A Conversation at SIFMA’s 2025 Annual Meeting

Moderated by BMO’s Scott Anderson, this session at SFIMA’s 2025 Annual Meeting brought together members of the SIFMA Economist Roundtable to share perspectives on growth, inflation, and policy. Against the backdrop of persistent inflation and fiscal uncertainty, panelists explored what’s next for the U.S. economy — and the balance between resilience and risk.

Key Takeaways

• Inflation remains sticky: Fiscal debt is nearing 130% of GDP.
• The Fed’s balancing act: Rate cuts may come at the cost of price stability.
• AI reshaping productivity: Efficiency gains could offset headwinds but displace millions of jobs.

Speakers

• Lindsey Piegza, Ph.D., Chief Economist, Stifel
• Thomas Simons, Chief US Economist, Jefferies
• Nicholas van Ness, US Economist, Crédit Agricole CIB

Moderated by:

• Scott Anderson, Ph.D., Chief US Economist and Managing Director, BMO and Chair, SIFMA Economist Roundtable

Watch

Transcript

Scott Anderson:               Well, good afternoon everybody. Hoping you’ve been enjoying the conference so far. A lot of great information for everybody here. So, you’re here for the highlight, right? What’s the state of the economy? Where are we going from here? We’re all going to look into our crystal balls and give you our best guess on where we are. So, as I mentioned, we’re going to do a quick survey. I don’t know, you’re going to put up the QR code for folks so they can… So, before you hear from the experts, we’re going to give a chance for the audience to weigh in on what you can all play armchair economists today and give us your thoughts on where you think the economy’s headed next year.

So, the first question is, in 2026, do you believe the US will experience a soft landing, similar growth as this year or hard landing or no landing at all, it’s actually acceleration growth? And it’s a real-time poll. So, as people put their responses in, we’ll get new results here. So, it looks like it’s a horse race right now between soft landing or somewhat slower growth, or I’m surprised to see hard landing as high as it is right now, almost 39%. You must be thinking about where equity valuations are these days. Wow. Okay, great. Let’s move to the second question. I don’t know. Okay, so what do you expect inflation to be in 2026? Similar inflation to this year, slower inflation or faster inflation?

And then we’re going to send these results directly to the Federal Reserve Board after this conversation. Again, interesting results. Very stagflationary forecast from the audience here. A hard landing and faster inflation, not a great forecast. I had probably get fired if I put that one out there, I don’t know. And last question then we’ll get to the meat of the discussion. So, where do you expect the Fed funds rate to end, not this year, but next year? We made the question a little harder. So, obviously some interest in how much central bank independence we’re going to have next year with the new Fed chair and possible new Fed governors. So, a lot of uncertainty about where we’re going to land in rates at the end of next year.

So, we’re at between four and 4.25 right now on the Fed funds target rate as of the September cut. It looks like most of you aren’t expecting a lot more rate, most of you between 3% and 4%, which is I think pretty close to the consensus view out there on the streets. So, looking for a few more cuts here from the Fed at least before the end of the year and into next year. So, thanks for that survey. So, I do think we’ve assembled an excellent panel of chief economists today to help you shed some light on where we may be headed. And like we said, we’ve got Lindsey Piegza from Stifel. We’ve got Nicholas van Ness from CIB Credit Agricole, and Thomas Simons from Jefferies here.

So, as you know, 2025 was a year of profound economic policy changes. We had a lot of dominating in the news cycle of the tariff and trade issues, immigration issues, policy changes. Of course, we had the tax and spending policy changes with the one big beautiful bill and we’re now of course sitting here in Washington D.C in the third week of a federal government shutdown. So, lots to talk about here. And we haven’t had a lot of economic data, right as governments had shut down now for more than 20 days. But there were some concerning signs of U.S labor markets slowing in August and over the summer. We’ve got the Federal Reserve now in inactive rate cutting mode and talk about ending their quantitative tightening within months.

And we’ve seen some threats to central bank independence. So, a lot going on as you can imagine on the policy front and the economic front. And then I’d say because I come from San Francisco, I sit in the Bay Area and we’re running in the background and maybe in the foreground is an AI investment boom, which we’re seeing a lot of evidence of out there on the West Coast. And of course, watching what’s going on on Wall Street in terms of the equity market and other financial market valuations, perhaps maybe getting a little over their fees. So, lots to talk about here today. So, let’s dig into it here.

So, just to set the stage, how would each of you characterize the health of the real economy right now in terms of your GDP and GDP outlook, employment inflation growth? And I’ll start with you, Nicholas.

