The Decisive | Season 4 Ep.17 - Optimism and Uncertainty: The 2026 US Economic Outlook

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Kristen Hallam: 

You’re listening to the Decisive Podcast—insights and analysis to empower confident decision making. 2025 was a turbulent year that included sharp increases in tariff rates, volatility in financial markets, and historically elevated uncertainty. So far, the U.S. economy has fared well, with growth this year near its potential, and unemployment remaining low. As 2026 approaches, our economists have been reviewing the drivers of our forecast for the year ahead. They are here today to share their insights on some key themes in the outlook, including artificial intelligence, Federal Reserve independence, tariffs, and the state of the labor market.  

Let me introduce them now. Ben Herzon, Ph.D. executive director and co-head of U.S. economics; Patrick Newport, Ph.D executive director and co-head of US economics; Michael Zdinak, Ph.D. director, US economics; and Lawrence Nelson, senior economist, US economics. I'm Kristen Hallam, Lead Content Strategist, and I'll be your host for this discussion today.  

Now let's kick things off with our outlook for 2026, which is rather optimistic. Michael, what are some of the key drivers of the outlook for growth in 2026 and how is the forecast for next year shaping up? 

 

Michael Zdinak: 

Thank you, Kristen. 2025 was unusually uncertain, and when we talk about that uncertainty, we're talking not just about the impacts of policy, but the direction. Here we have a list for you some of the drivers of the uncertainty in our forecast for 2025. It's no secret or of course there was the uncertainty surrounding tariffs, but that led to uncertainty surrounding swings in the source data for GDP, which naturally led to the question of what would the impact be of so much uncertainty in the forecast more broadly. And of course, there was the most recent uncertainty surrounding the impact of the government shutdown.  

So looking ahead to 2026, when we talk about next year, by comparison, the outlook is broadly optimistic and for roughly three reasons. First, there's no recession in our baseline forecast for 2026. And in addition to that, we're in the top third of the blue chip panel looking at growth of around 2.2% compared to a consensus estimate of 1.8%. And for the third reason that our outlook is broadly optimistic is that this is in comparison to what is historically low measures of consumer sentiment. And there's constant talk of whether or not we're on the brink of a recession. Clearly, we don't think so, and there are two reasons for that. First, there's less policy uncertainty heading into next year, though uncertainty remains, but the picture is much clearer. And second, equity markets have recovered strongly this year. Yes, they are increasingly sanguine about the impact of tariffs. But that can be for two reasons. 

Back in April, when markets roiled, we assumed that there would be a recovery in equities. And we've seen that this year. Now, looking ahead to 2026, the question is, do you believe equities are sleeping on the impact of tariffs? Or perhaps markets have decided that the impact isn't going to be as large as they once feared. But a lot of that is backward looking. But if we look forward to 2026, we're back to a world where growth is driven more by fundamentals. The question was about tailwinds. First, what's going to boost growth next year? I'll talk about that and what I have listed here is loosely in order of timing and magnitude. 

Let's get started. First tailwind I have for you is the recent budget legislation which introduced large cuts to the personal tax rate. We see this as boosting disposable income in the first half of 2026. And so that means consumers are going to have more money in their pockets and, and may be feeling a little bit better this time next year. This might come as a surprise to them because of the way these tax cuts are retroactive. So when they go to file next year, they're going to find that they're getting a larger return than they would have otherwise. A second tailwind is at the same time we see increases in federal spending on things like both defense and border security. This is going to enhance government consumption. 

And in terms of annual increases, 2026 is large and it's relative to both what we expected back in June and what the CBO has in their baseline as well. Both of these cushions are going to provide a floor to consumption next year, especially in the first half. And so when we look ahead, it's one of the main reasons why our outlook is more optimistic. If we turn to other tailwinds in addition to these two major factors, we have a narrowing of the mortgage spread. Rates aren't coming down as quickly as they would have otherwise, but they're still expected to come down. And this means there's going to be some modest support for housing than there would have otherwise been. At the same time, we're also looking for production to increase to address an underbuild of inventories that we see at a macro level. And this will also support growth.  

