Market Snapshot: What’s Driving the Economic Outlook? Featuring Scott Anderson, BMO

Before we begin, I do want to start with the recap of the markets. We’re recording this on Wednesday, August the 5th. July proved to be an interesting month. Markets saw a notable pullback in semiconductor stocks with the Philadelphia Semiconductor Index declining by more than 20%. That’s a sizable drop, but even after this move, the index remains up nearly 60% year to date and well ahead of the roughly 10% return of the SP 500 over the same period. It is worth noting, however, markets have rebounded sharply since the end of July. August 4th marked a new high for the SP 500, with the index up 1.8% on the day, and the NASAC rallying 3.3%. Bond yields move in the opposite direction with the 10-year yields hitting a new high for the year. Newly appointed Fed German wars seemed to play a role in the bond market sell-off given an absence of forward guidance. Bond yields moved in the opposite direction with 10-year yields hitting a new high for the year. The first print for Q2 GDP came in softer than Q1 and weaker than consensus, 1.5% actual versus estimates of 2%, and versus 2.1% in Q1 2026. The good news, personal consumption growth jumped 3.2%, well above the 2.3% consensus, and a big improvement from just 0.5% in Q1. Core PCE prices were benign too, rising just one-tenth of percent in June. So, Heidi, the July edition of SIPMA’s Insight Market Metrics and Trends report focused on the disconnect between Q2 earnings season and stock performance. Despite double-digit S P 500 earnings growth, roughly half the companies beating both revenue and earnings expectations still saw their stock decline during the trading day following the announcement. Can you elaborate on what you covered in this report?

Heidi Learner: Sure. Thanks, Ken. We’ve had a very robust earnings season so far. Q226 earnings growth is the highest it’s been since 2021, and it’s even greater than what we saw in the first quarter, which had also been a post-COVID high. Yet we’re still seeing a large number of companies experience a one-day decline in price following these earnings feeds. We think investors are placing greater weight on forward guidance than on reported quarterly results alone, particularly when it comes to future CapEx spending plans. To take an example, Q2 earnings for the consumer discretionary sector have weatened consensus forecast by more than 120%, so more than double what analysts have been expecting. But the average one-day price move for these companies around their announcement dates has been just 0.1%. Even when we look at individual companies and look at those companies whose earnings and revenues both meet street expectations, exactly half of reporters had one-day price declines. And this was true on an absolute basis and also relative to the performance of the SP. So it seems good news isn’t necessarily enough to propel stocks further, at least from what we’ve seen to date.

Bentsen: And it’s just I’m just curious, Heidi, and I thought it was a fascinating report. Um how unique is this over time? I don’t know how far you look back to see if there’s been a similar breadth of the differential that you found in the report that we just released.

Learner: We’d we’d have to go back a few more years to really have some comprehensive data. Um, but perhaps one thing that may emerge on a future monthly metrics report is the extent to which CapEx spending is really um affecting price movement. And for that, we’d really want to go back to prior periods where companies have been deploying so much capital, so probably in the pre-2001 era.

Bentsen: Great. Well, we’ll we’ll we’ll we’ll maybe take a look at that and something for our listeners and viewers to to look forward to. With that, Heidi, thank you for that. And now let’s tune in to a replay of the Economists council briefing. Well, let’s discuss the results of the survey. Conducted after the Federal Open Market Committee’s June meeting, the survey captured perspectives from U.S. economists at more than 30 leading global and regional financial institutions and assessed the current economic landscape and the outlook for inflation, labor markets, monetary policy, and more. So, with that, let’s go to our conversation and let me bring in Scott and Heidi into the conversation. Scott, thank you for joining us today.

Scott Anderson: Thanks for having me on again.

Bentsen: Great. Um, so let’s start with the economic outlook. The survey showed the median forecast for real GDP growth holding steady at 2.2% for 2026. Q4 2026 over Q4 2025, unchanged from the November survey. How would you describe the underlying strength of the U.S. economy as we move through the rest of the year?