Nicholas van Ness:               Sure. So, I think overall, we’d say it’s been a little bit of a mixed bag. I think the economy has performed decently well, been relatively resilient, especially when you consider the major shifts in policy that have been pretty constant during so far in Trump’s second term. But at the same time, we do think there’s some risks to be aware of, and I had say at least the economy may have become a little bit more vulnerable to a shock as we move forward. Starting with GDP growth, the data has obviously been extremely noisy so far, especially components like net exports, inventories due to the shifts in trade policy.

If you look to maybe smooth that a little bit and you average the first half of the year, we have growth averaging about 1.6%. So, still a decent pace. And I think if you look at some of the components, you had certainly some strength in investment or non-residential investment. I guess I should specify a lot the AI boom likely contributing there. Consumption, that makes up the largest portion of the economy around 70%. And I think spending momentum has been pretty strong to this point, or at least to this point, I should say through August when we have actual data given pretty strong household balance sheets in the aggregate.

That said, if you look at that 1.6 pace, that average in the first half, that is down pretty solidly from 2.6 in the second half of last year. And we would say that growth has become a bit narrower. Meaning, that I think there are maybe some more struggles among smaller businesses, lower income households, which you can see in things like a pretty clear upward trend in a lot of types of delinquencies and growth has become more heavily concentrated among, we’d say larger businesses and upper income households.

So, just that the more concentrated nature of growth I think means that if you have a shock that causes just, for example, upper income households to become a little bit more conservative or more cautious, then that’s something that could hit the economy going forward. On the labor market, maybe a little bit similar, still I think in a decent spot right now. Unemployment rate is still historically low at 4.3, even if it’s off the cycle low that we had seen. In the wake of COVID as we’d enter into the low hiring, low firing environment, I’m sure people have heard that phrasing pretty commonly. So, I think if you have a job, things are pretty good. Layoffs, at least in the aggregate are still very low.

Wage growth is above where it was in the pre-COVID period. But on the other hand, if you don’t have a job, things aren’t as good. And the hiring rate has certainly slowed pretty sharply and it’s become much more difficult to find one. And now, we do think that needs to be taken in the context of pretty sharp or drastic shifts in immigration policy. That means the break-even pace of hiring is much lower. We think that’s probably below 50,000 a month. So, that maybe mitigates some of the slowdown in hiring in terms of limiting upward pressure on the unemployment rate. But at the same time, it does mean that if there’s a shock that leads to rising layoffs, then we don’t necessarily have hiring that’s strong enough to offset that.

And then lastly, very quickly on the inflation front, again, we think a little bit mixed. I’d say certainly made some pretty substantial progress compared to where we were two, three years ago. The tariff impact so far I think has been relatively limited, or at least not as bad as many had feared. But we do think that some tariff impact is still to come and it’s more been delayed, rather than completely avoided. Plus, if you look at say, services inflation, that’s a little bit less impacted by tariffs. That has been, we think relatively a slow grind lower and still at levels that are a little bit above what we would consider consistent with the 2% target.

Scott Anderson:               So, where do you see core inflation at the end of the year?

Nicholas van Ness:          So, end of this year we have core CPI at about 3.2% and then hovering in that range throughout the first half of next year before some gradual slowdown after that.

Scott Anderson:               So, we’re not quite there yet, we’re going to see a little bit more. How about you, Lindsey?

Lindsey Piegza:                  Well, I think certainly we were concerned about growth as we turn the calendar page into 2025. And as mentioned, it was largely a reflection of this anticipated impact of policy on trade. And that was a storyline that largely played out in the first quarter. We saw imports surge about 40%. And of course, as we’re sending money out of the country, that contracts from growth and net trade shaved off about 5% from first quarter GDP, resulting in that 0.6% drop that we saw January to March. Now, there were some sizable positive offsets in terms of consumption and investment in the first quarter, and that carried through into the second quarter. And so, while we did see that dismal decline, we also saw a sizable pop-up near 4%.

And if you watch Atlanta’s GDP now again based on data that we have, that’s looking at about a three and a half percent gain in Q3. So, when we look for the entirety of the year, we are optimistic that we’ll be around a two-ish percent growth rate. So, noticeably above what the Fed is forecasting, not necessarily anything to write home about as 2% I generally say is the bare minimum that we should expect from a developed economy, 1% from population growth, 1% from productivity, there’s your 2%, but still positive and well beyond some of the more dire forecasts that we saw in the marketplace at the onset of the change in policy as the Trump administration came to Washington.

As far as employment, we have lost some momentum in terms of hiring that’s to be expected in an aged recovery. We’re still talking about positive job creation. We’re still putting Americans back to work, but doing so at a noticeably reduced pace. But at an average pace of 75,000 or closer to about 30,000, if we look at just the last three months, that’s still in the range of what the Fed tells us is needed to maintain that break-even level in terms of employment figures. Now, the unemployment rate at the same time, very low in that four-ish percent range as it has been for the past several years. Wage growth is still solid. Job vacancies are still robust.

