The Federal Reserve is prioritizing labor market stability by cutting rates, fully aware this choice means inflation will remain above its 2% target for longer. This is a conscious trade-off, accepting persistent inflation as the price for insuring the economy against significant job losses.
While AI-related spending adds a significant 0.4% to U.S. GDP, its net economic impact is much smaller. A large portion of this investment flows out of the country to pay for imported technology and hardware, significantly reducing the direct domestic benefit of the AI spending boom.
One of the key risks to the 2026 outlook is a 'demand upside' scenario where growth accelerates unexpectedly. This would keep inflation hot and likely force the Fed to pause or even reverse its planned rate cuts, creating a significant shock for financial markets that have priced in a more accommodative policy.