Anderson: Well, great question. You’re absolutely right, Ken. U.S. economic growth in the first half of 2026 remained remarkably resilient and stable, despite being buffed by a number of shocks and underlying structural changes to the U.S. economy. I think number one on economists’ minds in this survey was, of course, the spike in energy prices and inflation with the conflict with Iran. And that’s that’s a big change from December of 2025. And almost every all economists on the council raised their forecast on CPI and PCI inflation substantially, about a percentage point above where it was in December. On top of that, of course, we got ongoing shocks from the tariffs in trade uncertainty just today, the president announcing new 50% tariffs on Canada. Um, and so that that shock from that has diminished in terms of the economic impact, but it’s still very much there. And the uncertainty of that is what’s playing out for a lot of industries and CEOs around the country. We also have the diminished in migration and in population growth, labor force has actually contracted over the past 12 months. Um, so that’s that’s continuing to weigh on aggregate demand. And then just the labor market in general, we’ve seen a moderation in job growth, though most panelists thought job growth would stabilize at these lower levels, and and real income growth has actually slowed as well. So that’s that’s weighing on consumers besides the fact that gasoline prices are rising. On the positive side, though, which is really offsetting a lot of the negatives at the moment, is the rapid rise we’re seeing in the stock market, stock prices, household wealth. Um and of course, we had the one big beautiful bill act um that really um drove larger income tax refunds in the second quarter, which really both of those things really kept real consumer spending growing, um, though it left a more uneven landscape for consumption where we had lower income households that aren’t benefiting from the wealth effect or as much from the income tax refunds. They’re they’re actually seeing struggling a bit more with rising energy, food, and transportation and service prices. Um and then, of course, what’s got a lot of Wall Street attention these days is the AI-driven investment boom. Business investment continues to see most economists’ forecasts in the first half of the year. So um nearly all of the council members did raise their forecast on business fixed investment this year despite all these headwinds and shocks that are buffeting the economy. And that that that AI investment seems to be will be go ongoing despite um you know the Iran war and other shocks. And so that’s a pretty important stabilization for us right now, keeping the economy afloat. And and the outlook is that growth could stay in this two to two to two and a half percent range, a little bit above potential or close to potential over the next 12 to 18 months. So it’s a pretty generally pretty constructive outlook the median forecast.

Bentsen: So that’s that’s great. That’s a great overview. So maybe let’s let’s dig down into some of the points you you you mentioned. You know, while the while the survey of the of the of the round table you know did find sort of the growth outlook you know flat or at all, it did also find that half the survey participants noted a deterioration in their 2026 outlook, with you know half only half reporting an improvement, and that even though all the respondents put in a recession risk next year at 30% or below, there was some movement around that. What what did you make of a forecast that is less optimistic in some sense on growth, but is more confident that a recession can be avoided?

Anderson: Yeah, like I as I mentioned, the outlook is pretty uneven. We’ve got a lot of forces hitting the economy all at once, so it’s pretty hard to disentangle all the effects. Um, I do think the Iran war and the rise we’ve seen in gasoline and oil prices was pretty unforeseen in December. And I think that’s part of the reason why I think most of the council members responded the way they did to that question. I do think it has put additional downward pressure on real income growth, which is the lifeblood of consumer spending. We’ve seen consumer confidence getting hit, you know, big declines in consumer confidence on the back of the war break out. And this is also, as you know, pushing up not only inflation, but interest rates. And so we’ve seen longer term, especially longer-term interest rates moving higher, mortgage rates have moved higher, and that’s undercutting some of the strength we were expecting to see, or some of the recovery we’re expecting to see in the housing market and residential construction. Economists are pushing off though that recovery into next year, given given these effects.

Bentsen: So you talked about AI and fixed business investment. Increased AI cap X was quoted as the is the top upside risk to the economic forecast, with a pullback in energy prices and stronger consumer spending rounding out the top three upside factors, while an AI investment correction escalating geopolitical conflict, as you mentioned, and a further increase in energy prices were cited as a top downside risk. Separately, the most likely impacts of AI over the next 12 to 18 months were seen as a boost to GDP, again, going back to particularly fixed business investment, through greater investment and productivity gains, but also added inflationary pressure from the CapEx spending itself. How did these factors shape your expectations for growth moving forward?

