US Dollar: Fed path and inflation risks – Wells Fargo

Wells Fargo Economics, led by Tom Porcelli and colleagues, expects the Federal Reserve to keep the fed funds rate at 3.50%-3.75% through year-end 2027, with 10-year Treasury yields near 4.35% in 2026 and 4.30% in 2027. Despite a more hawkish tone, they still see scope for patience if inflation cools and the labor market stays balanced.

Policy rates seen steady into 2027

"Our base case remains for the FOMC to stay on hold this year, but the potential for hikes is high."

"Our fed funds forecast remains unchanged, as we continue to look for the FOMC to keep the fed funds rate steady through year-end 2027 at 3.50%-3.75%. Our forecasts for the 10-year Treasury yield at year-end 2026 and 2027 are also unchanged at 4.35% and 4.30%, respectively."

"If the worst of the energy and tariff supply shocks are truly behind us (a big if, we know), and if the labor market is not overheating (we don't think it is), we think there is a path for the Fed to remain patient, keep the policy rate unchanged, and await softer inflation readings in the months ahead."

"Accordingly, we look for the yield curve to bull steepen modestly as the market's rate hike expectations are slowly dialed back in the month ahead."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)