Affordability Takes Center Stage in U.S. Policy

Summary

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Podcast Summary: Thoughts on the Market

Episode: Affordability Takes Center Stage in U.S. Policy

Date: February 4, 2026
Hosts: Michael Zezas (Deputy Global Head of Research, Morgan Stanley) & Ariana Salvatore (Head of Public Policy Research)

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Episode Overview

This episode dives deep into the mounting importance of affordability in U.S. policy, especially following the end of a government shutdown and amid persistent concerns among key consumer cohorts. The hosts explore which policy proposals might have real impact heading into a critical election year, demystifying the likely political and economic implications for investors and affected populations.

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Key Discussion Points & Insights

1. Affordability: The Policy Landscape

• The recent government shutdown has underscored that affordability remains “in focus,” with investors and the public eager for action.
• Upcoming events (State of the Union address and the administration’s budget proposal) are expected to keep affordability at center stage.

  “Affordability is still in focus… and one that we think warrants a little bit more scrutiny.” – Ariana Salvatore [00:22]

2. Who Feels the Crunch Most?

• Three Most Affected Cohorts:
  • Lower-income consumers: Facing “persistently higher inflation and more recently, weaker wage growth.”
  • Younger consumers: Hardest-hit when inflation peaked, now contending with elevated borrowing costs.
  • Renters and recent home buyers: Struggling with “much higher shelter burdens that aren’t fully captured in standard inflation metrics.”
• Notably, these are the groups where the President’s approval ratings have dropped the most.

  “These are also the cohorts where the President’s approval ratings have seen the largest declines.” – Ariana Salvatore [01:29]

3. How Policy Is (and Isn’t) Targeted

• Four Policy Priorities:
  1. Targeting the right cohorts: Particularly those under the most financial and political pressure.
  2. Feasibility: Policies must be passable, a significant hurdle given Congressional gridlock.
  3. Timing: The legislative window is extremely tight given impending elections.
  4. Speed of disbursement: Voters want rapid results, which limits the scope of viable policies.

  “Even if Republicans can agree on certain policies, getting them procedurally through Congress can still be a challenge.” – Ariana Salvatore [01:59]

• Most Realistic Tools:
  • Executive actions and agency directives are likely to dominate, given Congressional procedural barriers.
  • If reconciliation bills emerge, they will be slower and mostly cover specific tax credit changes, particularly around housing.

4. Macro Impact: What Moves the Needle?

• Most policies (tax credits, subsidies, payment pauses) are micro in effect—meaningful for targeted groups but with limited macroeconomic impact.
• Tariffs are the exception:
  • Lowering tariffs “probably has the broadest and most sustained impact on affordability because it directly affects inflation.”
  • Recent actions: Agricultural imports were exempted, and a trade deal with India reduced the overall tariff rate from ~50% to 18%.

  “Lower tariffs would narrow inflation differentials across cohorts, support real income growth and make it easier for the Fed to cut rates.” – Michael Zezas [03:47]
  “Just the other day, we heard news that the trade deal with India was finalized, reducing the overall tariff rate to 18% from about 50% prior.” – Ariana Salvatore [04:17]

5. Three Investor Takeaways

• 1. Baseline improvement ahead:
  • “Even absent new policy,” affordability is expected to improve due to cooling inflation and possible rate cuts.
• 2. Don’t overreact to headlines:
  • Most proposed policies won’t materially alter macro growth on their own.
• 3. Cohort divergence matters for equities:
  • Ongoing weakness among low-income/younger cohorts helps explain underperformance in parts of consumer discretionary.
  • A cooling inflation environment, especially via tariff relief, is key to broadening consumer recovery.

  “Pressure on lower income and younger consumers helps explain why parts of consumer discretionary have lagged while higher income exposed segments have remained more resilient.” – Michael Zezas [04:59]

6. The Political Reality

• Affordability will remain a hot political topic through November and likely beyond. Efforts are expected to remain “targeted and incremental,” reflecting both practical and electoral constraints.

  “It’s politically salient. The policy responses are likely targeted and incremental, and this should continue to remain a top focus for voters heading into November.” – Ariana Salvatore [05:31]

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Notable Quotes & Memorable Moments

• “Lower income households have experienced persistently higher inflation and more recently, weaker wage growth.” – Ariana Salvatore [01:08]
• “Lower tariffs would narrow inflation differentials across cohorts, support real income growth and make it easier for the Fed to cut rates.” – Michael Zezas [03:47]
• “Most proposed affordability policies are unlikely to generate a meaningful macro growth impulse, so investors shouldn’t overreact to headline announcements.” – Michael Zezas [04:39]

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Important Timestamps

• 00:22: Affordability remains front and center post-shutdown
• 01:01: The three groups most impacted by affordability woes
• 01:48: Four main constraints on policy design and implementation
• 03:03: Likely tools for executive action in the near term
• 03:29: Macroeconomic impacts and the centrality of tariffs
• 04:24: Real-world moves: U.S. trade actions and tariff relief
• 04:59: Three takeaways for investors and the equity market context
• 05:31: The political staying power of affordability issues

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Tone & Style

The conversation is analytical but accessible, blending data-driven insight with practical political analysis. Zezas and Salvatore methodically break down the complex, intertwined economic and electoral issues, emphasizing a balanced perspective for investors and policy watchers alike.

