Fed policy and the 2026 outlook: Here's what you need to know

[00:00:00] Speaker 1: One of the other variables right now that is being talked about quite a bit as we approach 2026 is the idea that 2026 will be the year halfway, almost halfway through it, where we get a new Fed chair, new leadership in that position. What exactly does that have significance towards with regard to not just the rate trajectory, but the overall macro backdrop that the Fed's going to have to navigate in those two halves of the year? [00:00:26] Steve Leisman: So here's how I think about the new Fed chair. At the margin, a dovish Fed chair will mean at the margin, maybe another rate cut. I do not see at the margin, I do not see a new Fed chair coming in and basically doing the president's bidding and bringing rate cuts, rates down to 1% or 2% or some number like that. I just don't see that happening, no matter who it is. And the reason, Dom, is because as you know, the Fed chair has a vote. The Fed chair, I don't know, herds the cats, corrals the cows, whatever you want to call it. But they only have one vote at the end of the day. And so a Fed chair who's going to take rates so-called off the reservation is not going to have the committee with them. And that's why some people are suggesting that the best choice for President Trump is somebody like Chris Waller, believe it or not. And the reason is because he has the best chance of really bringing the committee with him toward a more dovish stance because he's part of the system now. Now, that may not be something that sits well with the president who wants somebody who's going to try to drive down rates. But if the result of that is to create resistance on the committee, then I don't think the president gets what he's after. [00:01:38] Speaker 1: Just how much, Steve, just how much is the inflation story going to be one that percolates in 2026? We know it's taken a bit of a backseat in the last four to five months to a seemingly weakening on the relative basis jobs markets. Does inflation become more of a threat in 2026 than it has been in 2025? [00:02:00] Steve Leisman: That's an excellent question. And let me answer it from the position of perfect ignorance. And I'll tell you why, Dom, because we don't know what the inflation numbers are. We had those reports and they widely agreed from the New York Fed to most investment banks that those numbers were distorted to the downside because of some technical reasons inside of them that had to do with the missing month and some blanks that were filled in, not for political reasons, but that's just because of the way they did it. There might have been other ways they could have done it that were better and smarter and perhaps acknowledged it publicly before it happens. But in any event, we don't know what the inflation numbers are. We're not sure what they're going to be. So it is a major wild card. And if those numbers end up being worse than expected, for example, if more of the tariffs end up being passed along inside the goods sector and they spill over to the service sector, that's going to be another major limiting factor for the Fed. If they come down, though, if you think this through, let's say inflation does come back down to 2 percent, I don't think that changes very meaningfully the neutral rate or the Fed's need to get down much below neutral, which is where we started the conversation, 3 percent. So I think there's upside to rates if inflation is worse, but I don't think there's much downside to rates if inflation comes in and starts to behave as expected or hoped for by the [00:03:18] Speaker 1: Federal Reserve. All right. Asymmetric, it seems like. Steve Leisman, thank you very much for being here with us. We'll see you again soon. Have a nice weekend. All right. Jim, Steve brings up a number of interesting cross currents, right? If you take a look right now at the oil and gas market, it is showing maybe some signs of flagging inflation. It's not as much of a threat. There are some fundamental reasons behind that. But then you flip to the hard commodity side of things with precious metals and base metals, and they are setting record highs for gold and silver yet again today. All of that on the backdrop of a seemingly, supposedly weakening jobs markets, which could be another factor. That's the [00:03:59] Speaker 3: reason why Steve answered the way he did, right? Yeah. I don't think we can answer the question right now as to what is inflation doing. We need more data. You just mentioned cross currents. That's exactly what we've got here. Let's add one more cross current to it that's on my mind, which is that the Fed has resumed expanding its balance sheet. Now, it's not doing that to be stimulative. It's doing it to keep the banking system in an ample reserves condition where you don't have to worry about short-term funding requirements at the short end of the curve. But that is stimulative. And add that to the mix of what we're talking about, that it makes it very much a conundrum for the Fed right now. We still don't have this answer as to whether the tariffs are a one-time hit to inflation or something that's going to recur. I happen to be strongly of the opinion that it's a one-time hit. However, consider what I just said a minute ago, Dom, about the fact that the Supreme Court may invalidate the tariffs as they currently stand, which means these questions, which I firmly believe we can't answer definitively right now, are not going to be answerable probably for several months. And if I'm the Fed, I'm sitting here saying, listen, I've cut a lot over the last two years. We should just sit tight and see what happens. [00:05:09] Speaker 1: Hey, Kevin Simpson, in listening to Steve's comments, one of the things that kind of stood out to me was this idea that there is a good amount of at least interpretation as to what could happen in the coming months. Fed share aside, economic data even then can still be interpretable. What exactly do you feel is the overriding narrative that we go into 2026 with? Is it going to be just a continuation of 2025? Or are there things that could fundamentally change the entire story? To Bryn's point, maybe it's the midterms. Maybe it is something else down the line. [00:05:43] Speaker 4: Yeah, but I think if those fundamental changes exist, they're probably a second half story. I think we entered the year with the same playbook that we completed it. The one thing that I was thinking about when Jim was talking is with respect to the lag effect potentially that housing may play in this inflationary number. Because we're all scratching our heads wondering about its accuracy, where all the data will shake out now that people are back to work and we're getting some data. How pure it is, we're not sure. But I'm wondering if we might not just get lucky in 2026. And that's not an investment thesis. You don't bank a portfolio on luck. But there is the possibility that the lag effect on housing and rent equivalents and other things that go into these inflationary numbers could trend down and supersede some of the things that our eyeballs might be telling us from an inflationary standpoint. So I'm not sure exactly how it's going to play out. We're going to have to wait and see, as Jim said. But it would be interesting if that was to happen, because then you have a really nice tailwind for 2026. Because as I let off the show, inflation is what scares me. And it's possible, who knows, we may get lucky. [00:06:56] Speaker 1: Hey, Bryn, what do you think? Is it going to be one where you're just going to continue things in the first half of the year, the way that they have been the last five or six months? [00:07:04] Speaker 5: Well, I mean, if we get a repeat of this year, well, hold your nose because April and May wasn't too fun. I think that if you think about the cross currents or all just the different things that are happening, what's so important is think about if we get, let's say, two more interest rate cuts, how does that benefit all of us? Forget the stock market. First of all, we're issuing a ton of debt on the short term. And as we continue to roll that into lower rates, that is very meaningful on reducing the amount of interest we as Americans pay on U.S. Treasury. So that's number one. Number two, lowering rates, that's incredibly beneficial for housing. And I think within the CPI number, the White House is definitely dead set on having oil prices stay in the 50s, which we can talk about that later, the impact on oil companies. But that's very good for inflation. And I think as we continue to see owner equivalent rents starting to come down as they should be, that's going to be really pressure on keeping CPI, I think, at bay. And so I don't think it's really about getting lucky per se. I think that we have these ingredients, especially that owner equivalent rents is such a big part of core CPI. We need that to come lower. And with lower rates, you actually start getting the real economy, not just the stock market economy, the real economy doing much better. And also from a midterm, from an elected perspective, being able to get that interest lowered because rates and we keep refinancing on the short end. I mean, that's very positive going into next year.