Comments based on information available as of 5:45am CT on 12/26/2025
Growth: From Good to Great? 
Third-quarter real GDP grew at a strong 4.3% annualized pace, driven primarily by consumer spending—not data center build-outs or other trends dominating headlines this year. It was classic consumer-driven growth. Beneath the surface, however, much of that spending came from health care—outpatient services and prescription drugs—possibly inflated by “use it before you lose it” behavior tied to renewing or expiring health insurance benefits. Looking ahead, growth could move from good to great as investment spending picks up and consumer demand benefits from new tax provisions.
Inflation: A Choppy Trend Lower?
Third-quarter inflation ran 0.8 percentage points above the Fed’s 2.0% target—a reversal from the second quarter when inflation was nearly on target. Tariffs may not have fully filtered through to consumer prices yet, but imports represent a small share of overall spending. Services dominate, and rent inflation remains mild or even negative. With unemployment above the Fed’s long-run estimate, wage-driven inflation should remain subdued.
Policy: The Year of the Third Mandate?
When it comes to monetary policy, the Federal Reserve’s mandates from Congress are enshrined in law: maximum employment, stable prices, and moderate long-term interest rates. In 2021–22, overly loose policy overshot the inflation objective. In 2025, a cautious approach to rate cuts has left employment slightly above target. By 2026 or 2027, the Fed may need to focus more on its third mandate—moderate long-term rates—as businesses ramp up bond issuance to fund tax-incentivized investments in property, plant, and equipment and the Treasury needs to issue more debt since deficits aren’t turning to surpluses. This surge in financing could support growth but may catch bond investors off guard.
Looking Ahead: A Prove-It Year?
2026 is likely going to be a “prove-it” year for markets. Companies must deliver tangible productivity and margin gains from artificial intelligence (AI) and other investments. Mid-term election years can be challenging for investors. Some of it may come from impatience that presidential election year pledges haven’t fully materialized. Some may come from the natural uncertainty around control of congress and the policy outlook. Whatever the cause, election-year volatility could be taxing on investors. Historically, pullbacks have typically been followed by more substantial rebounds, so investors should think about using market swings to position for long-term growth.
