Investing.com - The Federal Reserve is tipped to cut interest rates twice this year as policymakers gauge the impact of U.S. President Donald Trump's tariffs on inflation and growth, according to analysts at Wells Fargo (NYSE:WFC).
Trump has already moved in the opening weeks of his second term in the White House to slap 10% tariffs on China, drawing countermeasures from Beijing. He has also announced duties on Canada and Mexico, but later postponed them after he received assurances from the two countries around border security.
In a note to clients on Thursday, the analysts argued that Trump will roll out more levies in the coming quarters, adding that the moves will likely be matched by retaliatory tariffs.
Economists have flagged that Trump's protectionist trading stance could refuel inflationary pressures in the U.S. A recent cooling in price growth has stalled at a level above the Fed's stated 2% target, with headline inflation in January as measured by the consumer price index coming in at a faster-than-anticipated 3%.
The possibly price-boosting effects of the tariffs could eat into incomes, leading to a downshift in U.S. economic activity over the next few quarters, the Wells Fargo analysts said.
However, they anticipate that growth will accelerate "somewhat" in 2026 as Trump's separate plans to roll out looser regulations and slash taxes should lift business investment spending and consumer spending.
Although the outlook remains "clouded" due to the tariffs, the analysts said they anticipate that the rate-setting Federal Open Market Committee -- which reduced borrowing costs by 100 basis points in 2024 -- could announce two more cuts at its meetings in September and December. The Fed is then seen leaving rates at a range of 3.75% to 4% throughout 2026, they predicted.
In January, the Fed left rates unchanged at 4.25% to 4.5%, noting signs of resilience in the broader U.S. economy and "elevated" inflation.
Markets reined in their expectations for Fed rate cuts this year in the wake of the hot January inflation data on Wednesday. Traders are now anticipating 28 basis points in easing this year, roughly equivalent to only one reduction.