2026 US Economic Outlook: Fed Policy, Trade Risks, and Labor Market Shifts

Bloomberg Surveillance · December 30, 2025 · Listen to Original Episode →

Original Title:

TL;DR

A shift in Federal Reserve composition towards lower-rate advocates will likely result in lower rates, a steeper yield curve, and higher inflation, creating a supportive backdrop for growth and financial conditions.
Persistent uncertainty surrounding trade policies, including potential tariff changes and renegotiations of agreements like USMCA, poses a significant risk to economic growth and corporate decision-making.
The US labor market is expected to see a gradual pickup in hiring in early 2026, driven by employers preparing for growth and focusing on upskilling current workforces for AI integration.
While inflation is expected to remain sticky, the Federal Reserve may cut rates in the second half of 2026 if corporate margins compress due to tariffs, potentially leading to two rate cuts.
Increased private and foreign demand for US Treasuries, coupled with technical changes in issuance and regulatory fronts, is expected to support dealer intermediation capacity and limit bond vigilante concerns.
The concentration of US Treasury ownership among highly leveraged relative value hedge funds presents a risk of exacerbating volatility if market conditions trigger deleveraging, though this is less likely in early 2026.
Wages are projected to stagnate throughout 2026 as inflation cools, with annual wage growth likely slipping from its current 3.5% rate, reflecting a cooling labor market.

Deep Dive

Entering 2026, the US economy faces a complex interplay of growth tailwinds and significant risks, primarily stemming from trade policy uncertainty and geopolitical instability, which could lead to a bumpy economic road despite current consumption strength. The Federal Reserve's policy decisions, influenced by committee composition, will be pivotal in navigating these challenges, with a likely bias towards holding rates steady in the first half of the year, though potential rate cuts loom in the second half if economic conditions deteriorate.

The outlook for interest rates and market volatility is heavily influenced by the Federal Reserve's composition. A shift towards members favoring lower rates, potentially driven by a change in Fed Chair and the departure of Jerome Powell, would create downward pressure on rates, steepen the yield curve, and lower real rates and inflation volatility. This environment is expected to persist through the first half of 2026, fostering easy financial conditions supportive of growth, although market volatility is anticipated to widen later in the year. The recent strength in base metals like copper and silver, alongside a depreciating dollar, signals robust global growth expectations and potential debasement concerns, suggesting central banks may be less aggressive on inflation. However, the primary risk remains an unexpected surge in inflation that could force the Fed to consider rate hikes, disrupting the current supportive financial conditions.

Bond vigilante concerns are currently subdued due to technical changes in US Treasury issuance, Federal Reserve reserve management purchases, and increased dealer intermediation capacity. While private foreign demand for Treasuries remains resilient, driven by a lack of global alternatives, a concentration of ownership among highly leveraged relative value hedge funds in the UK presents a risk for exacerbating volatility and deleveraging should market conditions shift.

The labor market is expected to see a gradual pickup in hiring in early 2026, driven by employers preparing for growth rather than mere survival, though significant surges are unlikely to reignite inflation. Demand will focus on workers who can leverage AI to enhance productivity, leading employers to prioritize upskilling their current workforce. While new graduates are a focus, the dominant sectors for employment will remain healthcare and skilled trades, with wages likely to stagnate as inflation cools. The narrative that AI is significantly slowing hiring is not strongly supported by current data; instead, other macroeconomic factors like tariffs and sticky inflation are more impactful. Rate cuts, while intended to stimulate hiring, have not yet translated into substantial job growth, and the current murky data landscape due to government shutdowns makes definitive analysis challenging.

The year-end weakness in mega-cap tech stocks, while not preventing a double-digit annual gain, suggests a potential rotation, with small caps showing some recent outperformance. Diversification remains crucial, as international and emerging markets have also delivered strong returns. The dollar's trajectory in 2026 will depend on inflation data and the pace of Fed rate cuts, with further cuts likely to weaken it against other currencies. As such, a continued emphasis on the ex-US portion of portfolios is advisable for dollar investors seeking to capitalize on global opportunities. Amidst this, investors are increasingly diversifying beyond traditional 60/40 portfolios into alternative assets like private equity and credit, made more accessible through product innovation, seeking to balance AI trade participation with portfolio ballast.