So, yes, there is some not necessarily reason to be concerned, but reason to be aware of some of that declining momentum, but far from an ailing economy or ailing labor market in desperate need of monetary policy support. That being said, on the flip side, I am very concerned about the inflation outlook. Inflation has become increasingly ingrained in this economy and the Fed seems somewhat passive about getting back to that 2% target. They maintain the vocal commitment to reinstating price stability, but for the past several years, they’ve simply not taken the steps to guarantee a return back to that 2% target.

And at this point, particularly looking out to the end of the year and as we turn the page into 2026, I do think the risk, the…

Lindsey Piegza:                  As we turn the page into 2026, I do think the risk to inflation is to the upside. If we see a stronger growth profile, a stronger consumer during that key holiday spending season, or if businesses begin to pass through more of that tariff costs, those higher costs, onto the end consumer unable to continuously absorb those cost increases into the bottom line. Any one or a combination of those factors will put upward pressure on inflation, complicating the picture for the Fed.

Scott Anderson:               Thank you. Thomas.

Thomas Simons:               Yeah, sure. So I don’t think I’ve disagreed too much with either of these views, certainly where we’ve come from and where we’re heading, but I’ll just try to take a little bit of a different tack in describing my view, which is it. And I think something that most people in this room would be sympathetic to is it’s like if you are going for your annual physical and you get your blood work done and all the numbers come back and they look… They’re all in the green range of the zones that say you’re not really in too much trouble. That’s kind of what most of the economic data looks like. We’re kind of in this moderate, not necessarily overheating type of zone, but you know in your heart that you don’t do as much diet and exercise as you should, you make commitments to changes that are not really going to be held.

And also you just don’t generally feel as good as the numbers suggest that you should be feeling. So there are a number of reasons why I think that’s the case. Certainly it seems that there has been a pretty significant shift in the seasonal pattern of both personal consumption on the household side, but also business investment as well, such that we’re getting a lot more chop in the data than we used to. I think there are some changing consumer behaviors that are not even so much seasonal but more concentrated on spending more around the holidays while also pulling back more and being more frugal in the interim period. So that kind of results in this greater amplification of the data. So that’s how we can have months of weak consumer spending data followed up by a back-to-school season that knocks it out of the park.

Or maybe in the next few months we’ll see slower spending in October and November, but then the holiday knocks it out of the park as well. So overall, I think that… One more comment: I’d like to really point out the interesting results we saw on that survey as we kicked off the panel, the first one with the hard landing and the inflation. It felt like how I would’ve thought things were going to happen, say, at the beginning of 2022. And unfortunately I, like many others, had to kind of push back a recession call to the point where I thought it was going to begin; we actually kind of ended up at the point where I thought it was going to end, so it’s sort of smacked down to zero months of negative growth. Point being that I think there is, actually at its core, more resilience in the household side than it appears.

And it isn’t just upper-income people who are spending wages, and it isn’t just people who have 401(k)s that are increasing magnificently and feeling like they’re wealthy. It’s really, especially in the household side, based on just a really strong diversification between what people’s individual circumstances are. And just one example would be if you purchased a home before 2020 or you refinanced it before 2021, you’ve experienced zero shelter inflation since then and a massive increase in your real income that isn’t just spending based on your feelings; it’s spending because you actually have quite a lot more freed-up money to put towards continuing at those consumption patterns.

So I do think that there is a risk that if we do get some kind of major pullback in equity markets, that we could see that dynamic kind of go away. And if we do see more broader weakness in the labor market, and we start to see weakening in the real estate sector further from where we are now. We have forced sales of homes when people become unemployed and that sort of thing. Certainly we could see this all sort of topple over, but I do put that kind of far into one of the tails of the distribution of my forecast.

Scott Anderson:               Well, thanks for that. And so what I’m sensing, what I’m hearing from all of you folks, is I don’t think any of you have a baseline recession call for next year.

Thomas Simons:               No.

Scott Anderson:               I think the economic data, as it has from much of the post-COVID period has kind of surprised, in the positive, in terms of economic resilience, as we’ve seen the last couple of quarters of GDP data. And so I think the risk I’m hearing–one of the major risks is the possibility of our inflation calls might be too dovish, too optimistic, and that the Fed’s got to keep it, one eye right now, even as they cut rates maybe into the end of the year, one eye on the inflation risks.

Because we are now what, three, four years into this elevated inflation. And what we really worry about is that getting baked into inflation expectations. So I do want to transition or dig in a little bit deeper into what everyone’s been talking about since the beginning of the year and when President Trump launched his Liberation Day assault on global trade and 80 years’ worth of free trade policy. So how do you see President Trump’s tariff regime and trade negotiations playing out for the rest of the year, and how’s that factoring into your forecast around economic growth, inflation, and how the trade flows and dynamics are playing out this year? And I’ll start with you, Nicholas.

