As the economy heads into 2026, questions are mounting around AI’s impact on work and investment, China’s slowing growth, tariffs and the Federal Reserve’s next moves.
Those themes and more framed Economic Outlook 2026, hosted Dec. 9 in Chicago by the University of Chicago Booth School of Business, where more than 500 alumni, students and community members gathered for a wide-ranging discussion on the year ahead. Part of a series established in 1954, this year’s events were entitled “Uncertainties and Tradeoffs: Making Sense of the Global Economy.”
The panel featured UChicago’s Randall S. Kroszner, the Norman R. Bobins Professor of Economics; Yueran Ma, the Carhart Family Professor of Finance; and Raghuram G. Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance. The conversation was moderated by Hal Weitzman, adjunct professor of behavioral science and executive director for intellectual capital at Booth.
What challenges will the Federal Reserve face in 2026?
Ma pointed out that investment in AI could complicate the Fed’s response to unemployment and inflation.
“Traditionally, we think that if you stimulate the economy, stimulate the labor market, investment, growth—it’s all the same thing,” Ma said. “But now, if you have more stimulation, that may very well make firms invest more in automation or AI. And then, if you stimulate more, you may not get as much effect on the labor market as you did in the past, at least going forward.”
Ma added that if AI indeed reduces production costs, however, it may help keep inflation down while the Fed stimulates growth in the labor market.
Rajan used the term “K-shaped economy” to describe the contrasting experiences of different socioeconomic classes in the current climate.
“You have people in the upper-middle class and above who are benefiting hugely from the wealth effects of the stock market. Their jobs will be augmented by AI rather than displaced by AI. Then there is the lower-middle class and below, who seem to be having a crisis of affordability right now. And they are very worried about their jobs,” Rajan said.
“But you can’t set policy based on one segment of the population,” Rajan added.
Rajan also questioned why the Fed would cut interest rates now, given that it would not help lower inflation to the agency’s target of 2%.
How could a new Federal Reserve chair affect the Fed’s relationship with the White House?
Kroszner stated there had been a lot of “clutching of pearls” over the criticism the administration had levied against current Fed Chair Jerome Powell. He noted there was no shortage of tough criticisms directed toward the agency during the Great Recession, when Kroszner served as governor of the Fed.
Kroszner pointed out that markets have remained stable despite many raising concerns about the friction between the White House and the Fed.
“I think also there's a lot of faith that the markets have in (U.S. Secretary of the Treasury) Scott Bessent to step in if something is getting out of control,” he said. “I think that, along with the checks that the Supreme Court have so far exercised and the checks provided by the Senate confirmation process for Fed governors and the chair, help to explain why the markets have been relatively calm.”
Kroszner concluded his response by arguing that dissent is not always a bad thing and can be useful in providing transparency into the decision-making process, particularly during uncertain times.
How have tariffs impacted the economy—especially manufacturing?
Rajan said that tariffs exerted a small amount of influence in bringing manufacturing back to the United States, noting that certain U.S. car producers had moved plants from Canada into the U.S.
“The question, however, is: Is it going to make the United States a manufacturing power?” Rajan said. “And the answer is, probably not.”
Reiterating a point he made at last year’s Economic Outlook, Rajan said that manufacturing jobs for semi-skilled workers with high school degrees don’t exist anymore because many of those tasks are now performed by machines.
Rajan went on to question the benefits of bringing manufacturing back to the U.S.
“There’s not so much advantage in bringing manufacturing of a lot of stuff back home,” he said. “It’s going to cost us a lot more for our customers to pay for that stuff. Just leave it overseas.”
Rajan predicted that tariffs would raise prices for consumers in the long run because of extra costs for manufacturers and a lack of competition.
Ma, agreeing with Rajan, stated that since 2020, investment in U.S. manufacturing had nearly doubled, but that the employment difference between now and 2019 was “almost zero,” despite the dramatic increase in investment.
“I think, ultimately, there are economic laws that are difficult to defy,” Ma said. “Consumers buy cheap things, you cannot peg long-term interest rates, you cannot peg long-term output, and you cannot direct trade, as in command and control. This administration sometimes seems extremely empiricist,” she said, suggesting the current administration is very willing to try policies that can run counter to established economic principles.
Kroszner, agreeing with Rajan that long-term negative effects of tariffs were possible, echoed a point he made during Economic Outlook 2024 that tariffs are harder on other countries than on the U.S. because trade is a much smaller fraction of GDP for the U.S. than for other countries.
