TD Securities has updated its GDP growth forecasts for the US economy. They point to strong personal spending and expected tax refunds in early 2026 as key factors. Economic activity is expected to stay strong, with a gradual easing of monetary policy likely. The unemployment rate is projected to stabilize at 4.3% by the fourth quarter of 2026. The report indicates that tax refunds might boost economic growth and consumption at the year’s start, contributing to a 2.3% increase in output for 2026.

Updated US GDP Growth Projections

We have increased our US GDP growth forecasts because of the strong personal spending observed at the end of 2025, paired with anticipated tax refunds this year. With growth now set at an optimistic 2.3% for 2026, there is a significant chance that the Federal Reserve will keep interest rates steady for a while. Additionally, the unemployment rate is expected to hold firm at around 4.3% by year-end. This outlook is supported by recent data showing Q4 2025 GDP grew at a healthy 2.9% annualized rate. The December 2025 inflation report indicated that the Consumer Price Index remained steady at 3.4%, giving officials little incentive to rush into rate cuts. Last week, Fed Governor Waller advised against easing policy too soon, reinforcing this cautious perspective.

Market Impact and Strategies

For interest rate derivatives, this indicates reduced chances of a rate cut at the March FOMC meeting. The yield on the 2-year Treasury note has already risen toward 4.50%, reflecting this strong economic climate. This environment benefits strategies that anticipate rates will stay high, such as selling SOFR futures contracts or buying put options on Treasury bond ETFs. In the equity markets, this creates a mixed scenario that could lead to increased volatility. Stronger growth is good for corporate earnings, but the possibility of delayed rate cuts could limit stock market price-to-earnings ratios, a trend we often saw in 2023. Therefore, traders might consider purchasing VIX call options or employing options straddles on the S&P 500 to prepare for larger price movements in either direction. The combination of a strong US economy and a cautious Fed should continue to support the US dollar. The Dollar Index (DXY) has already climbed above 104 in January, reaching its highest level since November of last year. Positioning for ongoing dollar strength against currencies from more dovish central banks, like the euro, seems like a solid strategy for the upcoming weeks. Create your live VT Markets account and start trading now.

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