Nicholas van Ness:          Sure. I can, I guess, hop in again. Yeah, I think what we’ve seen so far is, as I mentioned in my first answer, a lot of noise that doesn’t translate to signal. Clearly the massive surge in imports that we got in the first quarter and then the payback with that significant pullback in the second quarter–neither of those is really going to be a new normal. I think that’s just as companies are trying to adjust to this. So I think it might take a little while to eventually get… We’ll likely get some trade diversion, some reshoring in certain industries, but it may take a little while to get there. I think the other thing we look at as well with regards to trade policy is not just the changes in trade policy itself, but the massive amounts of uncertainty that that’s been creating. And certainly Trump’s kind of on-again, off-again approach to those negotiations, where he moves back and forth between when tariffs are going to hit, what the rate’s going to be, et cetera.

That obviously doesn’t make it easy for businesses to plan. I would say our base case has been that uncertainty would start to diminish and would become a lot smaller next year. I think at this point we have a lot of the sectoral tariffs that have been in place for a decent amount of time. A lot of various countries have reached deals or trade deals or at least the framework for a trade deal. So that, I think, does help the uncertainty come back down a little bit and contributes to our outlook for next year. Despite the fact that I talked about some of these risks and vulnerabilities in my first answer, we do actually expect growth, at least on an annual average basis, to pick up a bit in ’26 compared to ’27. But I do think there is a risk that this uncertainty drags on for longer than we’ve been anticipating.

And one key factor there is the legal challenges to the IEEPA tariffs. I’m not a lawyer, so I don’t have a strong conviction as to how that’s going to turn out, but I could see it going either way. And if those tariffs were to be struck down, I don’t think tariffs are going away because the administration’s shown a pretty clear affinity for that as a policy tool, but it could take some more time for the administration to figure out how they want to replace those, how the new tariffs are structured, et cetera. Which makes it a little bit tougher for businesses to plan even as we move into next year.

Scott Anderson:               That’s interesting. So one thing I think economists have been assuming since the trade war really heated up this spring was, a lot of the tariff effect might hit this year in terms of inflation and pass through to the consumer level. What are you hearing from clients and customers of the banks? Are you hearing that this might play out over a longer period of time because they’re worried about losing market share or scaring away consumers, or they don’t know what the final tariff rate’s going to be? How are you factoring that into your view for next year on inflation?

Lindsey Piegza:                  I think there were a lot of forecasts for inflation to jump five, six, 7% based on the perceived impact of these policies, which obviously didn’t play out. And part of that is the calendar, as you mentioned, in terms of how the administration rolled this out. They were implemented, pulled back, delayed, readjusted, but it was also how businesses passed through these cost increases. Many businesses trying desperately to shelter their consumer base by building up inventories, front-loading orders ahead of the proposed levies, not out of benevolence by any means, but simply out of risk of losing market share. But now, as we look out to the end of the year and particularly 2026, one of the concerns, as I mentioned earlier, is businesses no longer being able to foot that higher bill, and we’re going to start to see that pass-through rate increase onto the end consumer.

Now, if we did see the entirety of tariff costs go to the consumer, that could raise inflation by about 1.5%, meaning even a 50% pass-through could contribute about eight tenths of a percentage point increase to annual inflation. The reality has been much more muted. We’ve been talking about a 25% pass-through, more recently down to about 20% pass-through rate. So, again, really shielding consumers, but also suggesting that as businesses can no longer absorb that into their bottom line, that poses a sizable upside risk to inflation. And remember, consumers are already burdened by massive price increases over the past couple of years. If we look just at a five-year horizon, consumers have been shouldering 30% increases, maybe more in terms of key spending sectors: housing, transportation, medical services, your morning coffee. And so the concern is that as we start to see these pass-through rates from tariffs and other policies increase, that could put sizable downward pressure on the consumer at the same time putting upward pressure on inflation.

Scott Anderson:               Thomas, any thoughts?

Thomas Simons:               Yeah, and I think that we’re still in pretty early days in trying to decipher exactly what the impact is of tariffs on inflation. I think there’s a rather simplistic view where you kind of get the CPI report, and you start going line by line to all those various different items, and you point at, like, window furnishings, and they’re up nine tenths of a percent on the month. And you say, “Oh, that’s where the tariffs really come in.” Well, that was at a time when we had a nominal tariff rate on China of 115%, 130%, whatever it was, right? It wasn’t like window furnishings went up 100%. So clearly there is some kind of substitutions or adjustments that companies are having to make in sourcing, in trying to, I guess, work with partners that are in different places that have a more favorable bilateral relationship than others.