The core implication is that while underlying economic growth drivers remain, significant uncertainties in trade policy, geopolitical events, and the Federal Reserve's evolving stance create a volatile and complex outlook for 2026. Navigating this landscape will require careful attention to market structure, fiscal policy implications, and the divergent performance across asset classes and geographies.

Action Items

Audit AI integration: For 3-5 key roles, identify specific tasks AI can augment and define upskilling requirements for current employees.
Draft tariff impact analysis: For 3-5 core business lines, project how potential tariff changes and renegotiations could affect margins and hiring.
Measure Fed cut effectiveness: Track correlation between recent rate cuts and actual hiring increases across 5-10 industries to assess stimulus impact.
Evaluate diversification strategy: For 3-5 portfolio types, calculate the impact of international and alternative asset allocation on overall risk-adjusted returns.
Track labor market shifts: Monitor 5-10 key economic indicators (e.g., wage growth, sector-specific hiring) to identify early signs of labor market recovery or stagnation.

Key Quotes

"Our our take is that we've heard this so many times before and what we're really interested in is who is the individual going to be what is their preference on policy broadly and then will there be any further turnover or change within the federal reserve it is a committee we do know that it takes a number of individuals to move the needle on fed policy and impact interest rates and we're really trying to figure out who that's going to be what their preferences are and how does the committee composition change."

Mark Cabana of BofA Global Research explains that the market's focus is not on presidential commentary regarding the Fed chair, but rather on the identity and policy preferences of potential appointees. Cabana emphasizes that the Federal Reserve operates as a committee, and changes in its composition are crucial for understanding the future direction of monetary policy and interest rates.

"It doesn't matter a lot because it influences that composition of the committee as you know it takes seven voters for any action at the fed and if powell chooses to stay which would be historically unprecedented then it will mean that there's probably less willingness to cut rates aggressively if he leaves it'll give the trump administration one more seat in which they can potentially remake that committee and potentially then advocate for lower rates."

Mark Cabana further elaborates on the significance of the Fed Chair's decision to stay or leave the committee. Cabana highlights that if the current chair remains, it could signal a more cautious approach to rate cuts, while their departure would offer the administration an additional opportunity to shape the committee's composition and potentially influence policy towards lower rates.

"We do think that the fed composition is extremely important and that's one of the reasons that we do believe that the distribution of risk to the rate outlook is skewed to the downside we do believe it means likely lower rates steeper curve lower real rates higher inflation lower volatility which by the way i do think is quite a story for the end of 2025 that doesn't get a ton of airplay but that low vol environment is so important for us rates for us fixed income more broadly for elements of the dollar elements of the commodities trade and the gold trade that you were talking about before and and that fed composition does very much influence the outlook for rates and the outlook for vol."

Mark Cabana connects the importance of Fed composition to the broader market outlook, suggesting it skews risks towards lower interest rates and a steeper yield curve. Cabana notes that this composition also influences inflation, real rates, and volatility, with a low volatility environment being particularly significant for fixed income markets, the dollar, commodities, and gold.

"The idea that copper has been on a tear that silver has been on a tear that you have seen a depreciation of the dollar and frankly an underperformance of us assets in relation to some of these precious metals do you think that this is telling you of some kind of inflationary impulse that will come out in what we're seeing with respect to steeper yield curves and even if it's not volatility that that will grind wider throughout the year and potentially put a cap on some of that risk appetite."

The interviewer poses a question to Mark Cabana regarding the performance of commodities like copper and silver, alongside a depreciating dollar and underperforming US assets. The interviewer asks if these trends signal an inflationary impulse, potentially leading to steeper yield curves and increased volatility that could cap risk appetite.

