With the decision of the future Federal Reserve Chairman going to Kevin Warsh, some of the focus last week reverted to Kevin Hassett, who currently serves as the Director of the National Economic Council.
The market’s initial reaction to Warsh as incoming Fed chief was negative, as he is considered a critic and hawk on the Fed’s balance sheet and federal deficits, hence the notion of the Fed’s QE punchbowl being pulled, put a bid under the dollar and put stocks on the defensive. This is likely a short-term reaction, as unwinding and resolving the twin deficits will depend on inflation coming down further, future 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,” Hassett says the U.S. economy is undergoing a massive positive supply shock. While a “supply shock” is often associated with negative events (like the 1970s oil crisis), Hassett views it as a positive. He sees the economy entering a period of high growth with easing inflation, driven by structural improvements in the nation’s productive capacity.
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 technology, as evidence of a factory boom. He believes this onshoring will create a wave of new supply, keeping prices down even as demand grows.
Hassett likens the current economic landscape to the late 1990s internet boom. He says AI is beginning to drive productivity to higher levels, allowing the economy to expand without economic overheating triggering high . He credits administrative shifts, such as full expensing of capital investments and financial deregulation, with removing hurdles that previously slowed down production.
A major part of Hassett’s vision includes a critique of the Federal Reserve. Because we are in a supply-side boom, he says, the Fed is being overly cautious, 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 disproven by the data.”
Not all economists share Hassett’s supply shock optimism. Skeptics point to a few potential shocks of a different nature. Many analysts argue that aggressive tariffs on imports (such as those from China) act as a negative supply shock, potentially pushing inflation toward 3.5% by mid-year.
With net migration dropping, some fear a labor supply shock causing a structurally tight 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, rising from $29.2 billion to $56.8 billion, the largest percentage gain in nearly 34 years. Hassett has downplayed the spike as a temporary distortion. He says the underlying supply-side boom (the new factories under construction) will eventually lead to a structural reduction in the trade deficit as domestic production increases later in 2026.
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. However, 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), including food, hospitality, housing, healthcare, education, and retail.
Based on 2026 project pipelines and National Economic Council (NEC) estimates, current projections suggest that onshoring projects announced since 2025 could create 250,000 to 450,000 direct permanent jobs by the end of the decade. Including indirect spillover effects, new jobs could exceed 1 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 beyond two to three months is difficult, but both are moving slowly in the right direction – lower. This will be very bullish for both stocks and bonds for 2026.