And also, I think that businesses are coming into this from a place where, at least in the aggregate, this may be data that is also skewed towards the bigger players here. But if you look at just the aggregate measures of corporate profit margins in the S&P 500, they’re pretty high. There’s a lot of cushion that they have to absorb at least a temporary blow. And I think that, you know, I would bet on businesses in the United States being aggressive and dynamic enough to figure out how to recapture that margin through many more creative ways than just passing through a huge chunk of the price increases through your consumers.

Because at the end of the day, one of the reasons why I’m a little bit more sanguine on inflation, I think, from tariffs is that there’s no increase in real demand that comes from this, right? Or we harp on how so many consumers are already kind of stretched their limits; unless they’re going to be offered an unlimited amount of credit to continue to consume, they have to pull back somewhere, right? They have to either substitute with a cheaper product that may be more domestically sourced or forego, sacrifice the consumption of one thing or another. And in the case of essentials, there may end up being a reduction in their demand for services as well. Lastly, I think that we are still probably several months away from seeing most of the impact of inflation on tariffs because we can kind of see a sort of first-mover disadvantage in pricing…

Thomas Simons:               A sort of first mover disadvantage in pricing, that just recently played out, that I think is going to be something we see as we go forward. So one of the categories of inflation that has been really, really high pressure over the last two years, or so, has been insurance, whether that’s for autos or homeowners insurance, medical insurance, et cetera. These are highly substitutable goods or services, I should say, that consumers have. If they get their auto insurance bill in one month and it goes up, they just call up the other insurer and … they don’t have a day-to-day interaction with those businesses such that they feel particularly loyal to one. So you probably, as an insurer, want to try to keep your price as low as possible for as long as possible, try to capture some of the consumers who’ve given up on their previous insurers, and I think we will see that across the goods sector here, as well, as we get into next year and beyond.

Scott Anderson:               Interesting times, right? So let’s transition, a little bit, and talk a little bit about monetary policy and the Fed. So, in September, the Fed cut their benchmark rate to 4.25%. Policy makers seem to be signaling the possibility of one or two more cuts by the end of the year, expressing increasing concern about the weakening labor market even though inflation remains stubbornly high. How are you interpreting these moves and how are you factoring the Fed in as we look into the next year?

Nicholas van Ness:          So we’ve, I would say been, very hawkish on the Fed. Right now, and honestly for most of the past couple years, I’d say overall, that’s generally worked out pretty well. At some point it won’t, but we’re not ready to give that up yet. So our current base case actually only has one more cut and then done with the upper bound at 4%. We are maybe a little bit conservative about updating our forecast. So I would admit I wouldn’t at all be surprised to get two more this year, October, December. But if we did get that, I still think the Fed, once they get down to the end of the year at 3.75, would want to take a bit of a step back, and take some time to assess how the economy evolves after these cuts.

Clearly, the labor market side of the mandate has gotten the upper hand right now, given these rising concerns about downside risk to the labor market, at least. But our view, I kind of touched on our inflation forecast. We only have of core CPI getting down to 2.9 at the end of next year. And even into 2027, we think inflation’s going to struggle to get much below 2.5% plus our view that, despite the risks I highlighted earlier, we do still see those more as risks and not the base case that they actually materialize. So we only have limited additional cooling in the labor market with the unemployment rate peaking around 4.5% and growth picking up a bit next year. So given that mix, we essentially think what we’re going to see is a recalibration, and then the inflation side of the mandate eventually regains the upper hand as we move into next year.

Scott Anderson:               Where do you have the Fed funds rate at the end of next year?

Nicholas van Ness:          So still at four, four throughout the … so it’s certainly very hawkish-

Scott Anderson:               Definitely hawkish-

Nicholas van Ness:          … compared to the market.

Scott Anderson:               … compared to the consensus in market, yeah.

Nicholas van Ness:          I wouldn’t be surprised if it’s maybe somewhere between our forecast and where the market’s pricing. I haven’t checked today, but I know it’s been terminal rate of 3% or a little bit below, but that seems a bit overdone to us given the inflation picture.

Scott Anderson:               Lindsey.

Lindsey Piegza:                  While I certainly disagree with the Fed’s September policy move, it was posed as a risk management style cut. And as such, we see the majority of Fed officials are still anticipating further policy easing again in anticipation of that cooling in the labor market. So that’s the base case that the Fed is telling us, but at the same time, we have seven Fed members that see no further rate cuts by the end of the year. And so this really underscores that growing divide among policymakers, those that are starting to be concerned about the labor market and those that are still lingeringly concerned about that elevated level of inflation.

Now in terms of what we expect from policy, given the Fed’s material downgrade in their overall assessment of conditions, remember they went from solid down to moderated, coupled with the expectation of at least some further cooling in the labor market on the margin, I would suspect that there’s room for some additional easing. That being said, the still elevated nature of inflation, that still elevated level of inflation, is going to broadly limit the downside potential for rates. So, to me, that translates into one additional rate cut, at most, through the end of the year. It makes it less fun since we agree, but in this case, we also see just one additional rate cut.

