By early May, equity markets had rebounded from April’s losses, and recent data has yet to show a sharp drop in economic activity. Market volatility has also eased, with the VIX falling back to the low 20s, just above its long-term average.
Still, the outlook remains uncertain. While trade dragged down GDP in Q1, that effect is expected to reverse later this year as domestic demand softens and net exports offer a modest, though temporary, boost. A notable slowdown is likely in Q3, as consumer and business spending taper off following a pre-tariff surge, potentially resulting in a decline in GDP.
The labor market continues to cool gradually, but we expect hiring to stall and unemployment to rise by year-end. This mirrors conditions in late 2024, when the Fed cut rates by 100 basis points over three meetings. We forecast a similar pace of cuts this year, bringing the fed funds rate down to 3.50% before the Fed holds steady through 2026.
Unlike last fall, inflation may be rising this time due to tariffs. The Fed is expected to look past the short-term spike, assuming inflation expectations remain anchored.
*Article courtesy of Wells Fargo
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