Economic Commentary

As we enter the third month of 2026, we continue to believe that growth tailwinds outnumber headwinds this year. The January 2026 jobs report surprised positively, inflation continues to decelerate and corporate earnings growth prospects remain robust. Federal policy continues to generate headlines ranging from a partial government shutdown to Supreme Court rulings impacting trade policy to the nomination of a new Chair of the Federal Reserve. As the data and news rolls in, the markets are off to a solid start, building on three consecutive years of positive results.

Economic Tailwinds

Economic data releases have pointed to a strong start to 2026. The January jobs report saw hiring grow at its fastest rate since December 2024. Employers added 130k jobs, doubling estimates and the unemployment rate fell to 4.3% from 4.4% a month earlier. On the other hand, revisions to 2025’s data were negative, dropping average monthly job gains from a level of 49k per month to just 15k per month. We are hopeful January’s data indicates a stabilizing labor market, but for now we continue to believe the labor market is “slowly slowing”, characterized by low levels of hiring and low levels of firing.

Likewise, the January year-over-year inflation levels (+2.4%) improved from December and beat expectations, marking the lowest level since May of last year. Core inflation, which excludes the volatile food and energy prices rose 2.5% year-over-year, a rate not seen since March 2021. As anticipated, the FOMC kept rates steady in January. The positive move in the labor market coupled with the continued easing of inflation leads us to believe that the Fed will remain patient.

Not all news has been positive, however. The release of Q4 and full year GDP showed the economy slowing after a strong summer for economic activity. While still positive, the 1.4% annualized growth rate in Q4 fell far below the 4.4% growth of Q3 and missed analyst estimates. 2025 real GDP growth registered 2.2%, again below expectations given the weak reading in Q4. 2025’s prolonged government shutdown weighed on growth, with economists estimating a 1% impact. On February 14 the U.S. entered another brief government shutdown before agreeing on 11 of 12 funding packages. Today, only the Department of Homeland Security remains in a shutdown as lawmakers debate funding levels and operational protocols for immigration enforcement. While risks of a market slowdown remain present; overall, the economy appears to be on stable footing.

Tariff Ruling

On February 20, the Supreme Court ruled 6-3 against the administration’s “reciprocal” tariffs justified under the International Emergency Economic Powers Act (IEEPA). The court did not rule on whether or how tariffs collected since last April may be refunded to importers.

The administration has at least five other legal avenues to consider for enacting similar tariffs, though they come with more restrictions. After the ruling, the President initially signed a proclamation invoking Section 122 of the Trade Act of 1974 to impose a flat 10% tariff on foreign goods before announcing an intended increase to 15%. The new tariffs took effect at the 10% level on February 24 and will extend for 150 days at which point they will expire without Congressional ratification. The average effective tariff rate on all imports is expected to be modestly lower under this new program, with certain countries like China and India benefitting from a lower rate with others facing a higher rate. The President has also discussed using Section 232 of the Trade Expansion Act of 1962, which permits tariffs on particular industries on national security grounds. We continue to believe the administration will seek alternative legal means to enact similar trade policies to the ones invalidated by the Court but the complexion is not yet known.

US trading counterparties are reacting as well. IEEPA tariffs were used as leverage in bilateral negotiations. China, Japan, South Korea and the UK have all negotiated trade agreements with the United States since last April. The European Union responded to the court ruling by pausing its ratification of a US trade deal as it seeks more details on trade policy changes. Trade officials from India postponed a trip aimed at finalizing their interim deal. These developments leave trade policy as a potential source of headline risk, but we continue to believe uncertainty is lower than last April and another ‘tariff tantrum’ impacting risk-assets is unlikely.

New Fed Head

On January 30, 2026, President Trump nominated former Federal Reserve Governor Kevin Warsh to succeed Jerome Powell as Chair of the Federal Reserve. Warsh will take the reins, assuming he is confirmed by the Senate, when Powell’s term expires in May. The announcement triggered volatility in assets considered to be alternative currencies, with bitcoin prices falling 7%, gold losing over 10% of its value, silver falling more than 30% in a single day. The U.S. Dollar surged in response, while long-dated Treasury yields jumped, causing a steepening of the yield curve.

This volatility stems from Warsh’s proposed “QT-for-rate-cuts” framework, hinted at in a November WSJ op-ed, which calls for resuming Quantitative Tightening (QT) and potentially selling mortgage-backed securities to shrink the roughly $6.5 trillion balance sheet, while simultaneously lowering short-term interest rates.

The path for Warsh’s confirmation runs through the Senate Banking Committee where Senator Thom Tillis (R-NC) has vowed to block any appointments until a DOJ probe into the Fed’s renovation of its headquarters is concluded. Treasury Secretary Scott Bessent met with GOP Senators and believes there is a path for holding confirmation hearings. We ultimately expect Warsh to be confirmed and will be listening closely to his ideas for reforming the Fed as he proceeds through the confirmation process.

Conclusion

In summary, the economy and markets still appear to be on solid footing. Trade policy remains in flux, creating a potential headwind as businesses and consumers adjust to the evolving landscape. Attention will likely shift this spring to the confirmation of Mr. Warsh as the next Chair of the Federal Reserve and markets will be assessing the potential impacts of his reform ideas. While these transitions may trigger short-term volatility, we advise you to remain focused on fundamentals and committed to your thoughtfully-constructed long-term financial plans. On behalf of our entire team, thank you for the opportunity to serve on your behalf.