Anderson: Well, there’s no doubt the AI investment boom in CapEpps, CapEx growth we’re seeing right now is top of mind and really lose large in the economic outlook and how that plays out over the next 12 to 18 months is really going to drive um a lot of the economic overall economic outlook here. I do think the AI investment boom, the increase and the impact it’s having on the stock market, business fix investment overall um is is really overshadowing the consumer at the moment, and including the Iran war. So I I do think and part of the reason why the stock market has done so well, just with the latest news of the ceasefire breaking down and conflict you know widening perhaps in the Middle East, stock market has held up fairly well here because of this AI investment narrative that’s playing out on Wall Street. So we do see that as economists. We look at this through our macroeconomic lens and and we are you know anticipating a boost to productivity growth from this AI investment. Right now, we’re seeing a lot of that productivity gain. Um it’s important to note that productivity has actually picked up. It was through through the first quarter, it was running at about 2.9%. Um over the last 10 years, it averaged only 1.6%. So we’re definitely seeing a pickup in productivity growth already. I think a lot of that’s coming right now from capital deepening, the fact that we’re almost investing close to now approaching close to a trillion dollars a year in CapEx on um AI, as that’s what’s been pledged by the hyperscalers. So and that’s expected to continue or is planned to continue over the next four to five years at that level. So um that’s a big part of this story. Um, but of course, we also expect um it to raise the productivity of labor. And so knowledge workers, we’re gonna see, you know, coders, programmers are reporting big increases in their productivity and their tasks, but we expect that to spread to accountants, financial analysts, and you know, maybe even economists here going forward. So um there’s a lot of of that going on, and and there’s a lot of uncertainty around that. I mean, I think there was a letter that went out just last week from I think a hundred major economists, including Nobel laureates in academia, and kind of basically saying we don’t really know what’s gonna happen here and how this is gonna play out longer term, you know, in terms of the impacts on the labor market, how much is it going to boost productivity? So there’s a lot of unknowns at the moment. But I I will tell you that you know, economists have boosted our business fixed investment forecast by almost three percentage points from where it was in December based on this capital spend alone. And most most um studies that I’ve seen, you know, we see a potential improvement in productivity over the next 10 years of on average about a half a percent to as much as three percentage points a year based on um based on these AI investments. So that could really make some of our problems like our budget deficit and debt disappear if we were to see some of those more optimistic forecasts and scenarios around AI.

Bentsen: Yeah, that I I I noted the the pretty dramatic increase on the outlook on fixed business investment between the the two surveys. Hi Heidi, let me turn to you for a second. You know, same questions. You know, you’re looking, you know, on behalf of SIFMA every month, you’re looking at what’s going on in the markets, what’s impacting the markets, and then on a quarterly basis, looking at the fixed income markets. What stands out to you as the most impactful of issues or factors that are shaping your economic outlook?

Learner: I think it’s very similar to what Scott mentioned, which is the move away from personal consumption into non-residential residential fixed investment. And clearly that’s really the story of AI. I think if you look at the contribution to overall GDP growth, more than half of the growth we saw in Q1 came from non-residential fixed investment. And we’re now at all-time peaks in terms of the level of private fixed investment and information processing, equipment, and software as a percentage of GDP. And I think part of the concern is whether hyperscalers and chipmakers can sustain their level of capex, which to date has largely been funded through corporate bond issuance and equity market taps, and at what point perhaps the market steps back. And I think that’s part of the question, not so much whether the investment can continue, but whether the demand to finance that investment is still there several quarters down the road.

Bentsen: Yeah, and I think I mean, you know, um, and we’ll get into labor market in a bit, but the comments that Scott made with respect to just in the short-term productivity gains. Well noted that many of the top thinkers in economics aren’t sure what the long-term outlook is, that’s a pretty dramatic increase. I think you were saying what 1.6 or 7 to 2.9 or whatever. I mean, that’s a pretty substantial increase in productivity.

Anderson: Yeah, it rivals or surpasses what we saw in the dot-com era. So we’re already at those levels of productivity improvement if it if it’s sustained.

Bentsen: So just you know, maybe to round this out and then we’ll move on to inflation, you know, um again, you know, the survey, you know, looking further out, the survey for is forecasting in 2027 GDP growth rate at two at 2%, 27 over 26, a little bit down from from the 26 estimate. You know, what’s your read on on the trajectory going into 2027?

