February 28, 2026      

     Noise surrounding AI, geo-political tension, Fed independence, the Supreme Court’s ruling on tariffs, trade policy, and competing narratives have clouded the economic outlook and kept uncertainty elevated. The first estimate of the fourth quarter GDP was reported at 1.4%, notably below census expectations, but most economists and the Fed considered the economy to be surprisingly resilient. They view the pullback in the final quarter of 2025 as being driven largely by a steep pullback in federal outlays, reflecting the prolonged 43-day government shutdown. Conflicting signals from a decline in the Consumer Price Index (CPI) suggests some cooling of inflationary pressures, while an increase in the Personal Consumption Expenditure (PCE) Deflators suggest the opposite. Artificial Intelligence (AI) and its short-term and long-term implication for the labor market raises more questions about the direction of the economy and how the Fed may need to react, leaving many investors in a quandary over what to do.

     
     On February 20^th, the Supreme Court announced the ruling that found the administration’s use of tariffs under the International Emergency Economic Powers Act to be unlawful. The Court, however, did not explicitly rule on how or if the tariff revenue received would be refunded. As a result, the matter will be subject to further litigation and likely lead to a messy process, all while tariff revenue was anticipated to offset the bulk of the fiscal costs of the One Big Beautiful Bill Act. Additionally, the headwinds from trade policy uncertainty will remain with businesses, both big and small.

   The result is further uncertainty in a slow to hire-slow to fire employment picture as businesses remain cautious. At least that appeared to be the case through most of 2025. Private indicators such as the Challenger Layoff Announcement Report, the ADP Private Employment Change report, the weekly claims for unemployment benefits data and the Job Openings & Layoff Turnover Survey (JOLTS) suggested further gradual cooling of the labor market in the new year. The January employment report, however, provided an upside surprise. It showed that non-farm payrolls rose by 130,000 well ahead of the consensus forecast. A significant increase in civilian employment eclipsed a smaller gain in the labor force and pushed the unemployment rate down a tick to 4.3%. One month’s report does not make a trend, especially for a data point that undergoes frequent revision, but it clearly had some people rethinking where the jobs market may stand.




     There are also cross currents on measures of price pressures. The CPI reports hinted at further cooling in inflation. The Index rose 2.4% in January from a year earlier, down from 2.7% in December. Core (excluding food & energy) CPI registered a 2.5% year-over-year rate. The Fed’s favorite inflation gauge, the PCE Deflator, however, ran a little hotter than expected. In December, core PCE rose by 0.4%, a notable uptick from 0.2% pace in November. In annual terms, core PCE inflation was up 3.0% as compared to 2.8% year-over-year the previous month and well above the Fed’s 2% goal.

     Other economic data was also mixed. January Purchasing Managers Indexes from the Institute for Supply Management indicated expansion in both the manufacturing and service sectors, but survey respondents had a tone of caution around activity due to tariffs with a majority reducing or planning to reduce headcounts. Retail sales stalled at the end of the year with October and November’s numbers revised lower. Disruptive wintry weather in January and February may hinder a bounce back. The housing market remains in the doldrums for both new and existing home sales. On the other hand, orders, production, and imports tied to computers, communications equipment and semi-conductors have surged and manufacturing output in January rose at the fastest monthly pace in nearly a year. Production, excluding high-tech, also posted its strongest gain for the same period, broadening in output would make the expansion more durable and less dependent on a single sector like AI to carry the load.

     The Fed is expected to stay in a wait-and-see posture this quarter to allow the data catch up from the government shutdown, and the picture of labor market risks and the persistence of inflation both become clearer. At the January meeting, the minutes hint at a re-evaluation by most Committee members on the balance of risks to the Fed’s dual mandate. The vast majority of members “judged that downside and risks to employment had moderated in recent months,  while the risk of more persistent inflation remained.” While rate cuts are still on the table, the Fed seems to be entrenched at current policy settings as long as Jerome Powell remains as Chairman of the Federal Reserve Board. Of course, the makeup and mode of operation of the post-Powell Fed brings into play another layer of clouds to the economic picture and future path of interest rates.