The primary economic risk for the next year is not recession but overheating. A dovish shift at the Federal Reserve, potentially from a new Trump appointee, combined with loose fiscal policy and tariffs, could accelerate inflation to 4%, dislodge expectations, and spike long-term yields.

The outlook for 2026 is significantly more optimistic than 2025, primarily due to fiscal policy. Deficit-financed tax cuts are expected to add nearly half a percentage point to GDP growth. This stimulus, not AI, is seen as the main force lifting the economy from below-potential to at-potential growth.

Due to massive government debt, the Fed's tools work paradoxically. Raising rates increases the deficit via higher interest payments, which is stimulative. Cutting rates is also inherently stimulative. The Fed is no longer controlling inflation but merely choosing the path through which it occurs.

Regardless of the national deficit, expect more fiscal stimulus as politicians prioritize winning elections. The need to address voter concerns about 'affordability' ahead of midterms will drive spending, creating a 'run it hot' environment favorable to hard assets.

J.P. Morgan highlights a confluence of factors in 2026 that could create significant inflationary pressure. These include planned tax cuts, major national events like the FIFA World Cup and America's 250th birthday, and potential shifts in immigration policy, creating a powerful fiscal tailwind.

Robert Kaplan cautions against dismissing inflation risks. Many businesses are still absorbing tariff costs or working through pre-tariff inventory. He believes the full price impact will be passed on to consumers in 2026, potentially keeping inflation stickier than markets currently expect.

The economic impact of tariffs is not an immediate, one-time price adjustment. Instead, Boston Fed President Collins characterizes it as a "long one-off" process where the full effect can take months or even a year to filter through the economy. This prolonged adjustment period extends uncertainty and complicates inflation forecasting.

While the direct impact of tariffs may be temporary, the elongated process risks making consumers and businesses comfortable with higher inflation. Combined with questions about the Federal Reserve's political independence, this could unmoor expectations and make inflation persistent.

Restricting immigration halts a key source of labor for essential sectors like agriculture and construction. This drives up consumer costs and could cut GDP by 4-7%, creating a direct path to higher inflation and slower economic growth.