Episode Summary: U.S. Policy Breaks Past Peak Uncertainty

Podcast: Thoughts on the Market
Host: Morgan Stanley
Guests: Michael Zezas (Global Head of Fixed Income Research and Public Policy Strategy), Mariana Salvatore (U.S. Public Policy Strategist)
Date: December 17, 2025

Overview

This episode explores the outlook for U.S. public policy as it interacts with markets moving into 2026. Hosts Michael Zezas and Mariana Salvatore review key policy variables—trade (tariffs), fiscal settings, regulation—and discuss how the landscape has shifted from high uncertainty to greater clarity. They examine the likely policy path, potential catalysts, and what investors should be watching for, especially around tariffs, the Supreme Court, USMCA, fiscal policy, and the 2026 midterm elections.

Key Discussion Points & Insights

1. Moving Past "Peak Uncertainty" in U.S. Policy

• Investors are focused on clarity: Markets are now operating with more predictability around major policy variables (tariffs, fiscal policy, regulation), allowing for more fundamental-driven outlooks, notably in U.S. equities.
• Shift from "where policy is going" to "how it’s implemented":
  • “I think now we're actually post peak uncertainty for those variables and we're talking through how the policy choices that have been made interact with the outlook.” – Mariana Salvatore (00:37)

2. Tariffs and Trade Policy: From Volatility to Rangebound

• Tariffs no longer dominate uncertainty:

  • Uncertainty on how high tariffs could go has subsided. The effective tariff rate is far higher than a year ago but not at feared “extreme” levels.
  • “While the tariff story certainly isn't over going into 2026, it certainly feels like we've landed in a place that's more range bound.” – Michael Zezas (01:44)

• Two near-term catalysts to watch:

  1. Supreme Court Decision on IPA Tariffs
     • Could force changes in tariff structure or require refunds.
       • “There are really two things to watch. The first is what President Trump does in response...The second thing I would say is on the refunds piece.” – Mariana Salvatore (03:49)
     • If refunds are required, process may take 6+ months.
  2. USMCA Review (U.S.-Mexico-Canada Agreement)
     • Mid-2026 review is central for North American supply chains (especially autos).
     • Early 2026: USTR provides evaluation to Congress, likely prompting headlines and political debate.

3. The Fiscal Policy Outlook: Gridlock With Modest Action

• From extremes to the middle:
  • Initial fears ranged from big deficits (unmatched tax cuts) to heavy spending cuts.
  • "We kind of landed somewhere in between. It seems like there's some modest stimulus in the pipe for next year, but again, that is baked." – Michael Zezas (02:47)
• Unlikely to see additional legislative action in an election year:
  • Real constraints from process (limited Congressional days, need for bipartisan votes).
  • Reactive measures (like expanded fiscal policy) only likely if an economic downturn emerges, which is not in the base-case outlook.

4. Inflation/Affordability and Policy Response

• Affordability becomes a political touchstone:
  • Policies under discussion: “Tariff dividend” checks ($2,000), housing deregulation, ACA subsidies.
  • Mariana Salvatore notes legislative passage is unlikely without an economic shock, so regulatory actions and tariff tweaks are most likely levers.
    • “It's really the easiest and most available policy lever [tariffs] he has to address affordability.” – Mariana Salvatore (06:42)
  • Some direction seen already: tariff exemptions on food/agriculture and delayed action on semiconductors.

5. Regulatory Policy and Energy/AI

• Regulation changes move slowly and are less likely to be a 2026 story.
• Energy exploration and AI industrial policy are seen as areas with potential—though deep bipartisan disagreement means major changes are not in the base case.

6. The 2026 Midterms: Not a Catalyst for Big Policy Shifts

• Historical precedent: Presidential party loses seats; Democrats only need a small shift to gain House control, Senate is less predictable.
  • “If you get a divided government, you basically get fiscal gridlock...you really will probably see legislation only in areas that [have] bipartisan support.” – Mariana Salvatore (08:30)
• Limited consequences for fiscal or economic policy, unless an economic crisis hits. Expect more political skirmishes (funding, debt ceiling).

7. Executive Action Dominates Policy Risk

• Most impactful policies (tariffs, deregulation) are in executive branch control, not Congress—so less change likely even with a Congressional power shift.
  • “Tariff policy obviously does not depend on Congress. Deregulation helps if you have fundamental backing from Congress, but [it can] occur through executive agencies.” – Mariana Salvatore (09:54)

Notable Quotes & Memorable Moments

• On fundamental-driven market optimism despite policy backdrop:

  • “The double upgrade that our strategist made in the outlook has very little to do with the policy backdrop and more to do with fundamentals and things like AI and the dollar tailwind and all those factors.” – Mariana Salvatore (00:54)

• On the range of potential tariff scenarios last year vs. now:

  • “You could also make a credible argument that the average effective tariff rate was going to go up to 50 or 60%. ... We think the equilibrium rate is roughly around where we are right now.” – Michael Zezas (01:36)

• On the mechanics and timeframes of tariff refunds:

  • “If the Supreme Court does ... say that the Treasury has to pay back the tariff revenue that it's collected, we've investigated some different scenarios...dragged out over a long time period, probably six months at a minimum.” – Mariana Salvatore (04:35)

• On Congressional gridlock following midterms:

  • “If you get a divided government, you basically get fiscal gridlock. So, limits to fiscal expansion, absent like a recession or something like that that we don't expect at the moment.” – Mariana Salvatore (08:30)

• On the dominance of executive branch action:

  • “There are things in the executive branch, right. So tariff policy obviously does not depend on Congress. Deregulation ... can occur through the executive agencies.” – Mariana Salvatore (09:54)

Timestamps for Important Segments

• 00:37: Shift from peak policy uncertainty; focus on practical impacts and implementation.
• 01:26 – 02:47: Retrospective: Expectations vs. outcomes on tariffs, fiscal, and regulatory policy.
• 03:46: Supreme Court as a key trade policy catalyst.
• 04:40: USMCA review and implications for nearshoring and supply chains.
• 05:44: Affordability issues and the limited viability of legislative responses.
• 07:13: Energy, AI, and lack of expected legislative action.
• 08:02: The outlook and ramifications of the 2026 midterm elections.
• 09:54: The dominance of executive branch actions in policy shifts.

Final Thoughts

The episode emphasizes that the era of major policy unknowns is giving way to a more stable framework where the key is observing how businesses and consumers adjust to established policies. While legislative changes are unlikely heading into the 2026 elections, executive actions—especially around tariffs—remain critical levers policymakers can pull. Investors should focus on implementation details, Supreme Court decisions, and early signals from the USMCA review while not overreacting to midterm results that are unlikely to prompt dramatic fiscal shifts.