Has the Fed Fixed the Economy Yet? And Other Burning Economic Questions for 2026

The U.S. economy heads into 2026 in an unusual place: Inflation is down from its peak in mid-2022, growth has held up better than many expected, and yet American households say that things still feel shaky. Uncertainty is the watchword, especially with a major Supreme Court ruling on tariffs on the horizon.

To find out what’s coming next, The Conversation U.S. checked in with finance professors Brian Blank and Brandy Hadley, who study how businesses make decisions amid uncertainty. Their forecasts for 2025 and 2024 held up notably well. Here’s what they’re expecting from 2026 – and what that could mean for households, workers, investors and the Federal Reserve:

What’s next for the Federal Reserve?

The Fed closed out 2025 by slashing its benchmark interest rate by a quarter of a percentage point – the third cut in a year. The move reopened a familiar debate: Is the Fed’s easing cycle coming to an end, or does the cooling labor market signal a long-anticipated recession on the horizon?

While unemployment remains relatively low by historical standards, it has crept up modestly since 2023, and entry-level workers are starting to feel more pressure. What’s more, history reminds us that when unemployment rises, it can do so quickly. So economists are continuing to watch closely for signs of trouble.

So far, the broader labor market offers little evidence of widespread worsening, and the most recent employment report may even be more favorable than the top-line numbers made it appear. Layoffs remain low relative to the size of the workforce – though this isn’t uncommon – and more importantly, wage growth continues to hold up. That’s in spite of the economy adding fewer jobs than most periods outside of recessions.

Gross domestic product has been surprisingly resilient; it’s expected to continue growing faster than the pre-pandemic norm and on par with recent years. That said, the recent shutdown has prevented the government from collecting important economic data that Federal Reserve policymakers use to make their decisions. Does that raise the risk of a policy miscue and potential downturn? Probably. Still, we aren’t concerned yet.

And we aren’t alone, with many economists noting that low unemployment is more important than slow job growth. Other economists continue to signal caution without alarm.

Consumers, the largest driver of economic growth, continue spending – perhaps unsustainably – with strength becoming increasingly uneven. Delinquency rates – the share of borrowers who are behind on required loan payments in housing, autos and elsewhere – have risen from historic lows, while savings balances have declined from unusually high post-pandemic levels. A more pronounced K-shaped pattern in household financial health has emerged, with older higher-income households benefiting from labor markets and already seeming past the worst financial hardship.

Still, other households are stretched, even as gas prices fall. This contributes to a continuing “vibecession,” a term popularized by Kyla Scanlon to describe the disconnect between strong aggregate economic data and weaker lived experiences amid economic growth. As lower-income households feel the pinch of tariffs, wealthier households continue to drive consumer spending.

For the Fed, that’s the puzzle: solid top-line numbers, growing pockets of stress and noisier data – all at once. With this unevenness and weakness in some sectors, the next big question is what could tip the balance toward a slowdown or another year of growth. And increasingly, all eyes are on AI.

Is artificial intelligence a bubble?

The dreaded “B-word” is popping up in AI market coverage more often, and comparisons to everything from the railroad boom to the dot-com era are increasingly common.

Stock prices in some technology firms undoubtedly look expensive as they rise faster than earnings. This may be because markets expect more rate cuts coming from the Fed soon, and it is also why companies are talking more about going public. In some ways, this looks similar to bubbles of the past. At the risk of repeating the four most dangerous words in investing: Is this time different?

Comparisons are always imperfect, so we won’t linger on the differences between this time and two decades ago when the dot-com bubble burst. Let’s instead focus on what we know about bubbles.

Economists often categorize bubbles into two types. Inflection bubbles are driven by genuine technological breakthroughs and ultimately transform the economy, even if they involve excess along the way. Think the internet or transcontinental railroad. Mean-reversion bubbles, by contrast, are fads that inflate and collapse without transforming the underlying industry. Some examples include the subprime mortgage crisis of 2008 and The South Sea Company collapse of 1720.

If AI represents a true technological inflection – and early productivity gains and rapid cost declines suggest it may – then the more important questions center on how this investment is being financed.

Debt is best suited for predictable, cash-generating investments, while equity is more appropriate for highly uncertain innovations. Private credit is riskier still and often signals that traditional financing is unavailable. So we’re watching bond markets and the capital structure of AI investment closely. This is particularly important given the growing reliance on debt financing in some large-scale infrastructure projects, especially at firms like Oracle and CoreWeave, which already seem overextended.

For now, caution, not panic, is warranted. Concentrated bets on single firms with limited revenues remain risky. At the same time, it may be premature to lose sleep over “technology companies” broadly defined or even investments in data centers. Innovation is diffusing across the economy, and these tech firms are all quite different. And, as always, if it helps you sleep better, changing your investments to safer bonds and cash is rarely a risky decision.

A quiet but meaningful shift is also underway beneath the surface. Market gains are beginning to broaden beyond mega-cap technology firms, the largest and most heavily weighted companies in major stock indexes. Financials, consumer discretionary companies and some industrials are benefiting from improving sentiment, cost efficiencies and the prospect of greater policy clarity ahead. Still, policy challenges remain ahead for AI and housing with midterms looming.

Will things ever feel affordable again?

Policymakers, economists and investors have increasingly shifted their focus from “inflation” to “affordability,” with housing remaining one of the largest pressure points for many Americans, particularly first-time buyers.

In some cases, housing costs have doubled as a share of income over the past decade, forcing households to delay purchases, take more risk or even give up on hopes of homeownership entirely. That pressure matters not only for housing itself, but for sentiment and consumption more broadly.

Still, there are early signs of relief: Rents have begun to decline in many markets, especially where new supply is coming online, like in Las Vegas, Atlanta and Austin, Texas. Local conditions such as zoning rules, housing supply, population growth and job markets continue to dominate, but even modest improvements in affordability can meaningfully affect household balance sheets and confidence.

Looking beyond the housing market, inflation has fallen considerably since 2021, but certain types of services, such as insurance, remain sticky. Immigration policy also plays an important role here, and changes to labor supply could influence wage pressures and inflation dynamics going forward.

There are real challenges ahead: high housing costs, uneven consumer health, fiscal pressures amid aging demographics and persistent geopolitical risks.

But there are also meaningful offsets: tentative rent declines, broadening equity market participation, falling AI costs and productivity gains that may help cool inflation without breaking the labor market.

Encouragingly, greater clarity on taxes, tariffs, regulation and monetary policy may arrive in the coming year. When it does, it could help unlock delayed business investment across multiple sectors, an outcome the Federal Reserve itself appears to be anticipating.

If there is one lesson worth emphasizing, it’s this: Uncertainty is always greater than anyone expects. As the oft-quoted baseball sage Yogi Berra memorably put it, “It’s tough to make predictions, especially about the future.”

Still, these forces may converge in a way that keeps the expansion intact long enough for sentiment to catch up with the data. Perhaps 2026 will be even better than 2025, as attention shifts from markets and macroeconomics toward things that money can’t buy.

Has the Fed Fixed the Economy Yet? And Other Burning Economic Questions for 2026 was originally published by The Conversation and is republished with permission.