2026 Economic Outlook
Media Hit, 1/1/26
I’m going on NewsNation Live this afternoon for a 2026 Look Ahead segment. To my mind, there are four areas that are going to matter for the US in 2026, at least from an economist’s perspective (there are non-economic areas that matter, too!). In no particular order, those areas are:
Monetary Policy
Fiscal Policy
Trade Policy
The Rise of Collectivism
I’m going to be taking a decidedly US-focused approach to these topics. Obviously, they matter in other countries, too, but… I’m in the US and I do work for The American Institute for Economic Research after all :)
Let’s go through these one-by-one and then offer a sort of wrap up:
Monetary Policy in 2026
President Trump has made it very clear that he is not a fan of Jerome Powell.
Trying to get him fired for cause, very publicly criticizing Fed decisions (and attributing them to Powell), and finally appointing Steven Miran to the Fed’s board.
The truth of the matter is that we have very good reason to think that Fed independence could wane next year. This matters a lot more than people think. Having an independent central bank is critically important for any economy.
What’s equally important, though, is that people believe that the central bank is independent.
At the same time, though, the Fed has preemptively tried to “Trump-proof” the Fed by reappointing the regional presidents, who are not determined by the President in any way and who serve on the Fed’s Board of Governors.
Inflation continues to be a problem, eroding people’s purchasing power.
While it is true that wages have risen faster than inflation as of late, at least on average, the Fed having a publicly stated 2% target and consistently hitting well-above that is problematic for businesses and anyone looking to do long-term financial planning.
Remember: if the target is 2% and they’re hitting 3%, they are only off by one percentage point, but they’re missing their target by a margin of 50%.
Fiscal Policy in 2026
With more and more provisions of the Big Beautiful Bill coming into effect, there will be significant changes.
One of these is a likely decrease in tax revenues coming into the Treasury.
While I’m obviously all for decreases in taxes and letting people keep more of their hard-earned money, the reality is that what really determines a nation’s tax burden is not taxation itself, but spending.
Spending today without revenues coming in today means that future generations will be saddled with paying the bill for today’s profligate spending.
I see nothing in the BBB (or anything that Congress has done) that will result in a reduction in spending.
Without a reduction in spending, we’re just quibbling about who is going to pay for it and when.
Trump has claimed that the tariffs are bringing in “trillions of dollars” and that these will more than offset any reductions in tax revenues from other areas.
I’m not seeing any evidence of that, whether I look at official statistics or unofficial (and independent) analyses.
There are claims of pretty sizable increases in investment being made in the US. But those are years-long projects that may or may not materialize as they can be revoked at any time.
There’s also the idea that CEOs and foreign officials have caught on that Trump just likes to hear big numbers and may be just saying things to get him to grant exemptions to them.
Despite claims to the contrary, the national debt continues to rise.
For FY2026 we have so far borrowed $7 billion per day on average. Keep in mind that this includes a pretty long government shutdown.
Interest payments on the debt will almost certainly remain at or above $1 trillion per year. And as they climb, interest payments will remain the second biggest spending area for Congress (behind only Social Security).
This isn’t “investing in America.” It’s mortgaging our future.
Trade Policy in 2026
Tariffs have obviously dominated the national discussion, at least where trade policy has been concerned. This makes sense - “tariff” is, by Trump’s own admission, the most beautiful word.
There’s the Supreme Court case, which will determine the constitutionality of the President using IEEPA to impose tariffs without explicit authorization from Congress.
But even if the Court strikes these down, there are plenty of alternatives that the Administration could pursue that would allow them to do basically the same thing, albeit with potentially more paperwork on their part.
The reality is that tariffs are not working. If I subscribe to any “conspiracy theory” or “they’re really playing 4D chess” type thing, it’s that Administration officials understand that tariffs aren’t working but obviously can’t admit that publicly.
The Supreme Court striking them down would give the Administration the ability to say, “those damn Justices ruined everything, guess we have to go in a different direction now, hands are tied.”
The Rise of Collectivism
I’m going to be incredibly reductionist here, probably unfairly so. Traditionally, the Left has been viewed as “collectivist” and the Right has basically just been obstructionist to that agenda.
But today, the (New) Right is just as collectivist as any Left I’ve seen, perhaps even more so.
Trump and Congressional Republicans are now absolutely fine with the federal government owning shares of private corporations and dictating terms of contract and operations.
Industrial policy, where government officials quite literally pick winners and losers, is now very much the name of the game.
Phrasing basically everything as “us” versus “them,” especially when it comes to other nations like China, has become the norm.
All the emphasis on “jobs going to Americans instead of foreigners” that has dominated the commentariat.
And this isn’t even touching on Mamdani’s election to NYC Mayor and his meeting in the Oval Office where Trump said they “had a lot in common” and “had similar ideas.”
With that… Happy New Year to everyone!