TD Securities strategists Oscar Munoz and Eli Nir project output growth gradually slowing to potential by late 2026 as Iran-related stagflationary risks keep the Federal Reserve (Fed) cautious. Gross Domestic Product (GDP) is expected to return close to potential with 1.9% Q4/Q4 growth in 2026, unemployment near 4.3%, core Consumer Price Index (CPI) peaking around 3.0% y/y in Q2 2026, and disinflation resuming in the second half of 2026.

From stagflation risk to disinflation

"We expect output growth to gradually come down to potential by the end of this year, reflecting the conflict in Iran. The conflict presents stagflationary risks which we expect will keep the Fed on hold for most this year. Larger tax refunds could help consumers weather the storm of higher gasoline prices."

"GDP growth will likely return close to potential in 2026, ending with 1.9% Q4/Q4. Growth will likely be front loaded due to a rebound in government consumption post shutdown. A normalization in growth should result in a still-low unemployment rate of 4.3% by Q4 2026."

"Higher energy prices along with still-high tariffs should lead to a boost in consumer prices in the near term. We see core CPI inflation peaking at 3.0% y/y for Q2 2026. The numbers are similar in core PCE terms."

"Most of the impact of higher oil prices will filter into headline inflation. We expect disinflation to resume in H2 2026."

"We assign 30% odds to a US recession over the next year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)