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US GDP growth isn’t slowing down after all – expect more jobs, more inflation and fewer interest rate cuts, says Wells Fargo

Not long ago, most economists and Wall Street analysts had included a recession in their economic forecasts for the US: persistent inflation, rising interest rates and foreign wars would surely weigh on the economy until it burst, they said. But over the past year, a new story has developed in the financial world. With consumers proving their resilience to higher interest rates and inflation cooling, most experts began to see a “soft landing” – where growth slows but the economy avoids a recession – as the most likely outcome.

Now, three hot inflation reports at the start of the year and continued signs of robust consumer demand have put the soft landing narrative cold, and something new is taking over: the ‘no landing’ scenario.

Nearly half of all investors surveyed by Deutsche Bank in March said they expect a “no landing” scenario, in which the economy continues to grow and unemployment remains low, but inflation remains a problem despite Federal interest rate hikes. Reserve.

The Wells Fargo Investment Institute expanded on that story in a note Monday that upgraded its outlook for the U.S. economy. Although the bank did not specifically predict a ‘no landing’, researchers increased their gross domestic product growth forecast from just 1.3% for 2024 to 2.5% – the same as last year (2.5%).

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Wells also said the U.S. unemployment rate will reach 4.1% at the end of 2024 instead of 4.7%. The trade-off will be slightly higher inflation. The bank now expects US CPI inflation of 3%, down from the previous estimate of 2.8%.

Several factors have been cited as responsible for the unexpected strength of the U.S. economy in recent years, including record budget spending, especially in infrastructure and semiconductors; the resilience of the housing market to higher interest rates due to policy changes following the global financial crisis and supply constraints; even “greedflation.”

But Wells Fargo said the economy has performed better than expected as financial conditions — a measure of the availability and cost of borrowing, as well as the risk and leverage in financial markets — are effectively accommodative despite the Fed’s rate hike campaign.

Until then, the Chicago Federal Reserve’s National Financial Condition Index had been in accommodative territory throughout the Fed’s rate hike cycle, falling to -0.53 in the week ending April 5 – the lowest level since February 2022.

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Check out this interactive chart on Fortune.com

More growth and more jobs in the US are generally good news for the markets, and that’s what Wells Fargo sees for 2024. The bank’s economists and researchers have upgraded their S&P 500 target from a range between 4,800 and 5,000 to a range between 5,100 and 5,300. Still, they are not expecting a banner year, and that is largely due to the Fed’s policies.

Last year, most economists predicted three market-undermining rate cuts by 2024, while some predicted as many as six. But now that inflation is proving harder to curb than expected and the economy is still going strong, those predictions are shifting. Wells Fargo now expects just two rate cuts in 2024, starting this summer, followed by another cut in 2025. That would leave the fed funds rate between 4.75% and 5% at the end of this year, and 4.5%. % to 4.75% at the end of 2025.

Wells Fargo’s outlook may even prove optimistic after Monday’s retail sales report provided yet more evidence that the economy is still going strong. Retail sales rose 0.7% month-on-month in March, the Census Bureau reported, compared with economists’ consensus expectations for a 0.4% increase.

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Sam Millette, senior investment strategist at Commonwealth Financial Network, noted that bond yields rose after the report, “reflecting growing concerns about a possible no-landing, no-rate-cut scenario.”

“While the strong sales growth is a good sign for economic growth in the quarter, the increase in consumer spending could contribute to high consumer prices and trigger additional inflation,” he said. Fortune via email.

But Wells Fargo economists argued Monday that the economy’s “shift” into a faster growth mode “will likely be modest.”

“On balance, we believe the economy is still slowing, which should cool inflation and allow modest easing of interest rates and credit conditions through 2025,” they wrote.

Overall, Wells’ team said they expect a strong dollar, rising commodity prices, robust earnings and relatively smooth financial conditions in 2024 and 2025. And with the threat of geopolitical tensions and foreign wars, they reasoned, investors should expect volatility.

This story originally appeared on Fortune.com

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