Policy reset: How fiscal, monetary and trade frameworks shape 2026

Executive summary

We look for U.S. real GDP growth of 2.3% (annual average) in 2026. The improved outlook reflects a more supportive fiscal policy environment, a less restrictive monetary policy setting and a tariff regime that is not characterized by near-constant escalation as it was this year.

The resilient consumer continues to help shore up economic activity, though consumer spending is not poised to be an outperforming driver of growth in 2026. Tax policy changes in the One Big Beautiful Bill Act (OBBBA) offer some relief in the year ahead, particularly for lower- and middle-income households, where help is needed most.

Business fixed investment has been, and will continue to be, sustained by the splurge on all things tech- and AI-related. Investment-friendly tax policy changes help on the margin, and so will lower rates and an anticipated decline in policy uncertainty next year. These factors should help support investment growth in more traditional capex categories, which have struggled of late.

Tariff rates are not going back to 2024 levels anytime soon, but we think 2026 will show that 2025 was the peak for the U.S. average effective tariff rate. This in turn bodes well for U.S. economic growth in 2026 as trade policy becomes directionally less restrictive.

Inflation has been stuck around 3% amid a tug-of-war between slowing services prices but a tariff-induced pickup in goods prices. We expect inflation to still be above 2% by the end of next year. That said, our base case forecast for core PCE inflation to be 2.6% on a Q4/Q4 basis in 2026 would mark a directional improvement, with the softer labor market, well-anchored inflation expectations and the prospect for some tariff relief next year helping lead inflation lower.

Amid the blackout of government data due to the shutdown, alternative indicators paint a mixed picture of the jobs market: not clearly improving, but not falling apart either. Sturdier economic growth and reduced uncertainty should generate some improvement in hiring next year and keep the unemployment rate from climbing above 4.5%.

Our base case remains for the FOMC to reduce the fed funds rate by 25 bps at its December meeting, although recent Fed speak makes it a close call as we go to print. For 2026, we look for two additional 25 bps rate cuts by mid-year, which would put the terminal rate at 3.00%-3.25%.

While the global economy can continue to demonstrate resilience, the pace of global growth in 2026 is unlikely to match the rate of expansion achieved in 2025. Easier central bank monetary and fiscal support from select countries can put a floor under global growth; however, protectionist trade policies may restrain global activity.

Select foreign central banks can lower interest rates, but rate reductions similar to 2025 are unlikely to be repeated. A monetary policy divergence theme should build in early 2026 that weighs on the dollar; however, once Fed easing ends, the dollar can rebound and discussions about the greenback losing its reserve FX status should diminish.

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