The bank now projects real GDP to grow by 2.0% in 2025, down from the previous estimate of 2.7%. This adjustment reflects the anticipated impact of a 30% tariff on Chinese imports and a 5% tariff on all other imports, measures that could dampen economic momentum in the latter half of the year.
The report points out that tariffs imposed during President Trump’s previous administration prompted retaliatory actions from trading partners, resulting in reduced exports and suppressed real incomes.
The new tariff plans are expected to have a similar effect, with inflationary pressures likely to hit lower-income households hardest, given their reliance on imported goods. Despite current solid income growth, “the inflationary boost from tariffs would likely weigh on consumer spending,” the report says.
Businesses are already bracing for the impacts. Wells Fargo highlights contrasting sentiments among manufacturers, with some domestic producers expecting improved demand, and others worrying about rising costs and limited alternatives to Chinese inputs. The services sector is also expressing concerns about potential cost increases, further clouding the outlook for investment and employment.
Meanwhile, the US labor market, while resilient, is showing signs of softening. Payroll growth remains concentrated in a few sectors, and the unemployment rate is edging upward.
With tariffs potentially exacerbating these trends, Wells Fargo forecasts that the Federal Reserve will prioritize mitigating GDP and employment risks over controlling inflation.
The bank expects the Fed to enact additional rate cuts, reducing the federal funds rate to a range of 3.50%-3.75% by late 2025.
Also, disinflation continues “at a frustratingly slow pace,” strategists note, with the Fed’s preferred inflation gauge showing little change over the past six months. While goods deflation has slowed, services inflation pressures remain firm. November’s Consumer Price Index exceeded expectations but showed a positive deceleration in services inflation.
Looking beyond 2025, economic growth is expected to rebound to 2.2% in 2026, driven by a lighter regulatory environment and potential tax relief measures.
“Growth appears likely to pick up in 2026 once the initial impacts of the tariffs fade and the full suite of Republican policy changes go into effect,” Wells Fargo strategists said in a note.
“Specifically, the economy would receive a boost from a lighter regulatory touch and the prospect of additional modest tax relief for households beyond the extension of the Tax Cuts and Jobs Act (TCJA) of 2017.”
Source: Economy - investing.com
