The Watchdog — Home and Abroad
— Scott B. MacDonald, Ph.D.
Summary: The Federal Reserve’s FOMC meeting dominates the week. The idea of a 25-bps interest rate cut is baked into the picture, though what is said afterwards is important in setting the tone for 2026. At the same time, AI dominates equity and debt markets, the Trump administration is advancing its support for US farmers hit by tariffs, and House Speaker Mike Johnson is scrambling to pass the final $925 billion Fiscal Year 2026 National Defense Authorization Act (NDAA). Geopolitically, peace talks on Ukraine have stalled (largely due to Russian intransigence), Iran’s water crisis continues to deepen with the government looking to import water, and the Trump-Madura standoff continues to dominate events in the Caribbean.
At Home — Headlines
By the numbers. While the Fed dominates the week ahead, we will see a delayed JOLTS report from October, which provides some insights into hirings, firings, and quits (generally not an uplifting read). Last week’s data from private sector ADP and Challenger, Gray & Christmas, showed ongoing softness in the labor market. Also last week, the core personal consumption price index, which excludes food and energy prices, for September indicated a 0.2% monthly rise while the annual rate was 2.8%.
Herding cats at the Fed. The Fed is most likely to make a 25-bps rate cut on Wednesday, which would make it the third consecutive meeting with such an outcome. More attention is likely to be on divisions between hawks and doves. The key factor likely to tip the balance is the softening labor market. While inflation is not fully tamed and remains a major concern for some voting members, declining labor markets feed into the public’s pessimistic sentiment about the economy, which, in turn, could dampen consumer appetite for goods and services. Considering the overwhelming impact of the consumer on economic activity, this will weigh heavily on FOMC participants. The wording after the meeting is also key. We expect that Chairman Powell will frame a future rate cut in similar terms from his last FOMC meeting, stressing differing opinions over more rate cuts and being cautious in making any assumption of a looser monetary policy.
Powell’s replacement in May looms large over the economic landscape. The frontrunner is Kevin Hassett, the National Economic Council director and a Trump loyalist. Market opinion on Hassett is mixed. We concur with Claudia Sahm, a former Fed economist and currently chief economist at New Century Advisors, “Kevin Hassett is more than capable of doing the job of Fed chair, it’s just a question of who shows up. Is it Keven Hassett the active participant in the Trump administration? Or the Kevin Hassett the independent economist?” For anyone leading the Fed next year, being chair will most likely be like herding cats, not an easy process considering it could well become a more divided house.
AI and Limited Power. Anyone watching the financial news can’t escape the fact that the major technology companies are spending billions on data centers to fuel AI development. Indeed, big tech has ponied up to the bond market for over $100 billion in 2025. This is a shift from its previous reliance on cash-funded approaches. However, one of the big challenges for big tech is how to span the gap between capital raising for projects and generating enough power to reach Fourth Industrial Revolution aspirations. AI is thirsty for power: according to the Financial Times, data centers in the US represent a combined capacity of about 51GW, which equates to 5% of the country’s peak demand. And there will be need for even more power – by 2028 an estimated 44GW of additional capacity will be required by new data centers. The problem is that power capacity for the data centers coming online over the next three years will only be around 25GW.
Related to this, thirsty AI data centers (not to mention cryptocurrency bros) demand more energy, bringing up the issue as to how will the public good be balanced with commercial demands? While 2025 was a year of equity market giddiness over the AI revolution, 2026 will probably be a year where nitty-gritty considerations over energy are more manifest, including a sharper focus on the impact on local government politics and economies.
Trump aid to the farmers. One of the results of the Trump administration’s tariff policies was the damage done to the US farm sector. Of note, China’s refusal to buy US soybeans until very late in the year left many farmers under acute financial pressure. Simultaneously, many farmers were hurt by higher input costs, as with fertilizer, while low crop prices played their part. The Trump administration is launching a new $11 billion in one-time payments to crop farmers under the Department of Agriculture’s newly designed Farmer Bridge Assistance program. In his first term, President Trump provided $28 billion in relief for US farmers to compensate them for losses with an earlier stage of trade war with China. The US-China trade spats have been great for Brazilian farmers, who emerged in the last few years as the major suppliers of soybeans to China.
Gallup poll and stumbling capitalism. A new Gallup Poll, “Capitalism Stumbles With Young Adults” is worth a look. Disillusionment probably best describes the country’s mood on capitalism, with just over half (54%) viewing capitalism positively, well below the 60% mark in 2010. No surprise, young adults are the least supportive age group. Only 43% of the 18–34-year age group have a positive view of capitalism, with 35- to 54-year-olds sitting at 50% and the 55 and older crowd at 62%. Along political lines, Democrats and independents positive views of capitalism have fallen 8 points to 42% and 51%, respectively, while Republicans are steady at just over 70%.
Some reasons behind the souring view on capitalism include sentiment by younger generations that their ability to attain the lifestyle of their parents is out of reach, that capitalism is increasingly a stacked game in favor of the rich, and a deepening feeling that the American dream of upward social mobility has given way to the carnival-like bacchanal of crony capitalism. According to Gallup, the share of renters citing cost-related reasons for not buying homes, such as not being able to afford a home or lacking funds for a down payment, has risen to 68%, up from 45% in 2013. Some of this sentiment is caught by US historian Jon Meacham: “The perennial conviction that those who work hard and play hard and play by the rules will be rewarded with a more comfortable present and a stronger future for their children faces assault from just about every direction.” Although the economy is likely to continue its expansion in 2026, its K-shaped nature will probably reinforce the sentiment expressed above for the majority of Americans.