I think the Fed is going to really have a difficult time justifying further policy easing when inflation remains at this stubbornly elevated level. Remember, it was never about getting down from 6% to 5% to 4%, but down to that 2% level on a sustained basis, and the Fed simply has been unable to do that. And now they’re going to face this policy conundrum. Do they continue to cut rates and allow inflation to become increasingly ingrained or do they hold back, allow the labor market to cool somewhat against the backdrop of a 3% economy and really tackle the inflation equation that they should have, years prior, in the aftermath of the pandemic?

Scott Anderson:               So I know where the hawks are sitting right now, [inaudible].

Thomas Simons:               So I do get to present a little bit of a different view, I suppose, which is good. So coming into this year … if we kind of pull back to where we were a year ago, I suppose, we had the summer where it wasn’t clear that they were going to cut. Then September hit. After some revised data, they did this catch-up 50 basis point rate cut. Almost immediately after they did that, the data turned more positive and we weren’t sort of sure about how much further they were going to go, but they followed up with cuts in October and December, and then went on pause in January. And after that, my thinking was like, “I think that this makes a lot of sense. You just had a big shift in stance on rates. You want to see how things play out. Maybe they’ll wait six months and then cut three more times at the end of the year in order to get closer to neutral, basically.”

And what’s happened, of course, is we had a lot of chaos in the beginning of the year. The Fed, I think, appropriately sort of sat on its hands and waited and saw, I’m not sure what the past tense wait and see is, but they allowed things to play out, and now they are looking at it a labor market that’s far weaker than they thought it was going to be a year ago, six months ago, and I think are concerned that the momentum is going to get away from them, and that this is going to turn into a hard landing, of some sort, just from past policy actions. So I think they are going to continue to cut, at least in October and December. And I also think that they’re going to be more flexible on their balance sheet policy, as well.

So QT, they slowed down quite a bit earlier this year. At one point, they were rolling off 60 billion treasuries per month from the balance sheet, then it shifted down to 30, and now only 5 billion. But I think that we’ve seen, even in the last couple of weeks, that there’s been a little bit more pressure in overnight lending markets. And I’m not saying that that means we’re getting to a September of 2019 style freakout period, or that there are signs of idiosyncratic stress in funding markets, but more that it’s a signal to the Fed that they are crossing over another threshold, getting closer and closer to being more problematic with the availability of liquidity.

So a few rate cuts, that should help the margins for businesses that are more strained. And I don’t really think that there’s an argument that another 50 basis points of cuts is going to stoke some sort of big demand cycle that drives inflation higher and higher. From my point of view, it’s more about just making sure you don’t get into some really ugly disinflationary, deflationary, scenario where you have large swaths of unemployment that blow up a lot of very leveraged sectors of the economy. We talked a lot about how well the housing sector has done in the last few years. It would be quite a painful mess if we sort of unwound into a 2007 style. Even 50% of that would take us a long time to dig out from.

Scott Anderson:               So I’m just going to throw this out to anyone who wants to answer it. So, obviously, we will probably have a new Fed chair, maybe a new composition on the Federal Reserve Board of Governors. How is that factoring into your views on the Fed? Do you think we’ll see a more dovish Fed?

Thomas Simons:               Maybe on the margin. I think that these decisions are made by committee. They’re driven by a consensus. There are, as Lindsay pointed out, many who are not on board with this whatsoever, and they’re going to be very difficult to get on board irrespective of who’s chosen as the Fed chair. But I think that just the same as you have members of Congress that have far-reaching views on any particular issue, or you have one individual Supreme Court justice, that’s named to the bench, that they don’t take over. There’s no unilateral decisions that are being made by the Fed. So it actually doesn’t play in particularly to me, in my view. Maybe on the margin, because that may be a person who contributes to the discussion in a way, that maybe they’re a little bit more persuasive, but I’m not worried about a takeover of some sort.

Lindsey Piegza:                  I would agree with that. I think on the margin, the new Fed chair is going to help tilt the conversation. He or she has just one vote, just like the rest of the members, but the chairman can sway that conversation somewhat. But that being said, even if we presume a dovish member takes that chairmanship, there’s still a hawkish lean at the Fed. Despite this more dovish pathway that the Fed seems to be taking, there’s still a number of hawks that outweigh the doves, both on the board and among the regional presidents. So that’s something to keep in mind.

As far as who will fill that seat, I’ll just throw it out. I do think Waller is the number one contender right now. Miran, obviously, is on the short list, but I think Waller is well known to the markets. I think it would be a very smooth transition of power. He checks a lot of the boxes in terms of being a centrist dove. And I think, again, he’s accepted by traders, he’s known to take a patient methodical approach to policy, so I do think that would be the most logical and most smooth transition over in terms of the chairmanship, that power being handed over.

