Wells Fargo sticks with two Fed cuts after inflation shock

Wells Fargo is still telling clients to expect two Federal Reserve cuts in 2026 even as futures traders swing the other way, a split that has turned into one of Wall Street’s sharpest macro arguments over what the latest inflation scare actually means. In its 2026 outlook, the bank’s economists wrote: “For 2026, we look for two additional 25 bps rate cuts by mid-year,” leaving the expected terminal rate at 3.00%-3.25%. That call now sits against a market that, per Reuters, had priced the probability of the Fed’s benchmark rate sitting 25 basis points higher by January’s FOMC meeting at roughly 60 per cent. CNBC had traders assigning a 51 per cent chance the next move would be a hike by December.

Different clocks. That is the cleanest way to read the clash. Wells Fargo is trying to map where policy ends up once the current inflation scare fades. Markets are pricing what can go wrong first.

In its April US economic outlook, Wells Fargo argued the inflation shock looks temporary enough, and labour conditions soft enough, for easing to resume by mid-year. This is a path forecast, not a tradeable headline — it does not require the next print to look benign. It requires the recent run of hot data to fade rather than compound, and it assumes the Fed will still have room to validate easing once activity cools. Banks make that kind of argument because they are paid to model a destination. They can sit through interim volatility if they think the endpoint survives.

Markets do not price the same way. Futures contracts absorb each surprise in real time and make investors pay up for protection when the data turn ugly. A forecast for two cuts and a market-implied risk of a hike are not mirror images: they weight different hazards. Wells Fargo is effectively saying the bigger mistake would be to overreact to a burst of inflation that may not last. Traders are saying the bigger risk is that the Fed cannot afford to sound relaxed while price data keep coming in hot and yields keep pushing higher.

That distinction matters well beyond Fed-watcher circles. Once investors stop debating when easing starts and start debating whether easing survives at all, every duration-sensitive asset gets judged against a higher bar. Equity multiples, credit spreads and the dollar all lean on a steeper hurdle rate. This is not a 25 basis point argument anymore. It is a ranking of risks.

Why the market flipped

Hot inflation and rising yields are doing most of the work in the repricing Reuters and CNBC described. Investors no longer treat firm inflation as a nuisance that merely delays cuts by a meeting or two. They are starting to treat it as evidence that policy may still need to lean tighter, or at least stay restrictive for longer than most had pencilled in. That is how a market goes from shaving a cut or two to entertaining a hike.

The leadership backdrop sharpens the move. Kevin Warsh is walking into a market more sensitive to inflation surprises and less willing to assume the Fed can glide back toward easier policy on schedule. Reuters said he faces “a difficult messaging problem when he takes the reins from Powell.” Messaging is not cosmetic when the rates market is moving this fast. A new chair inheriting hotter inflation and a hawkish repricing has less room to sound reassuring without inviting a credibility test from traders.

Wells Fargo is not automatically wrong. But holding onto two cuts here requires a forecaster to believe the inflation burst will cool, the labour market will lose enough momentum to matter, and the Fed will still be able to validate easing by mid-year. That is what makes the call genuinely contrarian.

There is also a sequencing problem. Markets can price a hike risk long before they decide a hike is the base case, just as economists can keep a cut forecast in place long before the incoming data fully justify it. That leaves a window in which both views look internally consistent. Wells Fargo can argue the destination remains lower. Traders can argue the path to that destination has become rough enough to demand a higher premium right now.

Markets are not willing to prepay for that outcome. They are pricing the next shock first and the soft-landing story second, which is why Wells Fargo’s 3.00%-3.25% end-point now reads less like a base case to traders than a bet that the current scare burns out.

The next few releases will decide whether that bet looks early or wrong. If inflation cools and labour conditions soften, Wells Fargo will look stubborn in the useful sense: willing to sit through a violent repricing without mistaking it for a new regime. If price pressure stays hot and yields keep climbing, the market’s turn toward hikes will start to look less like a tactical hedge and more like the path of policy itself.