In addition to tariffs having negative effects in terms of pass through to consumer prices, they're also going to be contribute as a tailwind in respect that higher import costs are likely to redirect some domestic demand to domestic producers. Now, this will happen primarily where capacity is available, but if and when it does happen, it'll provide a boost to those local economies. That concludes our talk of tailwinds for today. 

 

Kristen Hallam: 

Michael, you've made a strong case for growth for 2026, but what about potential headwinds? What potential headwinds could challenge this outlook for 2026? 

 

Michael Zdinak: 

When you talk about tailwinds, you also have to talk about headwinds. So in addition to the fallout from tariffs, which we're already that we are all very aware of, and the question of if and when those will pass through consumer prices, I have a couple other things that I'd like to point out for you this year which are adding drag to our expectations for growth. The first is that firms are facing the highest real borrowing cost in about 15 years. And we don't expect that to fall next year. So that combined with increases in trade policy uncertainty are going to weigh on business fixed investment heading into next year. Same time, the price of risk is expected to rise in the year ahead as credit spreads normalize, which is also going to raise the cost of borrowing. This combined with what we have as a decline in equities in our outlook in response to a raising equity risk premium is going to add drag to growth. The baseline we have correction in our forecast is about 9% next year for equities. And it's primarily in response to this rising cost of risk.  

Elsewhere we have federal spending. We said it increased for things like border defense spending, but it's declined in other areas. So tailwinds that we've enjoyed in recent years from things like the Inflation Reduction Act and the Infrastructure Investment and Jobs Act are no longer going to be providing the boost to growth they once were. And this is now. This is a tailwind that has turned into a headwind in our forecast.  

And the final headwind that I have for you today is a broad slowdown in immigration. In our forecast, this shows up primarily in the decline of the growth rate of the population or the rate of household formation. And the way to think about this is simple and straightforward. When you're talking about economic growth, there are two easy ways to increase the size of an economy. Have more people, or make them more productive. And so fewer immigrants mean there's fewer people and less boost to growth. When we put these headwinds and tailwinds together, we come up with a picture for our outlook of next year where, yes, growth is slowing, but it's doing so unevenly towards potential. So our baseline is again, not a recession for next year. We actually think that the personal tax cuts and the increase in federal spending are going to be sufficient to boost growth above 2% next year. 

 

So as long as nothing breaks, we're going to be looking at a world where the unemployment rate isn't going to be expected to rise dramatically and instead it's going to peak around 4.5%, where it will likely remain for some time. And so these are things that we're going to be keeping a close eye on next year because it's going to be a signal for how resilient label markets are and how they're responding to changes that we expect to see. 

 

Kristen Hallam: 

All right, we're going to come back and fill in some more details on tariffs and equities. But before we get to that, Michael, how did the federal government shutdown shape the near-term forecast? 

 

Michael Zdinak: 

Yeah, when talking about the shutdown, it's important you separate the direct and indirect effects. Our November forecast assumes a six-week shutdown, very close to what we've seen. And that contributes to a reduction to fourth quarter GDP by about 0.8 percentage points. So a little less than 1%. That's the direct impact and that's the loss of government services that furloughed employees would have otherwise provided. So when people are being paid to not work, that's a hit to the price index for GDP. The indirect impact is what everyone's always asking about. What is the consequence of the loss of private sector activity that is supported either by the government or how consumers respond to this uncertainty by pulling back in consumption? 

That's hard to measure and we don't have that directly included in our November baseline. So that's a risk to our forecast. But anecdotally, in terms of the data that we've seen from the private sector and the data that I have for you, where you look at air travel, there doesn't have appeared to be a large retrenchment in consumer spending. Yes, consumers aren't happy about the shutdown, but they haven't really changed their spending behavior. Air travel this year was near where it was last year, actually even a little bit higher through the end of last week. And we've seen no reports from stores of collapse in demand. So as government starts to reopen and we start to get more data. That's one thing that will be keeping a close eye on: Are there any indirect effects of this now historically long shutdown and how does that change our outlook for not just the fourth quarter but heading into next year? There's always the chance that spending that was put off now will show up later. 