"We don't think there's going to necessarily be a surge in supply one of the really interesting things about the q3 gdp report was all of the corporate profit information that was contained in there so basically the measure that's that's sort of similar to retained earnings rose 33 quarter q4 q3 over q3 so year over year in the third quarter firms retained a huge amount of earnings and we we saw in the data that they didn't hire they really slowed hiring they absorbed some of the costs of the tariffs they also front loaded those tariffs right by importing at the end of last year and beginning of this year and we really think that that something has to give there right so firms don't keep 33 retained you know year over year retained earnings they invest in capex they pay them out in the form of dividends or they hire more people we think some combination of those things will happen in conjunction with them passing on higher prices in addition we're going to get the tax refunds from the one big beautiful bill act."

Constance Hunter of the Economist Intelligence Unit discusses corporate profit information from the Q3 GDP report, noting a significant rise in retained earnings. Hunter explains that firms slowed hiring, absorbed tariff costs, and front-loaded imports, suggesting that this retained earnings will likely be reinvested in capital expenditures, dividends, or hiring, potentially leading to higher prices.

"We will see hiring activities slowly start to pick up as clarity kind of comes into view around policies like inflation and tariffs and how these factors are going to continue to impact employers into the new year."

Nicole Bachaud, Labor Economist at ZipRecruiter, anticipates a gradual increase in hiring activity in early 2026. Bachaud links this pickup to growing clarity around inflation and tariff policies, suggesting that as these factors become more understood, employers will be better positioned to plan for growth and adjust their hiring strategies accordingly.

"We're not seeing ai really reshaping where people are working we're really seeing ai right now impacting the labor market in how certain roles are showing up workers who are able to utilize ai to increase productivity to streamline their processes that's where we're going to see the most demand and we're already seeing employers start to focus on upskilling their current workforce and employers who are able to remove unnecessary barriers to make it easier to integrate ai into their workflows and to train employees on how to use those tools properly that's where we're going to see the biggest hiring bumps into the new year."

Nicole Bachaud clarifies the current impact of AI on the labor market, stating it is not reshaping where people work but rather how roles are performed. Bachaud emphasizes that demand will be highest for workers who can leverage AI to boost productivity and streamline processes, and that employers are focusing on upskilling their existing workforce and integrating AI tools to drive hiring growth.

Resources

External Resources

Books

"The 1776 Report" by Donald Trump - Mentioned as a document that could be overturned, impacting trade policy.

Articles & Papers

"The 1776 Report" (Source not explicitly stated) - Mentioned in relation to potential policy changes that could affect trade.

People

Jerome Powell - Fed Chair whose potential departure and replacement are discussed.
Mark Cabana - Guest providing analysis on the Federal Reserve and market outlook.
Guy - Interviewer asking questions about the Federal Reserve's composition and policy.
Lisa Abramowitz - Co-host of Bloomberg Surveillance.
Al Hunt - Co-host of Bloomberg Surveillance.
Stephen Miran - Individual whose term as Fed Chair is ending, prompting discussion about a potential new nomination.
Bowman - Individual mentioned as a potential candidate for Fed Chair.
Waller - Individual mentioned as a potential candidate for Fed Chair.
Constance Hunter - Economist providing analysis on the US economy, trade, and geopolitical risks.
Nicole Basha - ZipRecruiter representative discussing labor market trends and AI's impact.
Dana Dory - Investnet representative discussing market performance, diversification, and small caps.

