Wells Fargo experts predicted this month that the country’s top bankers would not just pump the gas a little on interest rates following a worrisome July jobs report but push the pedal to the metal.

Fears at the Federal Reserve have quickly shifted from record-high inflation to slowing labor market conditions, according to economists. And, with recession fears returned, the impact of those lower rates may be limited.

On CNBC Sunday, Wells Fargo chief economist Jay Bryson predicted the Federal Reserve would cut the rate it charges banks to borrow money by 125 basis points by the end of the year.

Bryson predicted a 50-point drop at the September meeting, another 50 points in November, and 25 points in December. Bryson thinks another 75 basis points will be cut by mid-2025.

For those keeping track, that would mean a drop from 5.33% in July to just above 4% by December.

“We haven’t been at these sorts of levels since 2007,” Bryson told CNBC. “And so, they have a lot of wood to chop just to kind of get back to neutral, and they need to kind of get back going in that direction as the economy continues to show some signs of stress.”

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Inflation Fears Have Turned to Employment Fears

At the start of 2024, Wells Fargo economists put the odds of recession at 50%. In the time between then and June, those odds dropped to 30%. But the modest 114,000 jobs added in July spooked experts.

“The July jobs report shook up the snow globe and reset expectations for the rest of the year and beyond,” the report stated. “It is an unusual state of affairs for one report to meaningfully disrupt financial markets and reframe economic expectations.”

The positivity earlier in the year may have also been misinformed. A revised look at employment showed 818,000 fewer jobs in the 12 months ending March 2024, according to the Bureau of Labor Statistics.

Wells Fargo economists predict nonfarm jobs to average 116,000 over the next 12 months compared to 209,000 averaged in the previous period.

While inflation has dictated Fed policy for the past two years, jobs may become the new challenge.

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Wallets to Tighten as Pay Raises Slow

With payroll growth slowing and unemployment rising faster than expected, consumer spending will follow, economists say. Consumer spending has been strong despite a creeping unemployment rate. But that spending has been dependent on income growth.

Experts still think spending will be positive, just moderated. Rate easing will help keep wallets from closing entirely, bankers say. Auto sales slowed in June but a preliminary look suggests July wholesale car purchases rebounded, supporting spending.

“We’ve long stressed that household spending has grown more dependent on continued growth in income, which is now losing momentum,” the report stated. “As we anticipate the labor market to moderate more significantly over the remainder of the year, we expect real disposable income growth to soften further.”

Don’t Expect Too Much From Greater Commercial Real Estate Investment

High interest rates and slowed new home sales have likewise slowed new home construction. Single-family construction permits have declined in the past five months. Multi-family construction has slumped even more.

That could reverse a little as interest rates drop and borrowing becomes cheaper for buyers and builders.

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Mortgage lenders have already built in lower-rate expectations into the price they charge borrowers for home loans. Mortgage rates dropped 40 points from mid-July to the beginning of August. Wells Fargo predicts a full 200-point drop (e.g. 6.5% to 4.5%), pushing buyer demand, builder confidence, and a return of residential investment.

“That said, the weaker growth environment for the economy and labor market will likely limit the scope for a rebound,” the report stated.

Construction of commercial real estate faces its own challenges. Office demand has been in a slump since the pandemic. Even demand for industrial buildings — once the bull in commercial construction — has lost much of its fervor.

Architectural firms have reported slowed billings for the past 11 months, according to the report. That indicator takes about a year to be reflected in construction. Interest rates could modestly help there as well.

“Looking to 2025, lower financing costs should brighten the (commercial real estate) demand environment and reduce barriers to nonresidential investment,” the report stated.