 

But with the timing of the shutdown, it being very near the beginning of the fourth quarter, there's plenty of time for businesses and consumers to make up that activity this year. So we expect the effects to our baseline is that they'll be small. 

 

Kristen Hallam  

Thank you, Michael. 

 

Michael Zdinak: 

Thank you. 

 

Kristen Hallam: 

Ben, let's bring you in. Artificial Intelligence AI of course is on our clients’ minds and I assume it's on your mind as well. Where are you seeing the effects of AI in the data that you track and how does AI factor into the forecast for 2026 and beyond? 

 

Ben Herzon: 

Thanks, Kristen. Well, we think of AI as occupying three spaces in the macroeconomic data. First is the investment spending involved in putting AI capabilities into place. Second is the contribution to overall equity valuations from companies involved in the development and provisioning of AI services. And third is the productivity gains that will ultimately result once AI is incorporated broadly into work streams. Now first, on productivity gains, our forecast assumes that the adoption of AI into workflows adds 0.1 percentage point per year to trend productivity growth. There's a wide range of estimates out there. I would say our estimate is on the more conservative side. 

It is what it is, 1/10 per year. On the investment piece, spending on data centers and computers has been rising rapidly over the last couple of years. But for these, the GDP impact is small as data centers represent a small share of spending and computers are largely imported. So a lot of growth there, but not a lot of GDP impact. Now investment in intellectual property products, however, which includes a lot of the AI related investment, is a large share of investment spending and it rose rapidly in the first half of 2025. In fact, growth of this spending component contributed an average of 0.6 per quarter to GDP growth over the first half. So it's a pretty, pretty big deal. 

Regarding AI and equity valuations, AI companies have in fact enlarged in the S&P 500 over the last couple of years, and that's probably not a surprise to a lot of our clients. Since January 2024, the S&P 500 has risen a whopping 42%. Over the same period, the market cap of a handful of companies within the S&P 500 that are commonly associated with AI rose 90%, so nearly doubled in value and accounted for nearly two thirds of the overall gain in the S&P 500 over this period.  

Now, an index that we constructed using the same methodology as The S&P 500 that excludes this handful of AI companies rose 20% over this period, which is still a pretty solid gain. But there's no doubt that AI is fueling rapid gains in broad equity valuations. Turning to how AI factors into the forecast, we view AI as imparting risk to the forecast both on the positive side and on the negative side. On the positive side, our forecast assumes that growth of spending on intellectual property products, which was rising so rapidly over the first half, we're assuming that growth of that component slows to below rates seen over the first half of this year. So if instead growth of that spending component remains elevated, then we would likely see GDP growth stronger than what we have in our baseline. So there's the positive risk. 

On the negative side, our forecast assumes a 12% decline in the S&P 500 from current levels over a period of about two years. Now this would be consistent with the AI stocks that I mentioned, giving back roughly 1/2 of the gains that they saw since January 2024. Now, a full return to January 2024 valuations for these AI stocks would imply roughly a 20% decline in the overall S&P 500 over the next couple of years. So this would have a negative impact on the near-term growth outlook. 

 

Kristen Hallam: 

Thank you, Ben. Now, another topic that's been top of mind for our clients is tariffs. So Ben, could you summarize what tariffs are currently in place and what we're expecting going forward? 