Organizations & Institutions

JP Morgan Asset Management - Mentioned as a global leader in active fixed income ETFs.
JP Morgan Chase & Co. - Parent company of JP Morgan Asset Management.
JP Morgan Distribution Services Inc. - Entity issuing a communication for JP Morgan Asset Management.
FINRA - Member organization mentioned in relation to JP Morgan Distribution Services Inc. and Open to the Public Investing Inc.
Public - Platform for building multi-asset portfolios, including generated assets with AI.
Open to the Public Investing Inc. - Brokerage services provider for Public.
SIPC - Member organization mentioned in relation to Open to the Public Investing Inc.
Public Advisors LLC - SEC registered advisor providing advisory services for Public.
Adobe Acrobat Studio - Product offering AI-powered PDF spaces for document analysis and tailoring.
Bloomberg Audio Studios - Producer of podcasts and radio news.
Apple - Platform for subscribing to podcasts.
Spotify - Platform for subscribing to podcasts.
Bloomberg Terminal - Platform for accessing Bloomberg content.
Bloomberg Business App - Platform for accessing Bloomberg content.
Bank of America - Employer of guest Mark Cabana.
Federal Reserve (Fed) - Central banking system discussed extensively regarding policy and composition.
Federal Open Market Committee (FOMC) - Committee within the Federal Reserve that influences policy.
US Treasury - Issuer of government debt, discussed in relation to issuance strategy.
SEC - Regulatory body mentioned in relation to Public Advisors LLC.
CVS Caremark - Provider of prescription plans with built-in savings.
Investnet - Firm represented by guest Dana Dory.
ZipRecruiter - Company represented by guest Nicole Basha, providing labor market insights.
FedEx - Company offering a smart platform for supply chain management.
Okta - Company providing identity management solutions for AI agents.
MyPolicyAdvocate.com - Platform for understanding insurance policy details.
Chase for Business - Provider of business credit cards.
JPMorgan Chase Bank, N.A. - Bank issuing Chase business credit cards.

Tools & Software

Generated Assets - AI-powered feature on Public allowing users to create investable indexes.
AI Agents - Discussed in relation to identity security and business service.
Adobe Acrobat Studio - Tool for PDF management with AI capabilities.
AI - Technology discussed for increasing productivity, streamlining processes, and reshaping roles.

Websites & Online Resources

jpmorgan.com/getactive - Website for JP Morgan Asset Management's active fixed income ETFs.
public.com/market - Website for Public's market offerings and bonuses.
public.com/disclosures - Website for disclosures related to Public's generated assets tool.
adobe.com/dothatwithacrobat - Website for learning more about Adobe Acrobat Studio.
cmk.co/stories - Website for learning about CVS Caremark's prescription savings.
chase.com/businesscard - Website for Chase business credit cards.

