U.S. GDP growth isn’t cooling off after all—expect more jobs, more inflation, and fewer rate cuts, Wells Fargo says

Not long ago, most economists and Wall Street analysts had a recession penciled into their economic forecasts for the U.S.: Stubborn inflation, rising interest rates, and foreign wars were sure to weigh on the economy until it cracked, they said. But throughout last year, a new narrative developed in the world of finance. 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 to start the year and continued signs of robust consumer demand have thrown cold water on the soft landing narrative, and something new is taking over: the “no landing” scenario.

Nearly half of all investors polled by Deutsche Bank in March said they expect a “no landing” scenario, where the economy continues to grow and unemployment stays low, but inflation remains an issue despite the Federal Reserve’s interest rate hikes.

The Wells Fargo Investment Institute piled on to that narrative in a note Monday upgrading its outlook for the U.S. economy. While the bank didn’t specifically predict a “no landing” outcome, researchers lifted their gross domestic product growth forecast from just 1.3% for 2024 to 2.5%—the same as last year’s rate of 2.5%.

Wells also said the U.S. unemployment rate will sit at 4.1% instead of 4.7% by the end of 2024. The tradeoff will be slightly higher inflation. The bank now sees U.S. CPI inflation of 3%, instead of its previous 2.8% estimate.

Several factors have been named to account for the unexpected strength of the U.S. economy over the past few years, including record fiscal spending, particularly on infrastructure and semiconductors; the housing market’s resilience to higher rates owing to post–Global Financial Crisis policy changes and supply issues; and even “greedflation.”

But Wells Fargo said the economy has outperformed expectations because financial conditions—a measure of the availability and cost of borrowing, as well as risk and leverage in financial markets—are actually accommodative, despite the Fed’s rate-hiking campaign.

To that point, the Chicago Federal Reserve’s National Financial Conditions Index has been in accommodative territory throughout the Fed’s hiking cycle, and decreased to –0.53 in the week ended April 5—its lowest level since February 2022.

View this interactive chart on Fortune.com

More growth and more employed Americans are typically good news for markets, and that’s what Wells Fargo sees in 2024. The bank’s economists and researchers 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 don’t expect a banner year, and that’s largely because of Fed policy.

Last year, most economists were forecasting three market-juicing interest rate cuts in 2024, with some predicting as many as six. But with inflation proving more difficult to tame than anticipated, and the economy still running strong, that forecast is shifting. Wells Fargo is now expecting just two interest rate cuts in 2024, starting this summer, followed by one more cut in 2025. That would leave the Fed funds rate in a range 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 might even prove optimistic after Monday’s retail sales report served as yet another piece of evidence that the economy is still running hot. Retail sales jumped 0.7% month over month in March, the Census Bureau reported, compared with economists’ consensus expectations for a 0.4% rise.

Sam Millette, senior investment strategist for Commonwealth Financial Network, noted that bond yields rose after the report, “due to rising concerns of a potential no-landing, no-rate-cut scenario.”

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

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

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

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

This story was originally featured on Fortune.com