The Macro Backdrop

A “No Hire, No Fire” Economy

During the summer months, there was no question that the labor markets had experienced a visible cooling in activity. Interestingly, while certainly far from complete, post-government shutdown data is highlighting more of a somewhat mixed employment setting and has given rise to an economy that is experiencing a “no hire, no fire” aspect.

Looking ahead, we continue to see the leading economic indicator, weekly jobless claims, residing at levels that are about 100,000 below where they were historically prior to a looming recession. In fact, a recent reading for claims placed the figure at a three-year low. That being said, new job creation has slowed, and the markets have witnessed a modest uptick in the unemployment rate.

That is the conundrum for both the Fed and the markets and begs the question: Will the 2026 trend follow the 2024/2025 episode, where the cooling in labor market activity that led to this rate-cut cycle back in September 2024 actually proved to be the “low point” for the jobs data?

In terms of the underlying economy, the consumer has remained stalwart, continuing to provide positive contributions. Once again, investors are still waiting for complete data, but the key cylinders of economic growth, consumption and investment have remained in solid territory. Also, it is distinctly possible the economy could receive a tailwind of sorts as the One Big Beautiful Bill’s impact comes more into focus in the new year.

While the impact of tariffs and cooling in new job creation needs to be watched closely, it has become more apparent that the U.S. economy may be able to avoid investors’ post-Liberation Day worst fears, i.e., an outright recession.

Inflation: Searching for Tariff-Induced Inflation

The “other shoe” the markets have been waiting to see drop is whether tariff-induced inflation will rear its ugly head. Thus far, there has been no surge in price pressures, but there have been signs that the spring bout of disinflation may now be over. Although key inflation readings should not necessarily be deemed worrisome, they are moving further away from the Fed’s +2% target.

Where should investors look to see if tariffs are playing a role in future price pressures? The goods component. Service-related inflation has managed to stay relatively calm, which is good news. However, from the goods side of the ledger, prior unchanged or negative monthly readings earlier in the year are now on the plus side, albeit remaining somewhat modest. Going forward, any tariff-related price increases would be more likely to show up in the goods sector of the economy, while services could be more neutral on overall inflation trends.

The potential challenge will be to see if the markets can look through any tariff-induced increases to inflation and focus instead on underlying demand pressures. In addition, as Fed Chair Powell has stated, another key factor to consider is whether any potential increase in prices will be short-lived or have more of a persistent impact.

Either way, the Fed’s 2% target continues to be elusive.

Fed Policy: Recalibrating the “Recalibration”

As was widely expected, the Federal Open Market Committee (FOMC) implemented another 25-basis-point (bp) rate cut at the December FOMC meeting, bringing the new Fed Funds trading range down to 3.50%–3.75%. With the resumption of rate cuts now at round three, and Chairman Powell referencing the resumption of rate cuts as a “risk management” approach, the more pertinent questions are: what will the Fed have in store for the markets in 2026, and will the voting members recalibrate the “recalibration”?

If you may recall, when the FOMC began this rate-cut cycle back in September 2024, Chairman Powell referred to it as a “recalibration” of monetary policy. With the Fed now implementing 175 bps of rate cuts over the last 15 months, it appears as if the broader sentiment within the U.S. central bank may now be to “wait out the data” to see if any potential easing in policy is warranted at this stage.

This point has been underscored by many of the regional Fed bank presidents, creating an impression of the Fed being a “house divided.” Based upon the broader economy pre-government shutdown, there apparently didn’t seem to be a need to go into an “accommodative phase” for policy just yet, but perhaps just get back to “neutral.” This is a point Powell & Co. have been making as well. Now, what is a neutral Fed Funds Rate? That is the key question. If you believe it begins at perhaps 3.50%, then we are essentially at neutral.

However, the Fed and, of course, the money and bond markets are now back to being highly data-dependent. The Fed Funds Rate has already been cut by 75 bps over the last three months, so you can make the case that the Fed may now be far less behind the curve than it was pre-September. Thus, future rate cuts will hinge directly on incoming economic reports. With inflation still about a percentage point above the Fed’s own 2% target, the FOMC will need to see additional cooling in the labor markets to spur additional rate-cutting action.

Bottom line: With the less consensus-driven rate cut among the voting members now “in the books,” the bar has probably been raised for future rate cuts, to some degree. In other words, the “rate cut crowd” in the Fed got what it wanted, so now it’s up to the data from here on out to get the more “hawkish” members on board.

Searching for GeoAlpha

If 2025 was a year dominated by commentary, concern and fretting around the Ukraine War and U.S. tariff announcements, 2026 is going to be much of the same. The war in Ukraine continues, with negotiations around a ceasefire and an eventual end currently underway. Tariff announcements have subsided, and the Supreme Court is set to rule on the legality of many of the Trump administration’s incremental tariffs soon. That means the uncertainties around particular levies, previously largely behind us, may be set for a comeback. The Trump administration is not going to shy away from one of its core tools for the implementation of its economic policies. The dynamics will change. That trajectory will not. For markets, this places the peak of tariff uncertainty squarely in the rearview mirror and in oncoming traffic. Much of the impact has been mitigated by U.S. businesses.

The war in Ukraine continues with the Trump administration moving to put additional pressure on the primary revenue source of the Russian Federation—oil. Under traditional circumstances, this would be highly positive for oil. That has not been the case, as the market remains well-supplied, and OPEC+ (which awkwardly includes Russia) has increased its production. Combined with the pressure the U.S. is putting on Venezuela, oil prices remain subdued. On the domestic front, the U.S. government has increasingly made strategic investments in industries deemed necessary from a national security perspective. This—like tariff policy—will continue to be a hallmark of the administration’s push for onshoring production, and more announcements are likely in the coming months.

There are certainly going to be further headlines related to tariff policy going forward. The Supreme Court is going to rule on the legality of the IEEPA tariffs soon, and that could cause some noise around the outlook for various policies. But it will be just that—noise. Tariffs are a favorite tool for implementing policy, and they are not going away. They are evolving.

When it comes to the outlook, it is important to do just that—look out for the pivots in the narratives and understand that they are changing, but only a bit.