U.S. Economic Outlook
Steady U.S. Growth Outlook, Inflation Elevated But Expected to Moderate
- We see real (gross domestic product) GDP growth holding around 2 percent in 2026, underpinned by robust artificial intelligence capital expenditures and near-term fiscal tailwinds. Consumer spending faces some headwinds from elevated gas prices and cooling incomes, but the labor market has improved and wealth effects continue to support upper income cohorts.
- Recent data now clearly shows the labor market has stabilized. Payroll growth has picked up notably, but the unemployment rate has been more steady. With wage growth also continuing to cool, we don’t see the pickup in job growth as tightening the labor market so far. We expect the unemployment rate will remain near current levels over the next year.
- Labor market stabilization has helped lessen downside risks to the outlook. But with negative real income growth, the expansion is increasingly reliant on a narrow set of drivers in the form of tech investment and wealth-driven consumer spending. Buffers keeping oil prices contained are also wearing thin, threatening a sharp rise in prices if oil flows are not soon restored.
- Core personal consumption expenditures (PCE) inflation has been hot so far in 2026. While tariff effects have receded, new inflationary impulses have emerged in technology goods from artificial intelligence (AI) capex spillovers, and in passthrough of higher costs from energy prices and supply chain disruptions. While year-over-year core PCE is expected to end the year above 3 percent, we expect some moderation in sequential numbers in the second half of 2026 as these impulses cool. Fundamentals continue to support a disinflationary path over time, helped by cooling labor and housing inflation along with elevated productivity growth.
Fed On Extended Hold into 2027, But Rate Hike Odds Rising
- We expect the Federal Reserve (Fed) to hold its policy rate at the current target range of 3.50–3.75 percent through mid-2027. Fed communication has shifted in recent months toward a more neutral policy outlook. With the labor market stabilizing and inflation running above target, the Fed has little reason to reduce rates in the near term.
- Market pricing now assigns a high probability of a rate hike by December 2026—a dramatic shift from the multiple cuts that were priced at the start of the year. We view risks around a hold as somewhat more balanced. Conditions for a hike would include sequential core inflation readings close to 3 percent later in 2026, a tightening labor market, or an unmooring of inflation expectations.
- New Fed Chair Kevin Warsh has signaled an approach centered on less frequent communication and a move away from the forward guidance frameworks that characterized recent Fed leadership. While this could shift the Fed’s communication style over time, we expect little impact on near-term policy decisions from the Chair transition. Chair Warsh has expressed commitment to the Fed’s inflation mandate, and the broader FOMC provides continuity in the policy process.
Global Economic Outlook
Oil Buffers Continue to Erode Amid Volatile Diplomacy
- Oil prices have declined on optimism around a deal with Iran that could lead to a reopening of the Strait of Hormuz. However, day-to-day progress on negotiations has been volatile, and the durability of any agreement is still uncertain.
- Until then, the Strait’s closure continues to remove substantial volumes from global markets. Demand destruction has helped rebalance the oil market and limit price increases to date, with Asia and downstream products bearing the brunt of the adjustment. However, buffers are draining and the demand-side cushion is thinning. With elastic demand reduction largely exhausted, further adjustment will fall on inelastic consumption, implying nonlinear upside risk if disruption persists.
- Even a near term reopening doesn’t normalize the oil market quickly. Initially, traffic will stay subdued pending safety confirmation. Once transits resume, it will take a few months for wells to restart and to repair damaged capacity. Inventories will need around six months to normalize.
- Our baseline sees Brent crude oil in the $90–110 range through mid-year, before declining in Q4. The slow descent reflects likely partial reopening, demand from inventory rebuilds, and a persistent security risk premium. Longer delays to reopening the Strait of Hormuz risk nonlinear increases in oil prices.
Investment Implications
Sector and Bond Selection Essential as Technical Tailwinds Ease This Year.
- Demand for fixed income remains healthy given attractive all-in yields in Treasurys and credit.
- Corporate fundamentals continue to look strong and are supported by steady earnings growth, keeping rating migration balanced. While AI disruption is likely to lift defaults modestly in leveraged loans and private credit, we see pressures as concentrated in vulnerable segments and broadly contained.
- Supply technicals will remain important to watch as a re-leveraging cycle brings the strongest net supply of credit issuance seen in years. Recent geopolitical developments have added to spread volatility, providing strong opportunities for sector and security selection.
- Our positioning continues to center on diversification and income generation; however, recent spread volatility has created more total return opportunities. We have been utilizing our excess liquidity to take advantage of market opportunities but are keeping dry powder with the expectation that volatility will persist for some time.
- We continue to favor Agency residential mortgage-backed securities (RMBS) where spreads remain relatively attractive and offer the potential for additional price upside from policy changes that could spur further buying both from the government sponsored enterprises (GSEs) and banks. Conversely, we have remained underweight investment-grade corporates where spreads remain very tight.
Important Notices and Disclosures
Bps (basis point): One basis point is equal to 0.01%. Carry: The difference between the cost of financing an asset and the interest received on that asset.
Investing involves risk, including the possible loss of principal. In general, the value of a fixed-income security falls when interest rates rise and rises when interest rates fall. Longer term bonds are more sensitive to interest rate changes and subject to greater volatility than those with shorter maturities. During periods of declining rates, the interest rates on floating rate securities generally reset downward and their value is unlikely to rise to the same extent as comparable fixed rate securities. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.
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