Monthly Economic & Interest Rate Outlook – Muddling through 2025, with uptick in 2026

Executive summary

Gross domestic product (GDP) outlook: We expect U.S. growth to increase from 1.8% in 2025 to 2.2% in 2026, driven by three factors:

• Greater clarity on tax policy, including stimulus for consumers and businesses.
• More Federal Reserve (Fed) easing translates into marginally lower borrowing costs.
• Steadier trade policy and tariffs, including ratcheting down rhetoric with China, Canada, and Mexico – our three largest trading partners.

Economic environment:

• Tariff uncertainty and volatility in freight, inventory, and sales continue to distort economic data.
• The recently resolved federal government shutdown limited economic data flow, complicating decisions for markets and policymakers.
• We expect the data catchup will come in uneven bursts, which probably means we won't get a clean read on the economy until early 2026.

Rate outlook:

• The Fed has cut rates twice recently and is likely to cut again soon. Another cut is likely in December or January, but not both. We see four cuts in 2026. It will also end quantitative tightening on December 1st, signaling a more accommodative stance.

Impact on yields:

• Short-term (1-month to 3-year) yields should keep falling, reducing investment income but easing borrowing costs for small businesses and consumers.
• We expect longer-term (>3 years) yields to modestly decline as well, though fiscal and trade policy concerns will keep them relatively sticky, leading to yield curve steepening.