Anderson: Yeah, I wouldn’t get too nervous about the median forecast. 2% is still probably at or a little bit above what economists consider long-term potential growth for the US at the moment. So it really does describe a soft landing sort of scenario as kind of the baseline view right now among economists, despite all these risks of higher inflation, higher oil prices, you know, headwinds on the consumer. So, you know, you know, if you look at the the median forecast among among council members, you know, they’re expecting a gradual cooling of business fixed investment into next year, but nothing that really falls off the chart, just the acknowledgement that it’s gonna be pretty hard to sustain the double-digit growth rates that we’ve had over the past year or so. And then a slight pickup, offsetting that a slight pickup in consumer spending, as in most economists do still think that we’ll see some moderation in inflation over the next 12 to 18 months as energy prices kind of plateau and and we see the Fed maintaining a slightly restrictive monetary policy. Um, so that should help good consumer. You start to see a little recovery in real disposable income growth, and that should sustain a little bit better consumer next year. We also are seeing some tantalizing evidence of some stabilization in the labor market. We don’t expect to be breaking any job growth records anytime soon, but we do most, you know, forecasters do think we’re gonna stay at pretty close to break-even job growth rates into next year, which will allow the unemployment rate to remain steady at pretty close to full employment at around 4.3% into next year. So pretty constructive environment. Of course, a lot of that hinges on the inflation outlook, right? And whether we do get that moderation in price inflation or if the Fed’s gonna have to react to that with rate hikes rather than letting it moderate on its own. That’s a big wild card, I think, as we look into next year’s forecast.

Bentsen: Well, that’s a good segue to inflation. The survey forecast a steep, a steep increase in the inflation outlook with headline CPI and PCE projected respectively at 3.4% and 3.5% in 2026, largely impacted by the latest oil and energy price increases before tapering to 2.4 and 2.3%, respectively in 2027, but still above the Fed’s target. Core measures are expected to increase more modestly to 2.9% core CPI and 3.2% PCE in 26 before coming down further to 2.5 and 2.4% and 2.5%, respectively, respectively in 2027. Um, the the you know, the factors that the committee was looking at um you know last November compared to what they’re looking at they were looking at last month changed, right? I mean, there and and you know went from tariffs to tariffs to energy, geopolitical. What are the factors that came into play in this most recent survey and what is the you know, and how does this shape your expectations for inflation for the rest of this year and going into 2027?

Anderson: Yeah, you’re right, Ken. I mean, I think the drivers of inflation have changed a lot um in the last six months or so. Unfortunately, we haven’t got a lot of relief on those price inflation forecasts. As I mentioned, inflation expectations and forecasts for this year have gone up by about a percentage point since the end of last year. Um But you’re right. I think the tariffs and trade uncertainty that economists anticipated would drive elevated inflation this year, those risks have diminished a bit. And the also the rebalancing in the labor market towards softer labor demand is reducing the pressure from rising wages, which most economists think will start to moderate services inflation over the next six to twelve months or so. So those are some of the positives. The the negatives, and of course, we’re a lot of those positives are being replaced by negatives on the energy price front, right? With Iraq outbreak with the war, um, I was just checking WTI prices this morning, it was 85.50 a barrel on oil. I think Brent was trading at 91 over 91 dollars a barrel. So oil prices just since July 6 when the ceasefire broke down, the MOU broke down. We’ve seen retracement of oil prices of about 25 percentage points from the July 6 lows. So that’s a pretty big bounce back. We’re not back at the peaks that we saw a month and a half ago, but we’re um you know, this certainly puts additional pressure on prices um and global supply chains and adds adds to some uncertainty here. I think the baseline view among we didn’t ask our panelists what their forecast was for oil prices at the end of the year, but I can share my own personal view is that we we do think oil will moderate by the end of the year. You know, it’s gonna be a bumpy road between now and then, but you know, we’re looking at oil averaging around $75 a barrel at the end of the year and kind of staying at that level next year. So that that would be important. If we can get to those levels, we should be able to bring that inflation rate down next year, somewhere closer to the two and a half percent range instead of the three, three and a half percent we’re we’re at right now. So a lot of uncertainty there. And I and of course the war is really going to drive that. And you know, whether we get you know, expansion of the war with another closure of the Red Sea oil, um, you know, which is what the markets are wrestling with today, um, you know, really raises some risks there. So yeah, things have maybe changed since we did the survey a week or two ago, but I think in general, most counts would still say, well, we should see some moderation without the Fed having to you know slam the brakes in terms of raising interest rates.

Bentsen: Well, and and and interestingly, the the survey showed that um you know, notwithstanding sort of the higher near-term numbers, 56% of the respondents expect PC core PCE rather, to fall to the 2% target on its own accord without any sort of significant economic slowdown. And 89% believe inflation expectations will remain anchored. So, you know, you you’ve you sort of got into that in your own views, but what what is it that that what do you what do you think the your you and your colleagues are seeing that they think that feel pretty confident, I guess, at this point that you know, as we get to say 2028, we you know PCE, core PCE should fall towards that 2% target, absent you know, any sort of dramatic action or you know externalities that we don’t you know we don’t see today.

