The federal government was shuttered for nearly half of the fourth quarter, delaying traditional economic data releases and forcing analysts to rely on less familiar private sector growth and employment measures. Within these measures, Fed officials focused on deteriorating labor conditions, voting to lower the overnight funds rate in both October and December. This, despite the economy accelerating in the second half of the year while consumer inflation remained frustratingly above the Fed target.

Advances in artificial intelligence and favorable tax treatment should fuel business growth in 2026, while potentially reducing labor demands. The new year brings a change in Fed leadership, along with likely challenges to central bank independence. We expect the FOMC, influenced by the president and a new chairman, will cut rates more aggressively than the December “dot plot” had indicated.

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