 

Ben Herzon: 

Sure. So the tariffs that are currently placed include various country specific tariffs that have been authorized under the International Emergency Economic Powers Act or IEEPA. These tariffs include the reciprocal tariffs that currently range from 10% to 50% depending on the country of origin. They also include tariffs on imports from Canada and Mexico and China, whose justifications are tied to immigration and fentanyl flows. Now also in place are various sector-specific tariffs, also known as section 232 tariffs on commodities like autos, parts, steel, aluminum, copper and various lumber products. So that's what's in place now. Regarding what to expect going forward, we expect new section 232 tariffs on semiconductors and critical minerals to come online within the next year or so. But the bigger question for the outlook is whether the Supreme Court will rule in favor of or against the legality of the tariffs that have been authorized under IEEPA. 

These tariffs account for the biggest chunk of tariff revenues. And our view is if the Supreme Court does strike down the IEEPA tariffs, they would quickly be replaced by tariffs similar in scope but authorized under different statutory authority. So the president, the administration, does have options here.  

 

Kristen Hallam: 

Thank you, Ben. That's really good context to have. Now, Michael briefly touched on this, Ben, but could you elaborate on how these tariffs are factoring into the forecast? 

 

Ben Herzon: 

Yeah, so they're factoring in a few places. As Michael noted, they're giving rise to inflation that is preventing what would otherwise have been a faster easing of monetary policy. This is keeping financial conditions generally tighter than they otherwise would have been and are weighing on interest sensitive sectors of the economy. But again, it's not just the tariffs themselves, it's the uncertainty surrounding the tariffs, which is probably also weighing on some types of investment spending. Finally, as Michael noted before, that tariffs do make imports expensive and are expected to redirect domestic demand to domestic producers where close substitutes and capacity are available. 

 

Kristen Hallam: 

So one more question on tariffs for you, Ben. Have we seen their full impact or is there more to come? 

 

Ben Herzon: 

Yeah, so the benefit to domestic producers, which you just mentioned, that will play out over several years. So as long as tariffs remain in place, there's more to come there. With regard to the impact of tariffs in financial markets, financial markets are broadly forward looking, so sort of a big surprise on tariffs. We’ve probably seen much of the impact there, but on inflation we do think there is more to come. Tariffs have been slow to pass through to consumer crisis. Part of the reason is that businesses stockpiled inventories early in the year prior to the broad imposition of tariffs so that they can use and sell commodities at pre-tariff prices. This is probably still helping to limit the pass through of tariffs to price gains. Another reason is that businesses are simply not importing as much from higher tariffed countries as they used to. 

And this is preventing what would otherwise be a larger increase in the actual average effective tariff rate. And finally, we do believe that businesses are to some extent absorbing the cost of tariffs in their profit margins. We think each of these factors which are limiting inflation are temporary in nature and that while the process has been slow, tariffs will continue to push through to prices. That's why we don't have core PCE inflation. We have it continuing to rise into next year and not reaching a peak until the second quarter of next year. 

 

Kristen Hallam: 

Right. Thank you so much, Ben. Now we're going to turn to themes in the labor market with you, Pat.  

 

Pat Newport: 

Yes. The unemployment rate today is the most important indicator of the state of the labor market, and that's because of slowdowns in both demand and supply for labor that are difficult to measure. The demand for labor is slowing because of a slowdown in economic activity, and the supply of labor is slowing because of reduced immigration and deportations. We don't know how many immigrants have entered or left the country this year. Any estimate is highly imprecise. 

So the unemployment rate increased from 3.5% in July 2023 to 4.2% percent in June 2024. And that had settled down, suggesting that the economy had hit some equilibrium. However, lately it has been inching up and the latest reading for August, 4.3% was the highest since October 2021. And this is telling us labor markets are not as tight as they were a year ago and that the economy may be weakening. 

 

Kristen Hallam: 

So, Pat, now the initial estimate for payroll employment has been revised down. Why is that? 

 

Pat Newport: 

Well, it could just be chance, but it could also be something else. Erica Groshen, the former commissioner of the Bureau of Labor Statistics and also a former classmate of mine in grad school, has suggested that it might indicate that some companies are stressed. So when a company is stressed, it diverts resources to maintaining its business and less resources to filling out voluntary surveys. So but the bottom line is really that we really don't know why the payroll estimates have been revised down.  

