Wells Fargo expects Fed to hike rates one more time in 2026

Wells Fargo anticipates the Federal Reserve will raise interest rates one additional time in 2026. The bank projects U.S. real GDP growth to be 3.0% annually in the third quarter, fueled by robust consumer and business spending. A significant factor behind this forecast is the surge in artificial intelligence investment, which continues to fuel business spending growth even after accounting for imports.

However, Wells Fargo acknowledges that AI spending will eventually decelerate as the investment matures, though it does not foresee a downturn, especially with capital expenditures expanding to other sectors.

For the month of August, the employment report decreased the labor market's downside risk, with a low unemployment rate, limited turnover, and wage growth not causing inflation. Despite this positive signal, Wells Fargo has revised its federal funds rate forecast to range between 4.00% and 4.25% by the end of 2026, with no additional hikes anticipated for 2027.

The bank believes it would be unreasonable to raise rates further when the root cause of excess inflation is primarily supply-driven and the labor market is not overheating.

Wells Fargo forecasts long-term yields will not experience a significant decline due to the higher floor under longer-term interest rates, resulting from robust growth projections, substantial corporate and treasury bond issuance, and monetary policy uncertainty. However, the normalization of yields to more typical historical levels could put pressure on housing and other rate-sensitive sectors.

Moreover, global policy risks indicate a tendency toward prolonged restraint, as persistent inflation continues to limit major central banks' actions across advanced economies worldwide. This report was generated with the assistance of AI and reviewed by a human editor.