Anderson: Yeah, well Ken on the bright side, you know, I I did talk about the the spike in oil and energy, but luckily we haven’t seen a lot of that you know pass through or translate through um to higher services inflation or goods prices overall. So it’s been pretty contained in the energy space. So as you know, core inflation, you subtract out energy and food prices and look at what’s left over. And of course, um the new Fed governor or new Fed chair Kevin Walsh has talked about maybe using an alternative core measure than the core PC that’s been favored at the Fed for for some time. We can talk a little bit more about that in a minute. But yeah, so there is this some some bright side there. And then of course, theory will tell you that the Fed should kind of look through you know, in an in an energy spike. As we know, energy is very volatile, it can jump you know 100% one month and down 50, 100% the next month. So the Fed doesn’t want to overreact any one number. Another thing on the bright side, I’d say, Ken, just very quickly, is on inflation expectations. We haven’t seen that, the spike in energy really translating into higher inflation expectations. That’s something the Fed is watching very, very carefully right now, because that might trigger a response from the Fed in terms of higher rates. The good news there is even if you look at the University of Michigan sentiment measure that came out, I think, last week, we saw some nice moderation in both the one-year and the one-year forecast on inflation from consumers in the in the longer term inflation expectation remained unchanged at elevated but unchanged. But the market expectations on inflation expectations have actually moderated even more. You know, we track um the inflation break evens in the treasury market of the two, the five, and the 10 year, and we’ve seen nice declines in those inflation expectations components back to almost pre-war levels, um, you know, even with the resurgence of um of the conflict in Iran with Iran. So that’s good news. If those inflation expectations can remain contained, the Fed will be able to hold off on raising rates and could see inflation returning to target before too long.

Bentsen: And and Hadi, I I know you and your team monitor inflation dynamics very closely, you know, with energy and geopolitical risk now rivaling domestic demand as a key driver, and you know, timeline for inflation’s return to target has been pushed further out. What should market participants be watching most closely?

Learner: I continue to watch services inflation. If we look at the PCE price index for services and strip out energy and housing, we’ve seen this measure actually start to turn up. We were at 3.9% on a year-over-year basis in May of this year, and that was the highest increase that we’ve seen since Q4 of 2023. Now, pre-COVID, this measure was safely between two to two and a half percent. So at 3.9%, I’m gonna continue to watch this metric in particular rather than let’s just say overall goods prices. Now, part of this measure, services, ex energy, and housing is transportation services, and that’s clearly going to be influenced by oil prices, but this is still something that bears watching overall.

Bentsen: And let’s turn, you know, let’s turn to the labor market. I I know both of you all made some comments about that in in the opening, but but you know, the the survey’s forecast for labor force participation was revised down from the November survey, with the rate now seen moving to below 62% over the next two years. Labor force participation, the labor force participation rate also declined to 61.5% in June, the lowest reading outside the pandemic since 1976, with roughly 720,000 people exiting the labor force that month alone. What’s behind such a sharp drop and you know what does that downward revision tell you about the labor markets forecast, Scott?

Anderson: Oh thanks for that, Ken. Yeah, we’re seeing a lot of noise in the labor force statistics at the moment. So I’d be you know a little cautious in drawing too many conclusions from the data, but we definitely do know that, you know, slowing in migration, slowing population growth from the new immigration enforcement and policies have had a big effect on labor force growth. And on top of that, we of course we’re really starting to see an acceleration of the baby boomers you know exiting the labor force. A lot of folks may have even accelerated their retirements because the stock market’s done so well, so they feel like they can they can do that. We don’t have a lot of good hard data on this, you know, there’s a lot of estimates floating out there. Um I will say this you know, most um right now we you know the the BLS is reporting that labor force growth is negative year over year now, down 0.7 percent through June, you know, with about 1.1 million folks exiting the labor force on net. Um, I think that’s a little weaker than what most economists thought we were at. We’re you know, we’re kind of expecting going forward that labor force growth will be somewhere in the zero to a half a percent range, which is still about a third the pace we had at the you know last couple years of the Biden administration. So we’re definitely seeing that slowing of the labor force. Um, that’s helped rebalance a labor demand and supply. So we don’t um, you know, we’re not as concerned about weaker demand for labor because we’d have less less supply out there. So the labor unemployment rate, which normally would be spiking at the moment, has really actually been quite flat. So, you know, this is something we’re watching very, very carefully. You know, the I was looking at the BEA’s estimates of population growth through May. They’re at about 0.3% now, year over year. Um and so again, it’s about a third of of the population growth that we we had just a year or two ago. So that you know, the this structural shift is you know happening below the surface. I don’t think a lot of it’s being driven by AI or the lack of demand at the moment. You know, we’re watching these surveys that are showing that you know there’s a lack of hiring of young people around AI and maybe even you know higher income folks um might be seeing um you know more pink slips in the future around around the AI trade. But at the moment we don’t think that’s really driving it. It’s it’s more of this demographic and population growth shift that we’re seeing from immigration.

