MARCI’S TOP FIVE ECONOMIC INSIGHTS FOR THE MONTH
DECEMBER 5, 2025
Federal Reserve’s Outlook for 2026
Major shifts are coming at the Fed in 2026, Dr. Rossell said. Jerome Powell’s tenure as Chair ends in May, and while he may remain on the Federal Open Market Committee (FOMC) as a board member, a new Chair will take the helm,
shaping policy in a complex economic landscape. Since the December 5 airing of Economic Insights, the Fed cut interest rates by 25 basis points at its final meeting of the year, bringing the target range to 3.5%–3.75%, as Dr. Rossell anticipated. The Fed’s latest dot plot now projects only one rate cut in 2026, a more cautious approach than markets initially expected.
U.S. Housing Market Outlook for 2026
Mortgage rates have settled near 6% after spiking to 8% in 2024–2025. This stability is unlocking pent-up demand as buyers who delayed purchases return to the market, Dr. Rossell said. The “lock-in effect” from low pandemic-era mortgages is fading, leading to more inventory and transactions in 2026 especially in markets that saw the biggest COVID-era booms, though at slightly lower prices.
Europe’s Housing Challenges: Why Supply Is Key
Europe faces a growing housing crunch driven by severe supply shortages, regulatory hurdles, and the high cost of building in dense urban areas, Dr. Rossell said. Regional differences matter Eastern Europe has high homeownership rates, while Western Europe leans toward rentals but the overall challenge mirrors the U.S. not enough homes for growing urban populations. Urbanization makes adding housing stock even harder, as replacing older structures with high-density developments is costly and complex. Local zoning and regulatory barriers add further delays. Dr. Rossell said the solution is clear build more housing but achieving it remains a major challenge.
Japan’s Bond Market and the Carry Trade Unwind
For decades, Japan’s ultra-low interest rates fueled the “carry trade,” where investors borrowed cheaply and invested in higher-yield assets abroad, such as U.S. Treasuries. This strategy worked for decades because Japanese rates stayed near zero, Dr. Rossell said. That era is ending, Dr. Rossell said. After COVID, Japan experienced inflation and rising interest rates for the first time in 20 years, threatening to unwind the carry trade. If rates continue to rise, investors could face losses, creating ripple effects in global markets, including U.S. Treasuries and mortgage rates. Dr. Rossell noted that while this shift ends an era of easy money, it’s not expected to cause systemic risk; it just removes one of the simplest profit strategies from the table
AI’s Economic Impact in 2026
Adoption of AI tools in the workforce doubled in 2025, from 20% to 40%, and Dr. Rossell said it will likely reach 60% in 2026. While productivity gains haven’t yet appeared in the data, this year will reveal AI’s real impact on workflows and costs. Massive data center expansions will continue, requiring significant capital and keeping interest rates somewhat elevated. Globally, AI remains U.S.-centric, driven by the “Magnificent Seven,” but infrastructure demands are creating new dynamics. Germany and the UK lead in data centers per capita, and rising energy costs may push future build-outs to regions with cheaper electricity, making the intersection of AI economics and geopolitics one of the defining stories of 2026.
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