Before pushing on to what the year ahead may look like, let’s recap a few 2025 predictions:
- no national recession, no recession in the tri-county area (yes, no recession for either)
- measured Fed funds rate decreases: 2-3 cuts not exceeding 100 basis points (yes, there were 3 cuts, for a total of 75 bps)
- ten-year Treasuries would rise during the year and fall back to the level where they started at year’s end (not really, the 10yr TCM Jan 1, 2024 was 4.57% and ended the year at 4.18%) rates did rise early in the year but fell to as low as 4.01% in the summer
What does 2026 hold? First and foremost, what can we expect from the national economy? Overall, we will see accelerated growth over last year, but modestly so – don’t expect any records to be broken. Some economists have feared geopolitical uncertainty would play a bigger role in holding the economy back last year with tariffs, government shutdowns and military actions. They were all gloom-and-doom with negative growth reported in Q1, but as 2025 progressed, the economy accelerated. Revised Q3 Real GDP growth was 4.4%, and forecasts are for Q4 to be a scorching 5.4%.
That momentum will carry into 2026. Why? Rising business-to-business spending, an expanding industrial sector and consumer balance sheets (in aggregate) being boosted by higher real income and impacts of tax law changes. Some of the key leading indicators include rising Industrial Production Orders, higher U.S. Business Capital Expenditures and growing U.S. Total Retail Sales. It’s not all roses, headwinds include: a flat auto market, mildly declining housing and commercial construction sectors and rising long term borrowing costs. Key barometers also point to persistent inflation due to higher costs for labor, electric energy, as well as wholesale goods and supplies subject to tariffs. So, while capitalizing on a growing macro economy to grow your top line, make sure rising costs don’t eat up the bottom line.
The Fed, which will have a new chairman in 2026, has lowered the Fed Funds rate by 175 basis points since mid-2024. Long term bonds such as 10yr Treasuries have changed marginally over that period – which sends a strong signal that the complex mix of risk, inflation, growth, fiscal policy, economic confidence and uncertainty factors on which institutional lending is based believe rates in the future won’t be correspondingly lower. While the Fed can indirectly influence long-term rates, it does not control them. Until now, the Fed has sent strong signals in its communications that any Fed Funds rate reduction in 2026 will be more measured than last year – perhaps only one to two 25 bps cuts. 10yr Treasuries could go in the opposite direction in equal measure.
The Fed also manages the balance sheet by buying and selling U.S. Treasury bills to roughly match the growth or decline of currency in circulation – a measure known as Quantitative Easing (QE) or Quantitative Tightening (QT). In December, it ended a nearly two-year period of QT, reacting to huge expansion of the money supply associated with federal stimulus spending around COVID. During that time, the Federal Reserve’s balance sheet declined by about $2.2 trillion. Monetary policy is now again entering into a time of QE with the purchase of U.S. Treasuries. Both the magnitude of these purchases and timing remains to be seen but generally more QE means more stimulus for the economy (by making borrowing cheaper) and increasing inflation risk. Between interest rates and monetary policy the Fed will be “walking the line” attempting to keep inflation in check while at the same time stimulating an economy that is, according to Real GDP figures, already chugging along nicely.
That’s all to say that 2026 will generally (not all sectors) be a year for businesses to grow and capitalize on the opportunities presented by an expanding economy and lock in rates for the next 5-10 years on real estate, machinery and equipment and other assets that will generate revenue and build value. Note that longer range forecasts predict cooling growth rates (but still positive) for 2027, as the overall business cycle for the U.S. continues to change.
Community banks like Summit Bank stand ready to partner with local businesses, leveraging local deposits to provide the necessary funding for operations and growth in what promises to be a dynamic year ahead.