Thomas Simons:               I would just say I agree with you.

Nicholas van Ness:          I, largely, agree as well. So maybe, again, not as fun. The chair is not a dictator and is only one, a member of 19 committee. So I think to have a real takeover, you would have to have the new chair, Trump wins his case against Cook, and then somehow convinces Waller and Bowman to refuse to renew or approve the regional presidents when they come up in February of next year. But that seems to me a highly unlikely scenario, I would say.

Scott Anderson:               So it’s unanimous, the Fed keeps its independence then.

Thomas Simons:               Insofar as it’s independent now.

Scott Anderson:               Exactly. It’s all relative, right? I’ll try to squeeze this in. We’re kind of running out of time here, but I did want to touch on this issue about the AI investment boom, and the AI impact on productivity and how you’re thinking about that. We tend to spend a lot of our time trying to forecast the next three, four quarters of growth, but obviously we’re trying to think 2, 3, 5 years down the road. Are you seeing any measurable effects from AI adoption on productivity yet? If not, when do you expect to see them and how do you see that playing out in the next several years? I’ll start with you.

Nicholas van Ness:          Yeah, I think … and productivity is, I’d say, kind of notoriously hard to measure. It can be extremely volatile from quarter to quarter. I think the recent data has generally been pretty strong, and part of that may have to do with AI, though I would say it’s very hard to maybe decompose how much is AI versus non-AI. Overall, I think, in the longer run.

Nicholas van Ness:          Overall, I think in the longer run I would certainly see a positive impact. I guess for me it might not 100% be a straight line though. We could get a little up and down just as there’s been massive amounts invested in AI and just naturally some of that’s not going to bear fruit. So there may be at least a portion of kind of malinvestment. It also may take time for companies to figure out how best to harness AI to kind of help them moving forward. So for me, I would say I haven’t necessarily incorporated a huge amount of impact into next year and see it as maybe a little bit of a longer-term story. Though, I don’t have a super strong conviction on the exact timing.

Scott Anderson:               Though the business investment has been very strong.

Nicholas van Ness:          Yeah. That’s certainly true.

Scott Anderson:               I’ve been single-handedly holding our business investment this year. Lindsey?

Lindsey Piegza:                  Well, productivity is going to be the biggest component here, and right now we’re seeing that in an average annual pace, about one point a half percent, we saw a big drop-off in the first quarter, a size we’ll pick up in the second quarter. And the upside range of expectations suggests that AI and technology broader-based, could continue to contribute about one and a half percent on an annual basis to productivity for the next 10 years, and potentially twice as much over the 20 years after that. That’s the upside of the range, that upper bound.

But I think a lot of these longer-term forecasts are extremely uncertain based on a very low implementation or uptick rate at this point. But also the unknowns surrounding the impact on the labor force. With industry analysis suggesting that we could see 9 million jobs worldwide replaced this year alone as a result of AI, and potentially replacing about 34% of tasks currently performed by humans by the end of 2030. So that’s not that far away. So when we think about AI and the implementation, I think for many businesses struggling under the weight of higher prices, higher costs of parts and materials, higher rental costs, and of course higher labor costs, the most expensive component in the production equation, AI has been a cost savings lifeline allowing these businesses to, in many cases, replace that human component, that person, wherever humanly possible.

But we cannot under-appreciate then the disruptive factor that this will have on the labor market. So when we talk about that potential uptrend, this trajectory of productivity contributing positively to the economy, we can’t forget about the component that potentially would be left behind. So a lot of uncertainty still around the net effect of AI on the economy.

Thomas Simons:               Yeah. I think that there are a couple of different ways we’re seeing AI play out in the economy very near term, but I think most of it is pretty far out into the future. There’s been two aspects of the labor market recently that I expect to continue when we finally get some more data on it, that shows some pockets of weakness developing. And if you look at it by age cohort, there’s really two groups that are seeing some vulnerability.

One pretty well discussed is recent college graduates, people who are under 25 years old. And the other one that I think is actually relatively under-discussed is in the 55 to 65-year-old range, where you have people whose very highly specialized skills are becoming more accessible to people on their devices, and thus those people don’t have as much of a leverage and demanding work, let alone high paying work. So that will result in some pretty significant disruptions, not only in the labor market, the economic data, but in society as well as we try to figure out how to either… I would say that both of those age groups actually have a common issue with AI is that it changed the way that their planning was going to go. For the younger folks, it’s planning on what kind of jobs are going to be available immediately. And for the older folks, it’s sort of planning on why you went so deep into specializing into one of these jobs that maybe doesn’t have a long runway after AI gives that ability to everyone in their pocket.