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Transcript

[A]

Welcome to Thoughts on the Market. I'm Michael Zezas, deputy Global head of Research for Morgan Stanley.

[B]

And I'm Ariana Salvatore, head of Public Policy Research.

[A]

Today we're discussing the continued focus on affordability and how to parse signals from the noise on different policy proposals coming out of D.C. it's Wednesday, February 4th, at 10am in New York.

[B]

President Trump signed a bill yesterday ending the partial government shutdown that had been in place for the past few days. But affordability is still in focus. It's something that our clients have been asking about a lot. And we might hear more news when the President delivers his State of the Union address on February 24 and possibly delivers his budget proposal, which should be around the same time. So needless to say, it's still a topic that investors have been asking us about and one that we think warrants a little bit more scrutiny.

[A]

But maybe before we get into how to think about these affordability policies, we should hit on what we're seeing as the real pressure points in the debate. Arianna, you recently did some work with our economists. What were some of your findings?

[B]

So Heather Berger and the rest of our U.S. econ team highlighted three groups in particular that are feeling more of the affordability crunch, so to speak. That's lower income consumers, younger consumers, and renters or recent home buyers. Lower income households have experienced persistently higher inflation and more recently, weaker wage growth. Younger consumers were hit hardest when inflation peaked and are more exposed to higher borrowing costs. And lastly, renters and recent buyers are dealing with much higher shelter burdens that aren't fully captured in standard inflation metrics. Now, the reason I laid all that out is because these are also the cohorts where the President's approval ratings have seen the largest declines.

[A]

Right. And so it makes sense that those are the groups where the administration might be targeting some of these affordability initiatives.

[B]

That's right. But that's not the only variable that they're solving for. Broadly speaking, we think that the President and Republicans in Congress really need to solve for four things when it comes to affordability policies. First, targeting these, quote, right. Cohorts, which are those, as we mentioned, that have either moved furthest away from the President politically or have been the most under pressure. Second, feasibility. Right. So even if Republicans can agree on certain policies, getting them procedurally through Congress can still be a challenge. Third, timing just because the legislative calendar is so tight ahead of the November elections. And fourth, speed of disbursement. So basically, how long it would take these policies to translate to an uplift for consumers ahead of the elections.

[A]

So thinking through each of these constraints, starting with how easy it might be to actually get some of these policies done, most of the policies that are being proposed on the housing side require congressional approval. In terms of the cohorts, it seems like these policies are most likely the focus on that seems aimed at lower income and younger voters. And in terms of timing, we know the legislative calendar is tight ahead of the midterms, and the policymakers want to pursue things that can be enacted quickly and show up for voters as soon as possible.

[B]

So using that lens, we think the most realistic near term tools are probably mostly executive actions, think agency directives and potential changes to tariff policy. If we do see a second reconciliation bill emerge, it will probably move more slowly, but likely cover some of those housing related tax credit changes. But of course, not all these policies would move the needle in the same way. What do we think matters most from a macro perspective?

[A]

What our economists have argued is that the affordability policies being discussed, tax credits, subsidies, payment pauses, they could be meaningful at a micro level for targeted households, but for the most part, they don't materially change the macro outlook. The exception might be tariffs. That probably has the broadest and most sustained impact on affordability because it directly affects inflation. Lower tariffs would narrow inflation differentials across cohorts, support real income growth, and make it easier for the Fed to cut rates.

[B]

Right. And just to add a finer point on that, I think directionally speaking, this is where we've seen the administration moving in recent months. Remember, towards the end of last year, the Trump administration placed an exemption on a lot of agricultural imports. And just the other day, we heard news that the trade deal with India was finalized, reducing the overall tariff rate to 18% from about 50% prior.

[A]

Okay, so putting it all together for what investors need to know, we see three key takeaways. First, even absent new policy, our economists expect some improvement in affordability this year as inflation decelerates and rate cuts come into view. And specifically, when we talk about improvements in affordability, what our economists are referring to is income growth consistently outpacing inflation, lowering required monthly payments. Second, most proposed affordability policies are unlikely to generate a meaningful macro growth impulse, so investors shouldn't overreact to headline announcements. And third, the cohort divergence matters for equities. Pressure on lower income and younger consumers helps explain why parts of consumer discretionary have lagged while higher income exposed segments have remained more resilient. So if inflation continues to cool, especially via tariff relief, that's what would broaden the consumer recovery and potentially create better returns for some of the sectors in the equity markets that have underperformed.

[B]

Right. And from the policy side, I would say this probably isn't the last time we'll be talking about affordability. It's politically salient. The policy responses are likely targeted and incremental, and this should continue to remain a top focus for voters heading into November.

[A]

Well, Arianna, thanks for taking the time to talk.

[B]

Great speaking with you, Mike.

[A]

And as a reminder, if you enjoy thoughts on the market, please take a moment to rate and review us wherever you listen and share thoughts on the market with a friend or colleague today.

[C]

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