US Economy Expected to Grow Near Trend Amid Dovish Policy Mix

The economy is expected to grow near its long-run trend over the next three years, with recession risk remaining low but not zero. The policy mix is likely to support this growth, with monetary policy leaning dovish as growth cools and fiscal policy providing individual and corporate tax advantages, ongoing spending, and investment initiatives.

The labor market is transitioning from a period of acute tightness following the pandemic toward gradual moderation, with further softening expected as firms unwind labor-hoarding behavior. This adjustment is more likely to occur through slower hiring, reduced job openings, and tighter control of headcount growth rather than widespread layoffs.

Inflation is expected to remain above the Federal Reserve's 2% target over the forecast horizon, with annual price increases settling in the range of 2.5-3.5%. This is due to factors such as sticky inflation in services, demographic constraints on labor supply, and elevated fiscal support.

The stock market outlook suggests a broadening in equity market performance, with returns likely to become less concentrated among mega-cap technology businesses. Valuations across leading technology franchises are elevated, and an environment characterized by continued expansion is consistent with improving breadth and renewed interest in other underappreciated sectors and international markets.