With the decision of the future Federal Reserve Chairman having been settled with the selection of Kevin Warsh, some of the focus over the weekend reverted back to Kevin Hassett, who currently serves as the Director of the National Economic Council.
The market’s initial reaction to Warsh as the incoming Fed chief was negative, as he is considered a critic and hawk on the Fed’s balance sheet and the federal deficits. Hence, the notion of the QE punch bowl being pulled put bid under the dollar and had stocks on the defense. This is likely a short-term reaction, as unwinding and resolving the twin deficits will depend on inflation coming down further, future interest rate cuts and the cooperation of lower Congressional spending. This endeavor is a long-term workout.
In what is being framed as the mother of all Goldilocks scenarios, Kevin Hassett is arguing that the U.S. economy is undergoing a massive positive supply shock. While the term “supply shock” is often associated with negative events (like the 1970s oil crisis), Hassett is using it in a positive, blockbuster sense. He contends that the economy is entering a period of high growth paired with easing inflation, driven by structural improvements in the nation’s productive capacity.
Source: www.yahoo.com
Hassett’s optimistic outlook for 2026 relies on several key supply-side catalysts. He points to a surge in factory groundbreakings, particularly in semiconductors, energy and tech, as evidence of a factory boom. He believes this onshoring will create a wave of new supply that keeps prices down even as demand grows.
Source: https://map.engineered-vision.com/
Hassett likens the current moment to the late 1990s internet boom. He argues that AI is beginning to drive productivity to higher levels, allowing the economy to expand without the typical overheating that triggers high inflation. He credits administrative shifts, such as full expensing for capital investment and financial deregulation, with removing the hurdles that previously slowed down production.
A major part of Hassett’s recent public commentary is a critique of the Federal Reserve. He argues that because we are in a supply-side boom, the Fed is being overly cautious by keeping interest rates high. “We’re having a massive positive supply shock, the likes of which we haven’t seen since the late 90s… the idea that the Phillips curve constrains the Fed to always hammer when there’s good news is being disproven by the data.”
Not all economists share this supply shock optimism. Skeptics point to a few potential shocks of a different nature. Many analysts warn that aggressive tariffs on imports (such as those from China) act as a negative supply shock, potentially pushing inflation toward 3.5% mid-year.
With net migration dropping, some fear a labor supply shock that could lead to a structurally tight job market and higher wage-push inflation. And while factories are being built, critics note that the future manufacturing capacity being touted and seeing real-world productivity gains from AI often takes years, not months.
Additionally, critics point to the 94% spike in the November 2025 trade deficit that jumped from $29.2 billion to $56.8 billion, the largest percentage increase in nearly 34 years. Kevin Hassett has downplayed the spike as a temporary distortion. He argues that the underlying supply-side boom (the new factories under construction) will eventually lead to a structural reduction in the trade deficit as domestic production later in 2026.
Source: www.ycharts.com
Job security is a major topic of conversation regarding the impact of AI, and there have been some high-profile layoffs announced during the current earnings season. Calculating the total number of jobs created by the current onshoring wave is complex because economists distinguish between construction jobs (temporary), direct manufacturing jobs (permanent) and indirect/spillover jobs (suppliers, local services) that include food, hospitality, housing, health care, education and retail.
Based on 2026 project pipelines and National Economic Council (NEC) estimates, current projections suggest that the cumulative onshoring projects announced since 2025 could create between 250,000 and 450,000 direct permanent jobs by the end of the decade. When including indirect “spillover” effects, that number is expected to exceed one million total jobs. If these numbers are anywhere near accurate, then the labor market should stay near full employment.
As for inflation and interest rates, forecasting out beyond two to three months is difficult, but both are moving in the right direction — lower. Let’s hope this is a secular trend in the making, as it will be very bullish for both stocks and bonds for 2026.