Bentsen: And and Heidi, the the survey results point to structural forces, including and Scott was kind of alluding to this, I think, but an aging population, elevated retirements, reduced immigration as a main drag on labor supply rather than cyclical weakness for demand of workers or for workers? That dynamic may keep unemployment lower than usual during a period of slower hiring, but it also reduces potential growth and can contribute to labor shortages and puts upward pressure on wages, which would be complicating the Fed’s job on you know, keeping a check on inflation. What does this mean for wage growth, labor costs in the Fed’s longer run policy framework?

Learner: Sure. I think at least for now, wage inflation really isn’t a threat. If we look at average hourly earnings on a year-over-year basis, they’ve actually been trending down. They were at a peak of 5.9% in March of 2022. And the latest report that we saw in June, we landed at 3.5%. So that’s a meaningful deceleration, but still above the Fed’s inflation target. Um, this is true even when we look at the employment cost index, which keeps the composition of occupations and industries fixed. And here we see total compensation similarly peaking in 2022 and leveling out at 3.4% in Q1 2026 for all civilian workers. And while this is higher than what we saw in 2018-2019, I think the trend has been in the right direction. So at least for now, wage growth really doesn’t present a headwind at present. But I think a sustained pickup in labor demand could change that dynamic on a go-forward basis.

Bentsen: So let’s shift to monetary policy. And before I turn to Scott, again, if you have questions, go to the Q&A tab on the bottom of your screen and type in your questions. So, you know, Scott, let’s discuss monetary policy. You know, following three cuts to the Fed’s policy rate in 2025, the survey predicts no cuts in 2026, with the majority expecting one to two cuts in 2027. Meanwhile, almost two-thirds of the respondents believe that a Fed hike that ends the equity market rally and causes long-term borrowing rates to spike poses a greater risk than a no-fed hike leading to accelerating inflation. What trisk do you see is more likely to materialize and why?

Anderson: Yeah, I probably alluded to this already in our conversation, Ken, but I do think, you know, we’re watching very carefully the new Fed chair,Kevin Walsh, and how you know economists were a little divided whether he was going to come in as a hawk or a dove on monetary policy. You know, when he was back back before the and during the global financial crisis, you know, Walsh was seen as a a pretty hawkish Fed governor. I do think um the FOMC appears to be pivoting towards this hawkish pivot. Um, you know, he’s you know, Chair Walsh in his comments to Congress last week and of course the June, his first June FOMC meeting really did talk a lot about inflation, you know, and remaining vigilant on the inflation front. Really hard didn’t even talk about the labor market at all. So I do think you know, when you look take the you know the totality totalitaire the totality of the evidence, you know, the FOMC statement, the minutes that were released on the June meeting, um, the update we saw on the dot plot and economic growth outlook, um, and now of course the unfavorable developments we’re seeing right again now in the Middle East, all these shift the balance towards maintaining the current monetary policy stance and more towards probably another rate hike rather than a near-term cut. Um the I would say on the bright side, you know, this was of course a week or two ago now that we’ve surveyed our economic council, but at the time economists were less concerned about a rate hike than the markets were at the time. So only 22% of our survey respondents thought the Fed would hike rates by the end of the year, for example. Um and so, but on the other, on the other hand, a lot of them thought the neutral Fed funds rate might be higher than the Fed’s median, somewhere in the three and a half to four percent range. So while economists didn’t think the Fed needed to hike anytime soon or immediately, they did worry that you know they shouldn’t cut or that you know rates will remain high for higher for longer there. You know, looking at the futures market today, you know, the the market given what the president announced on you know, Canadian tariffs and outbreak of the war, markets are factoring in, almost a fully factoring in a rate hike, one quarter point hike by October, you know, one and a half hikes by the end of the year. So, you know, the markets have kind of doubled down on the rate hike expectations, at least so far, given where things have developed for the last month.

