• Key policy rate: 3.5-3.75% (January 2026)
• Q4 2025 GDP growth rate: 2.2%; full-year 2025: 2.2%
• Manufacturing Purchasing Managers’ Index reading: 52.4 (January 2026)
• Inflation rate: 2.4% (January 2026)

The US is the world’s biggest economy, accounting for one-fourth of global economic activity. The Federal Reserve, its central bank, is arguably the most influential monetary authority in the world as its interest rate decisions affect yields on global assets, including foreign currencies. 

Since September 2024, the Fed has been on an easing cycle, unwinding high interest rates in place since 2022 as inflation eased from multiyear highs. The Fed took a prolonged pause in its rate cutting cycle in 2025 to observe the impact of hefty tariffs imposed on all foreign trade partners on inflation, which has trended well above its 2 per cent target throughout the year. Slowing domestic activity and a weaker job market have proven to be larger concerns heading into 2026. These rate cuts initially triggered capital rebalancing worldwide as the competitiveness of US financial assets wanes given lower yields and greater policy uncertainty – a direct effect of a second Trump administration. 

Household consumption is the main driver of US economic output, accounting for two-thirds of GDP. Growth is largely driven by purchases of durable goods and spending on services, although weaker consumer spending is likely as middle-income earners get more squeezed amid a slowing job market.  

President Donald Trump’s promised personal and corporate income tax cuts will ultimately translate to a wider budget deficit. Meanwhile, the adoption of increasingly protectionist trade policies through higher duties on foreign-made goods which Trump has since rolled back, as well as non-tariff barriers like export restrictions, would further raise the cost of consumer goods and put the US’ growth prospects at risk. A Republican Congress gives Trump free rein in terms of issuing more debt, adding to fiscal pressures. We expect, however, that worsening cost of living conditions would be a deciding factor in the upcoming US midterm polls.

House view: Since April 2025, Lundgreen’s has changed its risk appetite towards US stocks from overweight to neutral. Trump’s intensified tariff war mainly harms, and will continue to harm, the American economy more than anything else, with the US government shooting itself in the foot as inflation, GDP growth, and the dollar all taking a hit. On bonds, Lundgreen’s now prefers medium-term Treasuries over long-term notes amid heightened market volatility. A cooling job market and slowing economic activity, vis-à-vis still-elevated inflation, require the Fed to maintain a tough balancing act.

Updated as of 23 February 2026