 

Kristen Hallam: 

Thank you, Pat. So until recently, one way to describe the labor market was low hire, low, fire. Has that changed recently? And what is the outlook for payroll employment? 

 

Pat Newport: 

Yeah, it may have changed recently. There may be even slower hiring. It appears that payroll employment may have stalled and indeed it may be contracting. That's what the ADP numbers are telling us. They had a 42,000 number gain in October, but for the last three months ending in October, the ADP numbers increased by only an average of 3,000 private sector jobs a month. So if you include federal job losses, you're looking at negative numbers for September. And another thing to keep in mind is that because of the shutdown, we may have to wait until January before we get a good reading for how the labor market is today. 

And that's because the BLS did not collect data during the shutdown. And the combination of the shutdown and the Thanksgiving holidays means that the BLS will have fewer than 10 days to collect data for November. So we may have to wait for December's report, which comes out January 9, to get a good reading on where we are today. 

 

Kristen Hallam: 

Quite a wait. So something to look forward to in the new year. So the battle against inflation appears to have stalled. Is the labor market partly responsible for that? 

 

Pat Newport: 

I don't think so. So nominal wages are growing about 3.5, 3.7% in August and real hourly wages are growing about 1% and productivity is growing between 1.5 and 2%. And so wage growth between in the 3.5% to 4% range is uninflationary. And so it's not an issue. 

 

Kristen Hallam: 

Now you mentioned that fewer businesses are participating in surveys, fewer households are participating in surveys. Could you briefly talk about how this is affecting the employment report? 

 

Pat Newport: 

Yes, it's probably degrading the data. So current employment statistics response rate has dropped to 43% from 60% 10 years ago. And the current population household survey response rate has dropped to 68% from 87% 10 years ago. So the standard errors for the estimates are bigger than they were 10 years ago. And one way of overcoming this problem is just to increase the sample size. But the drop in the response rate is a significant issue. If those not responding to the survey would offer different responses from those who do respond to the survey. That's called nonresponse bias.  

And most surveys may be suffering from non-response bias. So with the CPS, I think a big problem is that undocumented workers are not well represented in the surveys. We have about 50 million workers in the labor force who are foreign born and of those between 10 to 15 million are undocumented. So those who are here legally tend to respond to the survey, but the undocumented tend to not respond. So if the unemployment rate or the participation rate of those who are undocumented is significantly different from the rest of the labor force than we'll get a bias in the survey. The problem is that we don't know what the unemployment rate is and what the participation rate is for undocumented workers because they're not in the survey. And it's the same thing with the CES. 

So, only 43% of firms are agreeing to participate in the survey, so the thing that we don't know is if the non responding firms if that's one of the significant reasons that the CES numbers are being revised by large amounts by two straight years. Some analysts have inferred that the native-born population and labor force is surging and the foreign-born labor force has dropped by 2 million this year. But if you examine the population data closely, you can see what's going on. So the population numbers in the employment report are projections. But the problem is the sample is skewed against the foreign born because there are so many undocumented workers not participating in the survey. 

 

Kristen Hallam: 

Thank you so much, Pat, for that discussion of the labor market. Now let's turn to the Fed. Lawrence, how has the Fed reacted to the evolving labor market picture as Pat's described it, and what do we expect them to do at the meeting next month? 

 

Lawrence Nelson: 

Well, thank you, Kristen. So the Fed has cut rates now at their last two meetings by 25 basis points, most recently in October. These have been risk management cuts in response to the weakening in the labor market that Pat characterized. The most prominent piece of evidence supporting that assessment has been the soft payroll growth we've seen over the last four months. But an important question is whether or not this slowdown has been driven by the supply side and structural factors, as Pat touched on, or the extent to which it's driven by cyclical and demand side factors. This is an important distinction for policymakers because monetary policy is better suited to deal with the cyclical side of the equation more so than the structural side. And while it is true that the labor market has been weakening, the wheels haven't fallen off. We haven't seen a deterioration. 

