116,000 per month over the next 12 months, down from 209,000 in the previous 12 months. A softer monetary policy is expected to help stabilize the labor market by supporting job creation and preventing further increases in the unemployment rate.

Consumer spending is another crucial area poised to benefit.

“We have adjusted our consumer forecast and now look for real PCE to slow materially at the end of this year and start of next year before rebounding in the second half of next year amid less restrictive monetary policy,” the report states.

Lower interest rates are expected to reduce borrowing costs, thereby encouraging consumer spending and supporting economic growth. Despite a projected slowdown in income growth, consumer fundamentals and aggressive Fed easing should keep spending growth positive.

The housing market is also likely to experience positive effects from lower interest rates. The forecast indicates an upward adjustment in the residential investment outlook, driven by recent declines in mortgage rates and expectations for further rate reductions next year.

We have taken up our residential forecast coinciding with recent declines in the mortgage rate and expectations for further rate softening next year,” Wells Fargo economists wrote. This should boost buyer demand, builder confidence, and overall residential investment, although some near-term weakness is still expected due to the current economic environment.

Inflation, which has been a focal point for the Fed, is projected to moderate. The core PCE price index is expected to increase by 2.6% year-over-year in the fourth quarter of 2024, reflecting a balance between goods and services inflation.

Wells Fargo highlights that “upward pressure on prices continues to ease as input cost growth, including labor, has cooled, and weakening demand is making it harder for businesses to raise prices.”

Overall, a less restrictive monetary policy is seen as a necessary move to sustain the economic expansion that has been in place since mid-2020.