Other Resources

Passive Investing - Investment strategy discussed as potentially costly.
Active ETFs - Exchange-Traded Funds aiming to outperform benchmarks.
Generated Assets - AI-driven investable indexes on the Public platform.
Identity - Concept discussed as crucial for trusting AI agents.
AI-Powered PDF Spaces - Feature within Adobe Acrobat Studio.
Bloomberg Surveillance Podcast - Podcast offering insights on markets, economics, and geopolitics.
Fed Chair Candidate - Role discussed in relation to presidential preference and announcement timing.
Fed Policy - Monetary policy set by the Federal Reserve.
Interest Rates - Key factor influenced by Fed policy.
Committee Composition - The makeup of the Federal Reserve's voting members.
Rates on Hold - Scenario where the Federal Reserve does not change interest rates.
Lower Rates - Scenario where the Federal Reserve decreases interest rates.
Unemployment Side of Fed's Mandate - One of the dual mandates of the Federal Reserve.
Inflation Side of Fed's Mandate - The other dual mandate of the Federal Reserve.
Rate Outlook - Forecast for future interest rate movements.
Move Index - An index tracking volatility, discussed in relation to market movements.
FOMC - Federal Open Market Committee, influencing market volatility.
Potential Rate Outcomes - Range of possible future interest rate levels.
Financial Conditions - The ease with which businesses and consumers can access credit.
Growth Backdrop - The overall economic environment supporting growth.
Stable Rates - Scenario where interest rates remain unchanged.
Lower Rate Volatility - Reduced fluctuations in interest rate movements.
Precious Metals - Asset class including gold and silver, discussed as a potential diversifier.
Copper - Metal discussed as an indicator of global growth.
Silver - Metal discussed in relation to technicals and debasement concerns.
Dollar Depreciation - A decrease in the value of the US dollar relative to other currencies.
US Assets - Investments denominated in US dollars.
Inflationary Impulse - A tendency for inflation to increase.
Steeper Yield Curves - A situation where longer-term bond yields are higher than shorter-term yields.
Risk Appetite - The willingness of investors to take on risk.
Sticky Inflation - Inflation that is slow to decrease.
Labor Market - The supply and demand for labor.
Debasement Concern - Worry that the value of currency is being eroded.
Central Banks - Institutions that manage a country's currency, money supply, and interest rates.
Base Metal Prices - Prices of industrial metals like copper.
Tax Cuts - Reductions in taxes, discussed in relation to economic stimulus.
Budget Deficits - Situations where government spending exceeds revenue.
Bond Vigilantes - Investors who sell bonds to protest fiscal policies they deem irresponsible.
Asset Swap Spreads - Measures of credit risk in the bond market.
US Treasury Issuance - The process by which the US government sells debt.
Reserve Management Purchases - Actions by the Federal Reserve to manage its reserves.
Repo Rates - Interest rates on repurchase agreements, a form of short-term borrowing.
Regulatory Front for Banks - Rules and guidelines governing the banking industry.
Market Structure Changes - Modifications to how financial markets operate.
Cross Margining Benefits - Efficiencies gained from consolidating margin accounts.
Collateral and Loo - Technical terms related to financial market operations.
Dealer Intermediation Capacity - The ability of financial dealers to facilitate transactions.
Treasury Market - The market for trading US government debt.
Duration Risk - The risk that changes in interest rates will affect the value of a bond due to its maturity.
Private Foreign Holders - Foreign entities that own US Treasury securities.
Ticks Data - Data related to trading activity.
Sentiment Shifts - Changes in investor attitudes.
Traditional Asset Manager - Investment firms managing assets on behalf of clients.
Real Money Investor - Investors whose primary goal is capital preservation and steady returns.
Relative Value Hedge Fund - Hedge funds employing strategies that seek to profit from price discrepancies.
Leveraged Positions - Investments made using borrowed money.
US Dollar Fixed Income - Debt instruments denominated in US dollars.
Risk-Free Assets - Investments with a very low risk of default.
Market Depth - The ability of a market to absorb large trades without significant price impact.
Repo Market - The market for repurchase agreements.
Macro Environment - The overall economic and political conditions affecting markets.
Deleveraging - The process of reducing debt.
Low Vol Inflation - A scenario of low volatility and moderate inflation.
Market Structure - The organization and functioning of financial markets.
Private Holders - Entities that own assets outside of public markets.
Foreign Holders - Entities outside of a country that own its assets.
USMCA - United States-Mexico-Canada Agreement, a trade pact.
Trade Deals - Agreements between countries to regulate trade.
Geopolitical Uncertainty - Risks arising from international relations and conflicts.
Middle East - Region discussed in relation to geopolitical uncertainty.
China Taiwan - Area of geopolitical tension.
Japan - Country mentioned in relation to geopolitical signaling.
Arctic - Region discussed in relation to China's breakthroughs.
Venezuela - Country mentioned in relation to strikes.
Unknown Unknowns - Unforeseeable risks.
Known Unknowns - Risks that are recognized but their impact is uncertain.
Resurgence in Inflation - A significant increase in inflation.
Deterioration in the Backdrop for the Jobs Market - A worsening economic situation for employment.
Surge in Demand - A rapid increase in the desire for goods and services.
Surge in Supply - A rapid increase in the availability of goods and services.
Corporate Profit Information - Data on the earnings of companies.
Retained Earnings - Profits that a company has not distributed to shareholders.
Capex (Capital Expenditures) - Spending by companies on physical assets.
Dividends - Payments made by companies to shareholders.
Tariffs - Taxes on imported goods.
One Big Beautiful Bill Act - A piece of legislation mentioned in relation to tax refunds.
Government Shutdown - A situation where government operations are suspended due to a lack of funding.
Data Landscape - The overall availability and quality of economic data.