While the, as Pat pointed out, the unemployment rate in August at 4.3% was the highest in several years, that's still up just 0.1 percentage point from where it was in August 2024. We're now two months behind on the employment data thanks to the government shutdown, the Fed does still have good measures to consider on the employment side of its mandate. One report that's garnered a lot of attention over the last few months has been the private payroll report from ADP, a payroll processing firm. Their estimates of payroll employment have tracked reasonably well with the initial estimates of total non-farm payrolls. The ADP estimate for September was negative, but October it ticked positive again and was above expectations. Another metric we've been following closely has been our aggregation of state-level initial claims for unemployment insurance. We've seen some volatility during the weeks of the shutdown, but that's fairly normal for the series. 

 

And there's also been a measurable uptick in claims from federal employees. So there's nothing that has been released since the government shutdown that would suggest that we should be expecting an imminent increase in the unemployment rate.  

Now on the other side of the Fed's mandate, inflation is now in its fifth year above target and moving in the wrong direction. One of the few data points we did get during the shutdown was the September Consumer Price Index. The Fed's preferred measure when considering its inflation target is the PCE price index. Recent readings on inflation have shown tariff effects. We've seen a notable increase in goods inflation, which is to be expected. But what's going to be causing concern for policymakers is the stickiness we've seen in services inflation over the last few months. 

The disinflationary trend we saw begin to emerge in 2023 has really stalled of late. So that would suggest that there is an increased risk of persistence of inflation, which is something that the Fed will need to monitor carefully going forward. Where does that leave us as far as December and the path forward for policy? We expect that a pause is coming given the stubbornness of inflation. The question really is when? In our latest base forecast we did show another cut in December, but I think it's going to be a very close call. As Powell said during his post meeting press conference in October, a cut is not a foregone conclusion. This has caused a significant shift in market expectations. Prior to that October meeting, Fed funds futures pricing had implied about a 90, 95% probability of a cut in December. That has now shifted and as of today [Nov. 18] it's about 50-50. 

I think this is an accurate assessment. It aligns with our own thinking because even if the Fed does cut in December, that would bring them down to where the median in the September SEP projected the funds rate would end by the end of this year. But you see even there that there was a pretty wide dispersion of thinking on policymakers as far back as September. Notably during his post meeting press conference in October, Powell characterized the participants at the meeting as having widely diverging views on what the appropriate decision would be in December. And of course there has not been any new data since that October meeting. The October meeting was just two days before the government shutdown began. So there hasn't been any data to meaningfully shift participants’ views on what the appropriate decision will be when they meet next month. So not only do we, we don't know what we don't know for the data that we're missing, but we don't know what we will know in December because we're still not sure what data reports will ultimately be available to help then guide that decision.  

Now, looking beyond December, we do expect that a pause in policy adjustment will reign for most of the first half of next year as tariffs continue to work their way into consumer prices. We expect two cuts next year in June and September, which brings the funds rate down to our estimate of neutral of 3 1/4% by the end of next year. But it is notable here that as where rates stand today after the October cut is just 75 basis points above our estimate of neutral, the Fed is running out of room to maintain restrictive policy with inflation in its fifth year above target. So it's really going to be a close call. We're going to be monitoring the data that comes out between now and December very closely as we consider what we will be expecting going into the meeting. 

 

Kristen Hallam: 

Thank you, Lawrence. So one thing we do know is there will be some changes at the top of the Fed next year. How is that factoring into our thinking on policy, Lawrence? 

