Podcast Summary: Thoughts on the Market
Episode: Will U.S. Inflation Slow in 2026?
Host: Seth Carpenter (Morgan Stanley Global Chief Economist)
Guests: Mike Gapen (U.S.), Chetan Aiya (Asia), Jens Eisenschmidt (Europe)
Air Date: October 1, 2025
Episode Overview
In this episode, Seth Carpenter convenes Morgan Stanley's macroeconomic brain trust to focus on the future trajectory of inflation in the U.S., the impact of tariffs and immigration policy, labor market dynamics, and the Federal Reserve's policy dilemma ahead of 2026. The discussion also touches on the Indian economy and its response to global trade tensions. The tone is candid, analytical, and slightly conversational, providing deep insights into key issues driving current economic debates.
Key Discussion Points & Insights
1. U.S. Inflation: Tariffs and Projections
[01:21]
- Current State: Core PCE inflation is at ~2.9%; forecast to climb to 3%+ by year-end due to ongoing tariff pass-through.
- Tariffs' Impact: Tariffs haven't fully run their course; more impact is expected as firms assess how much of the burden can be shifted to consumers.
- Looking Ahead to 2026: The panel agrees that tariffs may make current inflation "transitory," with a possible normalization next year, though downside risks remain due to ongoing policy changes and Fed actions.
Notable Quote
"We do not think that the economy has fully absorbed tariffs yet... So I think the year on year rate of inflation will continue to move higher into year end, hit 3%, maybe a little bit above." — Mike Gapen [01:21]
2. Immigration Restrictions and Services Inflation
[02:30]
- Labor Market Supply: Immigration restrictions limit labor supply, especially in services, contributing to firmer services inflation.
- Recent Data: Goods inflation has moderated but services inflation has been "to the upside," suggesting a connection between immigration controls and price pressures in certain sectors.
Notable Quote
"I'd say there's maybe some nascent signs that immigration controls may be keeping services prices firmer than thought... It's easier to say I think immigration controls may prevent inflation from coming down as much next year." — Mike Gapen [03:53]
3. U.S. Growth and Labor Market Contradictions
[04:18]
- Growth Data: Growth moderated in 1H 2025 (1.8% annualized) vs. 2024 (2.5%), but Q3 data is strong (tracking ~3% annualized).
- Tariff Impact on Growth: Yet to see evidence that tariffs are suppressing growth in the data.
- Labor Market Weakness: Contradicts strong growth—nonfarm payroll growth is weak; companies are cutting labor costs and absorbing non-labor costs (including tariffs).
Notable Quote
“Corporates have absorbed most of the tariff shock to date and we're still in the early stages of seeing whether or not they will be able to pass it along to consumers.” — Mike Gapen [06:59]
4. The Federal Reserve’s Strategy Amid Mixed Signals
[07:11]
- Recalibration: The Fed is “recalibrating” — moving policy towards neutral due to balanced risks in inflation and labor weakness.
- Policy Shift Drivers: Recent emphasis has shifted from inflation worries to balancing against softening in jobs data. Fed is seen as planning two more rate cuts by year end.
Notable Quote
“What the Fed is saying is the balance of risks have become more balanced. They need to worry about inflation, but now they also need to worry about the labor market.” — Mike Gapen [08:08]
5. Political Pressure and Federal Reserve Independence
[09:00]
- White House Influence: Ongoing political pressure for rate cuts is noted, especially as Chair Powell's term nears its end.
- Fed’s Autonomy: Current shift in policy has enough labor market evidence to support it but there's apprehension that future policy may become more politically influenced, which could unsettle investors.
Notable Quote
"Looking forward into 2026, with the end of Powell's term as chair and likely turnover in other areas of the board, whether the Fed maintains a conventional reaction function or one that's perhaps more politically driven remains an open question..." — Mike Gapen [10:25]
6. India’s Outlook Amid Trade Tensions
[10:48]
- Growth Outlook: India is still expected to be a top global growth driver.
- Immediate Challenges: Two headwinds—domestic demand slowdown (due to tighter fiscal/monetary policy) and U.S. tariffs hitting 60% of exports with a 50% levy.
- Policy Response: Indian authorities have cut income tax, reduced rates, and lowered the goods & services tax, aiming for a demand-led recovery possibly visible from Q4 2025.
- Long-Term Uncertainties: Durable recovery depends on resolution of U.S. trade tensions.
Notable Quote
“We still don't have clarity on what happens on trade tensions, but...they have reduced household income tax, the central bank has cut interest rates...they have now just recently announced reduction in goods and services tax...these three policy actions together we think will drive domestic demand growth from the fourth quarter of this year itself.” — Chetan Aiya [12:22]
Notable Quotes & Timestamps
| Timestamp | Speaker | Quote | |-----------|--------------|------------------------------------------------------------------------------------------------------| | 01:21 | Mike Gapen | "We do not think that the economy has fully absorbed tariffs yet... inflation will continue to move higher into year end, hit 3%, maybe a little bit above." | | 03:53 | Mike Gapen | “Immigration controls may prevent inflation from coming down as much next year.” | | 06:59 | Mike Gapen | “Corporates have absorbed most of the tariff shock... we're still in the early stages of seeing whether or not they will be able to pass it along to consumers.” | | 08:08 | Mike Gapen | “What the Fed is saying is the balance of risks have become more balanced. They need to worry about inflation, but now they also need to worry about the labor market.” | | 10:25 | Mike Gapen | "Looking forward into 2026... whether the Fed maintains a conventional reaction function or one that's perhaps more politically driven remains an open question..." | | 12:22 | Chetan Aiya | "...these three policy actions together we think will drive domestic demand growth from the fourth quarter of this year itself." |
Important Segment Timestamps
- Opening & U.S. Inflation Outlook: 00:00 – 04:18
- Tariffs, Immigration, and Services Inflation: 04:18 – 07:11
- Labor Market Contradictions: 05:41 – 07:11
- Fed’s Policy Strategy & Rate Outlook: 07:11 – 09:00
- Fed Independence & Political Pressure: 09:00 – 10:48
- India’s Growth and Tariff Impact: 10:48 – 12:47
- Closing: 12:47 – 13:05
Summary
The panel sees near-term upward pressure on U.S. inflation due to tariffs and reduced immigration but expects moderation in 2026 if the external shocks ease. While U.S. growth data is resilient, the labor market appears weaker, creating a challenge for the Fed, which is shifting towards a more neutral policy stance even under political scrutiny. The discussion underscores the complexity of current macroeconomic management—especially as policymakers maneuver between inflation, employment, and political pressures heading into an election year. Globally, India's growth remains bright, though trade tensions are an ongoing risk, prompting aggressive domestic policy stimulus.
This episode provides clear, nuanced perspectives for anyone seeking to understand the forces shaping inflation and monetary policy in the U.S. and abroad as 2026 approaches.