So I think that that’s going to continue to be a slow burning issue that we see in the labor market in the next few years. I think very long term, this is really a lifesaver for the US economy in a lot of ways as we continue to see demographic shifts that are not conducive to more and more potential growth over time, demographic shifts that I think the jury’s kind of out on what a very aged population does to inflation dynamics. I think that there’s good fundamental arguments that suggest fewer people working, you have higher wage pressure, et cetera. And in the US you have a very well-saved baby boomer generation that’s going to consume throughout their later years. It would seem that would be a pressure cooker for higher inflation. You also have countries like Japan where it’s been the opposite.

But generally my view is that this AI revolution is coming just in time really for the US that we can envision the productivity lost by having a more imbalanced relationship between workers and people that are being supported. This will allow that ratio to… It gives us more room before it becomes more problematic, I’d say.

Scott Anderson:               So buckle up, win for a wild ride, right?

Thomas Simons:               Yes.

Scott Anderson:               Interesting time to be an economist. We’re in the five speed round now, so I’ll just close with one last question for all of you. So looking ahead into 2026, what are the biggest downside risks you see in your economic outlook and what are potentially the most biggest upside risks that you’re seeing as you look into next year specifically? So I’ll start with Nicholas, any thoughts, closing thoughts?

Nicholas van Ness:          Yeah, I mean, I guess I do look at markets a little bit. We’ve discussed AI, and I think someone said earlier there’s kind of both a bubble and a boom. So I think even if over the long-term the benefits end up potentially being substantial, in the near term you could have a period with a bit of malinvestment that brings equities down. And given that, as mentioned, upper income households that maybe rely a little bit more on a wealth effect from something like equities have been driving consumption to a greater degree, that’s potentially a risk out there.

At the same time, household balance sheets are very healthy. We’ve also had a substantial increase in housing wealth. Overall net worth is up by more than 50 trillion compared to where it was pre-COVID. So that surprising resilience of the consumer that’s basically continued unabated over the past few years is I think another thing that could be on the other side of an upside risk that continues to potentially an even greater degree than expected.

Scott Anderson:               Sounds like you’re sleeping pretty good then. How about you, Lindsey?

Lindsey Piegza:                  I think my biggest concern is that stagflation scenario, you talked about recession, certainly not zero by any means, but not our base case. But I am concerned about a Fed that’s consistently allowing inflation to remain above that 2% target, which will eventually, not necessarily in the next year, but eventually choke off upside potential growth and result in not necessarily negative growth or that recession scenario, but a stagnant economy, slow growth, elevated prices, that stagflation scenario. So that’s really what keeps me up at night.

As far as what I’m optimistic about, whether it was fears of the economy not being able to grow post-COVID or adopt to this work from home environment or concerns, as I mentioned about inflation via trade jumping to 5, 6, 7%. I think we’ve weathered the worst case scenarios. There’s still a lot of challenges for the economy, but I am optimistic that we’ve sidestepped some of those more dire predictions for the near term economy.

Thomas Simons:               Fully agree with these. I think those are high on my list. Downside risks, I would toss out very left tail like idiosyncratic things like China invading Taiwan or fraud, which is impossible to really predict ahead of time, especially if that is in companies that have very large equity influence on people’s wealth effect feelings. So I don’t think that those are likely, those aren’t in my base case. I think a more likely downside scenario is just that if we do get continued inflation, that the so-called K-shaped economy, if the fulcrum of that K goes higher and higher up the income spectrum. Because as people up the income distribution feel more and more stretched, that’s more and more cash that’s being pulled back if those households feel like they can’t continue to consume. Then we will start to mitigate this argument that the lower end consumer doesn’t move the needle, it’ll be sort of the middle consumer that is starting to move the needle.

As far as upside risks, I don’t think that these are particularly big either. I think that we’re just kind of settled into a trajectory of slightly above trend growth for the foreseeable future. But I think that it’s underappreciated in the context of uncertainty and business planning that we got the passage of the One Big Beautiful Bill on Independence Day. For the last several years we’ve had things like the IRS having to rewrite tax code applications and papers up until the end of the year. So as much as we’ve had uncertainty about tariffs, now we have this shutdown issue, the top line numbers are pretty well known and the policies are pretty well known too. So from the point of view that that could spur more investment, I think that that’s something that’ll carry us through as soon as the beginning of next year and certainly the 2027 as well.

Scott Anderson:               So let’s hope those tail risks remain in the tails for next year. And I want to thank our panel today, Lindsey and Nicholas, Thomas, wonderful job. I think we’ve gotten a lot of good information on how the outlook is evolving for next year. What I heard was a pretty optimistic outlook on growth, but concerns about inflation lingering and perhaps the Fed can’t cut as much as the markets have priced in here. So we’ll have to wait and see those tea leaves change. But thank you for having us today. Thank you.