Bentsen: And and Heidi, you know, on following up on that and and you know what you’re seeing or what you’re hearing in what you’re seeing in the markets, you know, how how do you interpret this shift from a easing cycle to a Fed that appears to at least be on hold? And I would agree that the chairman certainly sounded very hawkish, sounded very hawkish last week when he was testifying before Congress.

Learner: He did, and there’s a real divide, I would say, between what the Economist Council sees and what the rest of the market sees, which is somewhat interesting. Um the Economist Council, as Scott mentioned only 22% of our respondents saw the Fed hiking by year end. And that compares with the market with us looking at CME futures, where the market overall is pricing at an 87% chance of some hike by year end. And that’s with roughly 38% of the market seeing one hike and 35% seeing two hikes, and then the balance seeing three or more hikes. So that’s a real difference from what our own panelists are telling us. I think what’s interesting to note is that this change in the market overall represents a real sea change from what we saw at year end. So since we saw the Fed’s last cut in December of 2025, um up until about March of this year, the market was aggressively pricing in and easing, and clearly that’s now changed. Um, and this is interesting, even in light of the fact that core CPE, um I’m sorry, core CPI rather, um that we just saw from the most recent print was unchanged on the month. And that was the first time we had a flat reading since a string of decreases back in 2020. So I think in light of the maybe step back in inflation, you know, one month doesn’t make a trend, but it was decidedly good news. It’s just interesting to see that the market is really pushing for a rate hike, which is again not what our what our council sees.

Bentsen: And Scott, you know, you know, Chairman Warsh is just entering, I guess, his third month more or less of being the 17th chair of the Federal Reserve Board. Um, you know, he he’s before he was confirmed and and since he’s took office, he’s certainly he’s talked about a lot of changes, reviews that he wants to do, he set up various task force with a you know a whole number of luminaries participating on those, talking about elimination of the dot plot, greater focus on trim mean inflation, a smaller balance sheet. And you know, you know, even though 63% of our respondents think that the current $6.7 trillion level of the balance sheet is probably appropriate. How do you expect Chairman Warsh to differ from Chairman Powell and what changes should market participants expect?

Anderson: Well, I think we’ve already seen some of that with the with the June FMC statement and his post-meeting press conference. The FMC statement itself was about a third the length of under Paul’s. So, you know, the one thing that we’re really focused on right now is just how Fed communications and forward guidance are going to change from this new Fed chair. And it, you know, as as he shared in his commentary to Congress and others is is that you know he’s he’s really looking at perhaps scaling back forward guidance, perhaps getting rid of the dot plot going forward um and other changes in communication, maybe even scaling back press conferences, not doing them as much as they’ve been done over the last couple of Fed shares. So, you know, the big thing is of course what’s going to come out of these um these task force that Kevin Walsh has set up, and he’s set up five of them around a number of important areas. One, of course, is inflation framework. So he’s looking at, you know, should we still be looking at the core PCE or should we be looking at alternative like trimine inflation measures? Um he’s he’s talking about communications. Are we oversharing, overly transparent? Do we need to scale some of that back? Um on the balance sheet again. Do we need to maybe if we don’t reduce the balance sheet further, as as most I think economic council members didn’t think that we needed to reduce the balance sheet a whole lot from where we are right now? But they might change the composition of that balance sheet, more focused toward treasuries, shorter end, longer end versus you know, having agencies and other mortgage-based securities in that in that port Fed portfolio. And then if just on economic data in general, are we really taking advantage of all this alternative data that’s out there from the internet and other sources that could help inform the Fed’s decisions? And then, and then just of course the AI effect, right? How is this gonna play out in terms of um productivity, labor market impacts, and how is the Fed gonna have to maybe respond to that through monetary policy as those this develop? So a lot, a lot of new things for markets to think about. I think on the bright note, this really does raise the value of economists like us that are you know kind of Fed watchers. If the Fed isn’t sharing as much in their forecasts or around their next rate moves, you’ll have to turn to folks like us a little bit more and in terms of what we think, in terms of what the fund’s thinking.