Therefore, he contended, tariffs could be used as an effective negotiating tool. Kroszner also pointed out that some of the U.S.’s biggest exports, such as energy, are not goods that other countries would voluntarily place reciprocal tariffs on. So except for some farm products, there is relatively limited scope for retaliation by other countries—which is what we have observed, he noted.
What effect will AI have on the economy—and are we in an AI bubble?
“The impact on the real economy, I think, depends a lot on the ultimate adoption and use of AI,” Ma said.
She explained that the downstream implementation of AI products by U.S. companies are harder to predict, and that the implementation is crucial for understanding whether AI investment will turn into economic growth and productivity gains.
Rajan agreed with Ma, stating that we have not yet seen the “final adoption point” of AI and how it will benefit companies and consumers.
“Where do AI companies think they’re going to make the money if they’re competing with each other, and they don’t have final demand yet?” Rajan said. “Until you have that final demand, all this could just be investment, and you need to translate [it into profit].”
As with all new technology, he argued, it will take time for AI products to be implemented and adopted. He used the example of the automatic telephone, which was first invented in 1920, but did not fully replace all human telephone operators until 1985—a full 65 years later.
Kroszner pointed out differences between the dot-com boom of the late 1990s and early 2000s and the current AI investment boom, voicing concern that some investors in AI were beginning to take on much more debt than dot-com investors in the late 1990s.
“That’s the thing that worries me,” he said, “that when some of these firms get into trouble, it can have bigger economy-wide impacts. That then affects the banking sector and the availability of credit. Liquidity can dry up, so the situation could become closer to what happened with the mortgage crisis.”
Will China stabilize growth amid multiple economic challenges?
“The property market cycle probably will take some time to play out,” Ma said.
She predicted that China would continue investing heavily in AI and robotics, as well as other sectors where its economy had a clear advantage. But she also noted its major economic issues: low consumption, deflation and low consumer sentiment.
Rajan asserted that the real estate downturn in China was a “huge issue” that had spilled over into other parts of the economy.
“Land sales used to be a big part of revenues for the local governments. But with prices having fallen so low, land sales are no longer possible, so the pressure has fallen on production to be the source of revenues for companies,” Rajan explained.
He went on to say that China had a problem with overproduction because manufacturers were being pushed to produce by local governments.
“The right way to deal with this is to stop the overproduction,” Rajan continued. “But for that, you’ve got to go into the incentives of the local governments.”
“One of the major challenges is the dramatic decline in working-age population because of the one-child policy,” Kroszner added.
“Demographics are having a significant impact by reducing growth due to fewer workers and adding downward pressure to the property market by reducing housing demand. On top of this is lower overall domestic consumption, both because of a rapidly declining population and because of a very high savings rate. The pieces just don’t fit together.”
What are the biggest concerns for the economy in 2026?
Rajan voiced concern the Fed may be cutting rates too early and referred to the U-shaped interest rate curve that commonly occurs before financial crises.
“I don't think we’re at a tipping point yet, but I think we could be building toward that tipping point if the Fed is not careful. That’s my worry,” Rajan said.
Ma brought up the poor financial situation of higher education institutions, compounded by federal cuts to research funding. The lack of support could have global implications when it comes to innovation and competition, Ma argued. She noted that China is investing heavily in science, and that many top scientists now are choosing to work in China instead of the U.S.
Kroszner raised the issue of sudden revaluations of asset prices, especially in areas of heavy investment like AI. Since a lot of investment is happening through private equity, he explained, revaluations could be more dramatic.
“What if someone has to sell one of these large investments at a 40% discount to the private equity valuation? Everything else then comes down with a 40% discount, and even if people can’t get out of their private equity investments with their lower valuations, they’re going to have to sell somewhere in the system,” Kroszner said.
On Dec. 10, Ma and Rajan joined Brent Neiman, the Edward Eagle Brown Professor of Economics, at the New York Economic Outlook event, in a conversation moderated by Ray Iwanowski, MBA’97.
Interested in hearing more about what lies ahead for the economy in 2026?
Register for the Jan. 28 Global Economic Outlook.
This virtual event will feature Veronica Guerrieri, the Ronald E. Tarrson Distinguished Service Professor of Economics and Willard Graham Faculty Scholar; Chang-Tai Hsieh, the Phyllis and Irwin Winkelried Distinguished Service Professor of Economics and PCL Faculty Scholar; Luigi Zingales, the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance. Moderated by Romesh Vaitilingam, writer, consultant and editor-in-chief of Economics Observatory.
—Adapted from an article originally published on the Booth website.
