Economic Outlook - February 2026
- The most recent inflation data show that U.S. consumer prices remain moderately elevated but significantly lower than the peaks seen earlier in the decade. The Federal Reserve’s preferred measure of inflation, Personal Consumption Expenditures (PCE), posted a 2.8% rise for November 2025, slightly above the Fed’s long-run 2% target, and in line with expectations. Monthly changes showed modest increases, particularly for shelter and some services, although goods inflation remains muted. These numbers have been in a pattern of similar results for over a year now.
- The U.S. labor market closed 2025 with continued cooling: employers added just 50,000 jobs in December, marking one of the weakest monthly gains in years. Annual job growth came in at about 584,000, one of the slowest growth years in over a decade. The unemployment rate edged down to 4.4% from 4.5% in November, reflecting a slight increase in willing workers versus available jobs. Wage growth remained moderate, and job openings declined, pointing to softer demand for labor overall. The takeaway is that the labor market is rebalancing a bit, from record low unemployment for over a decade, but not showing signs of major decline.
- During the January 2026 Federal Open Market Committee (FOMC) meeting, the Federal Reserve held interest rates steady, signaling a pause after reducing the overnight lending rate in late 2025. The FOMC stressed that inflation remained above target, justifying their cautious, data-dependent stance to remain conservative with rate cuts. Despite persistent inflation slightly above the 2% target, softening in the labor market has driven rate cuts. Chair Jerome Powell emphasized that policy was well positioned and that the Committee was in no rush to reduce rates further, pushing back against expectations for more aggressive rate decreases.
- President Trump has nominated Kevin Warsh as Chair of the Federal Reserve. Warsh was a former Fed Governor from 2006 – 2011. While his future stance on policy remains unknown, we have enough data to understand his historical thought process. He has aligned in the past with the idea of a target inflation rate of around 2%, with a caveat that controlled, slightly higher inflation can still be positive for the economy. His stance on reducing interest rates has changed over time – he has expressed a willingness to lower rates while controlling inflation by shrinking the overall Fed balance sheet. This means that the Federal Reserve slows how much money is added to the system by reducing the number of Government bonds issued.
- The U.S. Dollar declined in 2025 around 8% – 10% versus most of the large global currencies due to Fed policy decisions – never recovering after a Liberation Day drop. This was a major factor in buoying international equities in 2025 and the beginning of this year. Despite this, the dollar remains the world’s mainstay currency for foreign exchange transactions, invoicing, in central bank reserves, and for borrowing purposes, which suggests finding a replacement is a high hurdle.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, U.S. Federal Reserve, Empirical Research Partners, Moody’s Ratings
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