Kevin Flanagan, head of fixed income strategy at WisdomTree Asset Management and a Wall Street bond strategy expert, predicted that the U.S. economy will maintain a healthy growth rate of around 2% next year, fueled by consumption and investment, without entering a recession. He also predicted that while U.S. inflation will continue to exceed the Federal Reserve’s 2% target, the impact of tariff policies will not cause a sharp increase in inflation.
Flanagan provided this assessment of the U.S. economic outlook and market risk factors in a video interview with Yonhap News on the 19th. WisdomTree, headquartered in New York, specializes in exchange-traded funds (ETFs) with total assets under management of $142 billion (approximately 210 trillion won, as of December 19).
Flanagan, a bond strategy expert who worked at Morgan Stanley for 30 years before joining WisdomTree, said his basic outlook for the U.S. economy in 2026 is “close to maintaining the status quo.” He predicted, “The U.S. economy will grow 2-3% or around 2.5%, and while inflation will not surge, it will remain above the Fed’s 2% target.”
Flanagan’s outlook is not significantly different from the Fed’s growth forecast (2.3%) and inflation forecast (2.4%) for next year, released in its Statement of Economic Outlook (SEP) on the 10th. Regarding the impact of tariff policy on prices, he stated, “If there were going to be significant price increases, we would have already seen them. While there may be more modest price increases going forward, I don’t think a significant inflationary shock is a fundamental outlook.”
He projected the Fed’s benchmark interest rate to remain in the 3.0-3.5% range next year, anticipating two or so additional rate cuts. The yield on the 10-year U.S. Treasury notes, the benchmark for global bond markets, is expected to trade in the 4.0-4.5% range, similar to the current level. Regarding the possibility that concerns about a widening federal budget deficit could trigger a rise in bond yields, the bank stated,
“The main drivers of bond yields are the economy, inflation, and Federal Reserve policy,” and added, “If the U.S. Treasury does not change the size of its Treasury auctions, the impact will be minimal.”
Regarding concerns about a “debasement trade,” where foreign investors are moving out of dollar-denominated assets, the bank stated, “Foreigners are still buying U.S. Treasury bonds,” adding, “The dollar remains a global store of value, and while we’ve seen some movement into gold, we don’t anticipate the dollar being replaced by the euro or other currencies.” Regarding the possibility of a slowdown in U.S. consumption, the bank stated, “Employment is growing, and average wage growth is outpacing inflation. As long as these two factors persist, consumption will remain a key driver of U.S. economic growth.” Regarding the recently highlighted artificial intelligence (AI) bubble controversy, he distinguished between AI technology and AI investment, and predicted that “AI-related investments, centered on data centers, are likely to continue into 2026 and, along with consumption, will support the overall economy.”
Regarding the AI bubble theory, he said, “At this stage, I am not in the camp that believes there is a bubble in AI,” adding, “However, we should not expect the kind of sustained growth we have seen so far,” predicting a moderation in AI investment. Meanwhile, Flanagan diagnosed that if the employment situation bottoms out and rebounds, contrary to general market expectations of continued weakness, it could have a negative impact on the bond market.
“If the employment index improves more than expected, the Fed may reduce the number of additional interest rate cuts or not cut at all,” he analyzed, “This is a risk factor for the bond market.” Conversely, regarding the possibility of a worsening labor market, he assessed, “If the labor market worsens rather than simply cools, and the unemployment rate exceeds 5%, it would pose a risk to the entire economy. Currently, there are no visible factors that could trigger such a situation.”