Investing.com -- Wells Fargo projects real GDP will expand at a 3.0% annualized rate in the third quarter, driven by strong consumer and business spending. The bank downgraded its previous forecast, attributing the change primarily to net exports.

Artificial intelligence investment continues to drive business spending growth, even after accounting for imports. Wells Fargo acknowledges that AI spending must eventually slow as investment matures, though the bank does not expect outright declines, particularly as capital expenditures expand to other areas.

The bank expects fourth-quarter inflation to reach 3.2% on a quarter-over-quarter basis, incorporating new methodological changes. Excluding energy prices, the inflation trend remains largely favorable, with tariff effects fading and shelter inflation cooling. Price pressures remain limited to a few categories related to AI infrastructure development.

The August employment report reduced labor market downside risk. The unemployment rate remains low, turnover is subdued, and current wage growth is not inflationary, indicating the labor market remains balanced.

Wells Fargo changed its federal funds rate forecast to 4.00-4.25% by year-end 2026, with no changes expected in 2027. The bank stated it is difficult to justify hiking beyond that level when excess inflation is largely supply-driven and the labor market is not overheating.

The bank expects long-term yields will not fall substantially, as the floor under longer-term interest rates has moved higher due to solid growth expectations, strong corporate and treasury bond issuance, and monetary policy uncertainty. Housing and other rate-sensitive sectors may face pressure as yields normalize to more typical historical levels.

Global policy risks lean toward prolonged restraint, as persistent inflation continues to constrain major central banks across advanced economies.