Wells Fargo Projects One Final Fed Rate Hike to 4.00-4.25% by End of 2026

Wells Fargo has adjusted its monetary policy outlook, now forecasting the Federal Reserve will implement one more interest rate hike by the end of 2026. The bank projects the federal funds rate will reach a target range of 4.00-4.25% before holding steady through 2027.

Economic Outlook

The bank's forecast is underpinned by a robust view of the U.S. economy, with real GDP projected to expand at a 3.0% annualized rate in the third quarter. This growth is driven by strong consumer and business spending, particularly investment in artificial intelligence infrastructure. Wells Fargo noted this GDP forecast was downgraded slightly due to the impact of net exports.

On inflation, the bank anticipates a 3.2% quarter-over-quarter reading for the fourth quarter. However, analysts see a largely favorable underlying trend, with cooling shelter inflation and fading tariff effects. The report stated that current price pressures are limited to a few specific categories related to AI development.

Labor Market and Fed Rationale

Wells Fargo's call for a terminal rate in 2026 stems from its analysis of the labor market and the nature of inflation. The bank cited the August employment report as reducing downside risk, pointing to a low unemployment rate, subdued turnover, and non-inflationary wage growth as signs of a "balanced" market.

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According to the bank, it is difficult to justify hiking rates beyond the 4.00-4.25% level when excess inflation is largely supply-driven and the labor market is not overheating. This view suggests the Fed can achieve its goals without further significant tightening.

Market Implications

Wells Fargo does not expect long-term yields to fall substantially, arguing that the floor for longer-term interest rates has moved higher. This is attributed to several factors:

• Solid economic growth expectations
• Strong corporate and Treasury bond issuance
• Persistent monetary policy uncertainty

This environment could exert pressure on rate-sensitive sectors, such as housing, as yields normalize to more typical historical levels. Globally, the bank noted that policy risks among major central banks in advanced economies lean toward prolonged monetary restraint due to persistent inflation.