Voters, Trump and the Fed: the three forces shaping the US economy in 2026

Key policy milestones shaping US markets in 2026

In 2025, tariffs, data blackouts, inflation surprises, and political volatility all collided to reshape the economic landscape. This year will not be defined by the same forces. It will be all about power. Who holds it, who wields it, and how far they’re willing to use it. The US midterm federal election, the appointment of the next US Federal Reserve chair, and the continuing shockwaves from US President Donald Trump’s policies are the three forces that will steer the US economy this year. And that's no overstatement: inflation, rates, deficits, and global trade dynamics will all trace back to these sources. To understand 2026, one must understand what to expect in the election, from the Fed and from the president.

The three pillars holding up – and threatening – the 2026 economy

1. Midterm elections: the political wildcard of 2026

The 2026 midterms are not simply another election – they are the dominant political event of the year. Invesco highlights this directly, noting that midterms act as a political “thermostat”. In 20 of the past 22 cycles, the president’s party has lost House seats. If that historical pattern holds then Trump’s agenda faces resistance; if it breaks, markets must price in something far more consequential – a consolidation of power into the most interventionist US economic program in decades.

UBS underscores the scale: all 435 House seats, 35 Senate seats, and nearly 40 governorships are up for election. The outcome will determine whether Trump’s tariffs, tax cuts, deregulation, industrial policy, and expanding export controls will continue.

A Republican surge would act as a policy accelerant, raising the probability of further tariff escalation, tax-cut extensions, rapid deregulatory pushes, and firm political backing for structurally higher deficits. A weaker outcome would produce gridlock and policy friction, forcing investors to reassess how much of the Trump program is truly durable.

Goldman Sachs' assessment is understated but accurate: the midterms may “influence market sentiment, with potential impacts on equities, rates, and the US dollar”.

2. Central bank pivot: the defining power shift of 2026

The most important variable of 2026 is not a data release, it's who leads the Federal Reserve. With chairman Jerome Powell’s term ending in May, J.P. Morgan calls the appointment “the biggest event of 2026”. The stakes rise further if the Supreme Court expands presidential authority over other Fed appointments, increasing the administration’s leverage.

Prediction markets now tilt toward former Council of Economic Advisers chairman Kevin Hassett over current Fed member Christopher Waller. Hassett reflects a growth-first, more inflation-tolerant philosophy, a sharp break from Powell’s orthodoxy. Morgan Stanley classifies this as a potential shift from strict inflation-fighting toward an activist stance aligned with the administration’s fiscal and regulatory priorities.

The Fed’s newly introduced summary of economic projections reinforces this drift, reflecting how policymakers are recalibrating their expectations for growth and interest rates.

Recent Fed projections point to a lower terminal rate (which is regarded as the neutral rate for the economy) alongside firmer long-run GDP expectations, mirroring Hassett’s argument that the US economy can sustain stronger trend growth.

Institutional dynamics add even more weight. UBS notes that all 12 regional Fed presidents are up for reappointment in January 2026, effectively resetting the FOMC just as a new chairman takes over. What emerges is not simply leadership turnover, but a reconfiguration of the Fed’s institutional personality.

Complicating matters, inflation remains stubborn. UBS estimates 30 basis points to 40 basis points (0.3% to 0.4%) of additional tariff costs will pass-through in early 2026, keeping inflation near 3%. J.P. Morgan similarly expects persistent above-target inflation.

Put simply, the Fed must pivot at the exact moment inflation stiffens and political incentives intensify. This is not a conventional easing cycle, it's a monetary regime shift, and markets will price it as such.

3. Trump’s policy shock: structural risk behind 2026 inflation

The third force shaping the 2026 US economy is the ongoing impact of Trump’s economic policies: tariffs, tax cuts, deregulation, and industrial policy. These forces are not fading, but continue to define inflation dynamics, fiscal conditions, and corporate behaviour.

Tariffs remain the most potent fuel for inflation. UBS, in its US Inflation Monthly, shows they added 46 basis points to 70 basis points to the headline consumer price index and 24 basis points to 30 basis points to core inflation in 2025. Another 30 basis points to 40 basis points of pass-through is expected in early 2026, keeping core personal consumption expenditure near 3% and limiting how much relief monetary policy will be able to deliver.

Legal uncertainty amplifies the effect. The Supreme Court will rule in mid-2026 on the legality of these tariffs, which were introduced under the US Emergency Economic Powers Act. J.P. Morgan warns that even if the ruling restricts them, the administration would likely reconstruct similar tariff authority under different statutes, ensuring policy volatility remains elevated.

Fiscal policy reinforces this dynamic. Goldman Sachs estimates the One Big Beautiful Bill Act could add US$3.4 trillion to the deficit over a decade. Wells Fargo notes that while the effect of the act is to boost consumption – especially during early and main-season refunds in the first and second quarters of 2026 – it does little to improve long-term fiscal sustainability.

Deregulation is accelerating as well. Goldman Sachs expects renewed rollbacks across the financial, energy, and pharmaceutical industries, heightening near-term profitability but increasing structural instability when combined with tariffs and large deficits. Additional technology and strategic export controls, expected during the year, further reshape supply chains and corporate risk profiles.

Together, these forces create an environment of sticky inflation, elevated deficits, and policy uncertainty – the backdrop against which the Fed Pivot and midterms will play out.

As 2026 unfolds, the real risks and opportunities will come not from data, but from decisions made in Washington. The election, the Fed’s transformation, and the lingering shockwaves of Trump’s policy agenda will shape inflation, growth, and market behavior far more than any model suggests. This is a year built on three pillars of power, each capable of supporting or destabilising the macro landscape. The challenge now is not forecasting the cycle, but navigating a regime where policy itself is the cycle.

Sources: Federal Reserve, UBS, Goldman Sachs Asset Management, Morgan Stanley

This information is general in nature and has been prepared without considering your financial objectives, situation or needs. Consider the appropriateness of this information in light of your personal circumstances before making investment decisions.