Fiscal and monetary policies are expected to provide tailwinds for markets in 2026, with the One Big Beautiful Bill Act (OBBBA) providing stimulus and the Federal Reserve likely to continue cutting rates. However, households’ spending tax refunds could boost inflation further, inspiring the Fed to move more slowly.
Here’s a quick rundown of the potential impact of fiscal policy on the economy in the coming year.
How Fiscal and Monetary Policy Are Shaping the 2026 Economic Outlook
Accommodative fiscal policy, including large tax refunds, creates the potential for significant tailwinds for the 2026 economic outlook, though they also risk fueling higher inflation.
Policy Tailwinds That Could Support Markets This Year
Among the monetary and fiscal policies that could create significant tailwinds for the economic outlook in 2026 are the following:
- The OBBBA is likely to increase deficits to as much as 6% to 8% of GDP for a few more years, a level not seen historically in the middle of an expansion. The result should be increased corporate profits and a general economic boost.
- Outsized tax refunds resulting from the front-loaded tax cuts from the OBBBA, including new deductions, could boost household consumption in 2026.
- Continued interest rate cuts by the Fed, as it aims for a neutral policy rate of around 3%, could flow through into the overall economy, benefiting cyclical and rate-sensitive sectors.
Key Policy Risks We Think Investors Need to Watch
There are inherent fiscal and monetary policy risks we feel investors need to monitor, however:
- Tax refund-driven household spending could keep inflation elevated, creating a challenge for the Fed.
- The Fed might pull back from its expected rate cut trajectory due to the labor market picking up steam or continued high inflation amid tax cut-fueled spending.
What These Policy Trends Could Mean for Investors in 2026
The impact of fiscal policy on the economy could mean investors need to watch these trends in the coming year:
- A likely increase in fiscal deficits, which would be a positive for markets in the near term, because deficits eventually flow into corporate profits.
- An expected jump in household spending and, potentially, markets, from OBBBA tax cuts.
- Persistent inflation, but also elevated stocks from expected higher consumer spending.
- A dovish Fed, which could mean a near-term tailwind for markets.
- More yield curve normalization on Treasuries.
Explore the 2026 Market Outlook
It’s important to seek professional guidance when managing your investments, as fiscal policy shifts market expectations. Explore how fiscal policy may impact the stock market by downloading our full 2026 Market Outlook report.
The opinions contained in this complimentary download is provided entirely on behalf of CWM, LLC and is in no way related to Cetera Wealth Services LLC, or its registered representatives. This information is from sources believed to be reliable, but Cetera Wealth Services LLC cannot guarantee or represent that it is accurate or complete.