 

Lawrence Nelson: 

We'll start with what we definitely know for next year, and that is as the calendar turns over, we get four new voting regional presidents on the FOMC. The four who are going out have been among the more hawkish on the committee of late. We've heard from Austan Goolsbee of Chicago, Alberto Musalem of St. Louis, Susan Collins of Boston, all since the October meeting, that they are inclined to be cautious in terms of how much policy adjustment, how much policy easing they want to see into next year. And of course, the fourth current voting regional president is Jeff Schmid of Kansas City. He dissented against the October cut and we would expect him to descend again in December if the Fed ultimately decides to lower rates. And it's possible that these other regional presidents would join him on that in that decision as well. But those coming into the FOMC next year have also sounded fairly hawkish in their own right. 

We've heard from Lorie Logan of Dallas, Beth Hammack of Clark, Cleveland, who has been perhaps the most hawkish member of the FOMC, that they are also particularly concerned about inflation and inclined to favor a cautious approach to policy adjustment as well. Anna Paulson, the newest regional president, has also sounded cautious about policy adjustment next year. Neel Kashkari of Minneapolis is the fourth member who will be joining. We haven't heard much from him on policy over the last few months. But overall, I think it's fair to say that the churn of voting regional presidents will preserve some hawkish sentiment on the FOMC.  

The big unknown for next year is who's going to be the next Fed Chair. We heard earlier this month that the administration is down to five candidates who they're considering to replace Powell when his term as Chair ends next May. The candidates are Kevin Hassett, the current director of the National Economic Council; Kevin Warsh, the former member of the Board of Governors; Chris Waller, a current member of the Board; Michelle Bowman, also a current member of the Board. 

She was elevated to the role of Vice Chair for supervision by the administration earlier this year. I think it makes it unlikely that she will be the one to get the nod to change roles to become the Fed Chair. Her regulatory approach aligns well with the current administration's thinking there. So I think it's safer bet that she will remain where she is. And rounding out the group of five is Rick Rieder, the Chief Investment Officer of Global Fixed Income for BlackRock. And some reporting has suggested that the two Kevins are the leader in the clubhouse, if you will. For our part, we're not really inclined to handicap the President's thinking here. We're just going to stay in wait and see mode like everybody else. 

We have heard that it is possible we may hear who this is as soon as the end of this year. So we're going to be paying close attention to that. I think overall it's a fair bet that, a fairly safe bet that whoever does replace Powell will be a bit more dovish than he is. But the extent to which this matters for policy aren't really clear. The Fed Chair does not set policy unilaterally. They are just one vote on the FOMC. It’s really through their ability to forge consensus among their colleagues, which is something that Powell has excelled at during his tenure, that is the channel through which the chair influences policy. So again we're just wait and see. bBut it is something that we will be watching closely as the calendar flips into next year. 

 

Kristen Hallam: 

Thank you, Lawrence. Some big shoes to fill there for sure. How does the October balance sheet announcement factor into your forecast? 

 

Lawrence Nelson: 

So as part of the October meeting, the FOMC announced that they would be ending the runoff of their balance sheet effective Dec. 1. This was a slightly sooner end to runoff than we had anticipated. We had expected runoff to run through the first half of next year, but it's a small difference. The fact that it does end earlier means that the balance sheet is slightly larger in the long run in our forecast. And this will put some downward pressure on long term yields in the forecast. But it's a small difference so it doesn't make a huge difference on the forecast. To be clear, the decision to end runoff was not a policy decision from the Fed. It was more a plumbing keeping things smooth, money market functioning so that the Fed can continue to maintain stable rate control within the target set by the by the FOMC. 

 

Kristen Hallam: 

All right, thank you, Lawrence. Does the Fed have the ability to control tariff-based inflation? What tools would be used? 

 

Lawrence Nelson: 

No, no, they don't. The Fed's main policy tool is the funds rate. It's a famously blunt instrument so they can't control specific sectors of the economy. So as much as they I'm sure they would like to, it's not something that I think they can really factor into their policy decisions going forward. 

 

Kristen Hallam: 

Thanks for that. And that is all the time we have for today. Thanks to Ben, Pat, Michael and Lawrence for sharing their insights with us. Thank you. And until next time, thank you for listening to the Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.