Bentsen: So let’s let’s maybe close out. We have a few minutes left. Let’s um on talking about the markets and the market outlook. The survey has two-year treasury yields easing gradually from around 3.97 to 3.73 by the end of the second quarter of 27, with 10 years are seeing largely unchanged at around 4.4 percent, with inflation, inflationary, inflation and inflationary expectations reclaiming the top spot among factors driving that view. Response also soundly or response also sound pretty calmer on equities in the survey than in November, placing only a zero to 20% probability of a 20% or greater pullback in the next year. You know, Scott, what’s behind the calmer view and what does it tell you about the current market outlook?

Anderson: I think it’s a lot of it’s just the resilience in the equity market that we’ve seen. But I think you know the background in terms of fundamentals for US companies, especially those in the AI space, is pretty good given these in this inflation forecast and outlook. Um, corporate profits is a share of the economy. are still near record high levels in the first quarter. You know, you know, earnings expectations continue to exceed analyst forecasts. PE ratios are starting to be a little bit on the high side, even if you look at you know historical or forward looking. I also look at the CAPE ratio that looks a little bit, you know, really close to levels we saw at the peak of the dot-com bubble years. So there’s there’s different metrics to look at. But in general, companies remain in really good shape and you really see that in the corporate bond spreads. You’re just not seeing a lot of risk being priced in even with all these shocks washing over the US economy. Um so most economists are looking for pretty stable interest rates. I do think it’s more of a higher for longer forecast on the long end. You know, certainly you know focus on federal debt and deficits is something that’s I think going to grow over the next year or two, especially if the Biden administration gets their increase in military spending, you know, they’re asking for another 450 billion over defense over 2027 fiscal year. So we’ll see how that plays out and Congress are certainly asking for momentum to to continue the war.

Bentsen: And so um all these things probably are putting some upward pressure on longer term yields we you know we asked panel economic council members how much this was impacting the treasury market and and we thought it was fairly modest at the moment but it was it was a positive 15 to 20 phase point range given given what’s what’s going on now so it’s something that more and more bond investors are going to be focusing on more yeah i yeah yeah what’s interesting i mean i mean the panel was rather bearish on the on and you know i think it was something that in terms that of you know 78 percent respondents doubted that there would be any material impact on the deficit currently six percent of gdp declining in 2026 interesting i i heard a comment from a senior banker today noting that you know with the markets as strong as they are right now that we’re not seeing the spill on effect of of you know growth in corporate tax revenues and bringing down the deficit usually when you have a you know obviously the economy is not growing at a three percent it’s growing at a two percent handle but we haven’t seen the knock on effect of the strong economy to necessarily to impacting impacting our deficits um I want to we just have a minute or two left let let me just sort of close out I’m gonna ask Scott and Heidi if you’ll both um maybe start with you Scott sort of any final thoughts you’d leave us for the rest of the year yeah I you know I think the uncertainty and the outlook even though the overall outlook looks relatively calm and stable in the next 12, 18 months, I think it does hide below the surface, you know, a tremendous amount of turbulence that we’re seeing consumer spending and among income brackets within consumer spending even in the business investment space we’re relying a lot more on AI and those drivers to drive overall business investment to the detriment of perhaps other businesses and industries.

Anderson: We’re also seeing a bit of a pause right now in residential construction and the housing market as as mortgage rates rise. So a lot of challenges there I do think overall we still have a lot of positives to point to um you know and again a lot of that’s going to hinge on you know how inflation unfolds in the next 12 to 18 months and really the impacts of of AI and how as they wash over the economy. So those are some of the things that I’m really focused on right now in terms of you know possible things that could come from rough field and affect the outlet.

Bentsen: And Heidi, your thoughts?

Learner: I’m concerned about the Fed’s ability to really alter um the outlook for growth given that many of our challenges really aren’t demand driven but more supply constraints, whether it’s the labor force growth situation that we discussed or even global oil supply because issues that stem from demographic changes or immigration changes or global wars are structural in nature. And structural forces really don’t react to changes in monetary policy the same way that cyclical forces do. So it’s going to be interesting to see how the Fed responds particularly in the wake of these drivers of inflation that wraps our discussion for today.

Bentsen: Heidi thank you for joining me I’d also like to thank Scott for sharing his insights during the briefing and for his leadership as co-chair of the SIFMA Economist Council. And thanks to all of you all our listeners and viewers for joining us. As always comments and questions are welcome listeners can reach us at digital at SIFMA.org. Learn more about SIFMA and our work to promote effective and resilient markets please visit sifma.org and we’ll see you in September with the next market snapshot