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Will the U.S. economy enter the dangerous zone of "boiling a frog in warm water"?
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Hello everyone, today XM Forex will bring you "[XM Official Website]: Will the U.S. economy enter the dangerous zone of "boiling a frog in warm water"?". Hope this helps you! The original content is as follows:
Analysts predict that U.S. real GDP is expected to achieve an average annual growth rate of 2.3% in 2026. This growth rate is slightly higher than the potential growth rate, but not to the extent of "overheating" and more like a "medium-speed" expansion. Supporting this pattern are the three major policy environments of fiscal, monetary and trade, which have gradually shifted from the previous "obvious drag" to "moderate support".
In terms of fiscal policy, the tax adjustment in "One Big Beautiful Bill Act (OBBBA)" is a key piece of the puzzle. The new plan clearly favors low- and middle-income families, reducing the tax burden and increasing disposable income for this group. For this group of residents, the extra income is more likely to be consumed, and the marginal propensity to consume is higher, which helps support overall demand. Analysts believe that household consumption in 2026 may not be the "rocket engine" that drives the economy to significantly exceed expectations, but it can at least act as a "stabilizer" to prevent the economy from suddenly slowing down.
In terms of monetary policy, the Federal Reserve is shifting from "definitely tight" to "slightly loose but still cautious." Under the current circumstances, analysts assume that the FOMC will slightly cut interest rates by 25 basis points at the December meeting. Looking forward to 2026, the baseline scenario is to cut the federal funds rate twice more by 25 basis points each time before mid-year, so that the federal funds rate range will finally fall at 3.00%-3.25%. This level is significantly lower than the repressive range during the period of high inflation, but it is enough to constrain inflation expectations and achieve a relatively balanced result between growth and prices.
Trade policy has shifted from "marginal tightening" to "marginal relaxation." It is difficult for the average effective tariff level to return to the low level in 2024, but analysts believe that 2025 is likely to be the peak of this round of tariff increases.. Entering 2026, tariffs will no longer continue to increase, but uncertainty and cost pressure will be reduced, which will help xmtraders.companies make mid- and long-term planning and cross-border investment decisions. The shift from "continuous escalation" of tariffs to "relative stability or even slight easing" means that the marginal drag on economic growth has weakened.
Inflation is slowly falling, and the Federal Reserve is taking a "narrow bridge"
Currently, U.S. inflation is hovering around 3%: service prices have gradually cooled down due to slowing demand, but xmtraders.commodity prices have been supported by previous increases in tariffs and have fallen slowly. Analysts expect that overall inflation may still be slightly above 2% by the end of next year and has not yet fully returned to the Fed's target. If we look at the more representative core PCE, the baseline expectation is 2.6% year-on-year in the fourth quarter of 2026 (Q4/Q4 caliber), which means that the direction of inflation has significantly improved, rather than getting out of control again.
There are roughly three forces driving downward inflation: First, the labor market has cooled slightly, and wage growth has returned to a more sustainable range; second, medium- and long-term inflation expectations have generally remained anchored, without forming a "wage-price spiral"; third, as tariffs no longer continue to rise, the upward pressure on trade costs has weakened at the margin, helping to alleviate the upward factors in xmtraders.commodity prices. Under this xmtraders.combination, inflation is still slightly above 2%, but the downward trend is relatively clear, leaving room for subsequent cautious interest rate cuts.
The labor market presents a neutral picture of “neither hot nor collapsed”. Due to factors such as government shutdowns, there have been periodic "empty windows" in official data, and the market has relied more on high-frequency and private indicators. Based on this information, analysts judge that in an environment of more robust growth and lower uncertainty, corporate recruitment activities are expected to pick up moderately in 2026, and the unemployment rate is generally expected to be controlled below 4.5%. In other words, the employment situation returns to "relative equilibrium" rather than slipping all the way into recessionary deterioration.
Under this macro and inflation framework, the Fed’s operational rhythm can be summarized as “preventing inflation first, and then stabilizing growth.” First, use higher interest rates to firmly push inflation back to a controllable range. Then, when inflation has dropped significantly but is still slightly above the target, use limited interest rate cuts to prevent real interest rates from being too high for a long time and dragging down economic momentum. By mid-2026, when the federal funds rate range drops to 3.00%-3.25%, the policy interest rate will be closer to the "neutral level", which will neither add fuel to the fire of inflation, but also provide a moderate support for the economy.
Under the global slowdown, the trend of the US dollar changes
From a global perspective, analysts predict that the world economy will most likely still maintain a certain degree of resilience in 2026, but the growth rate may be slightly lower than in 2025. Some economies will continue to use relatively loose monetary policies and targeted fiscal support to "bottom up" their national growth. At the same time, rising protectionism and increasing trade barriers will restrict the division of labor in the global industrial chain and cross-border capital flows, making it difficult for global growth to replicate the expansion pace of the previous year.
The "differentiation" of monetary policy will become an important theme in 2026. Some central banks still have room to cut interest rates in 2026, but it is difficult to repeat the relatively concentrated and larger easing cycle in 2025. As the differences between countries in terms of inflation pressure, growth prospects and fiscal space widen, policy paths will become increasingly "different". In this process, exchange rate fluctuations will also become more strategic: in the early stage, if the market expects the Fed to ease at a faster pace than other economies, it may weaken the US dollar; but once the Fed takes the lead in ending interest rate cuts and other central banks are still considering further easing, the US dollar will have the opportunity to strengthen again.
Overall, the U.S. and global economic picture in 2026 is a "directional improvement but not everything is worry-free" after multiple uncertainties: the U.S. maintains moderate expansion, inflation slowly falls, policies gradually return to neutrality, and global growth still avoids obvious stalling in an environment of intensified protectionism and differentiation.
The above content is all about "[XM official website]: Will the U.S. economy enter the dangerous zone of "boiling a frog in warm water"?". It is carefully xmtraders.compiled and edited by the XM foreign exchange editor. I hope it will be helpful to your trading! Thanks for the support!
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