Despite global challenges including ongoing wars and trade tensions putting upward pressure on prices, the U.S. economy is expected to remain fairly resilient in the year ahead, according to Harvard University economics professor Karen Dynan.
Dynan spoke Tuesday at the Peterson Institute for International Economics’ semiannual Global Economic Prospects event, alongside scholars who discussed how current trade and immigration policies factor into the U.S. economic outlook. Dynan spent 17 years on the staff of the Federal Reserve Board, currently serves on a task force assembled by Federal Reserve Chair Kevin Warsh to review Fed policy and was the chief economist at the Treasury Department under former President Barack Obama.
“It’s fair to say that we are in a challenging environment right now given the adverse events of the last couple of years, and yet global growth is holding up and I expect that the most likely outcome for next year is that we’re going to see continued forward momentum,” Dynan said.
But Dynan’s projections show that momentum easing some, with global economic growth slowing from 3.5% in 2025 to 3.2% this year and 3.1% in 2027.
For advanced economies like the U.S., Dynan predicted that growth is “likely to remain solid,” which she attributed in part to the pace of the global artificial intelligence buildout. Growth in AI has helped carry both the U.S. and global economies forward despite higher energy prices stemming from the wars in Ukraine and Iran, according to Dynan.
U.S. GDP grew 2.3% in 2025. Dynan projects the economy will maintain that pace this year, with annual growth of 2.3%, before dipping to 2.2% in 2027.
She expects energy prices to generally ease, the Fed to raise rates further and inflation to fall gradually. Dynan also noted that the federal debt would soon require action from Congress but was not forcing lawmakers’ hands just yet.
Dynan didn’t give a detailed explanation of why she anticipated an easing of energy prices beyond simply that the forecast followed futures contracts, which lock in prices today for commodities such as oil and natural gas to be bought or sold at a later date. However, her forecast was in line with the U.S. Energy Information Administration’s October Short-Term Energy Outlook. Also released Tuesday, the report forecast elevated global oil prices in the near term – raising its fourth-quarter estimate for Brent crude to $105 per barrel, up $14 from its September estimate – followed by a decline to an average of $84 per barrel next year.
Warsh has repeatedly pledged to scale back the Fed’s forward guidance, arguing it makes markets too dependent on the central bank, although he has also indicated that inflation is currently a top priority for the Fed. But Dynan was explicit Tuesday in her remarks on upcoming rate decisions.
“The Fed will be data dependent, but the most likely outcome, I think, is three more quarter-point hikes,” Dynan said.
But those hikes likely won’t happen until after the October meeting, according to Dynan.
“It’s too close to the election, and we don’t have the definitive data in hand that would justify that, but I do expect hikes at December, January, February,” she said.
Under former Chair Jerome Powell and now under Warsh, the Fed has mostly held rates steady throughout President Donald Trump’s second term. After months of boisterous public calls from Trump to lower rates, the Fed lowered rates three times at the end of 2025 by a quarter-point each time, to a range of 3.5% to 3.75% but kept rates there until September, when it raised them a quarter point.
Falling energy prices combined with Fed tightening led Dynan to predict a gradual decline in inflation, though she expects core inflation, which excludes volatile food and energy prices, to come down more slowly.
The U.S. will soon have to reckon with its growing federal debt of more than $40 trillion and persistent annual deficits, according to Dynan, though she said the current political environment makes immediate action unlikely.
“The risk of fiscal crisis has been boosted by the significant increase in interest rates this year, growing federal debt, the increase in federal deficits from last year’s tax cut, a shift in ownership toward leveraged hedge funds – and a productivity boost from AI will help, but it’s not a panacea,” Dynan said.
But she added that the lack of action from Congress, “though they’ve seen this problem coming,” and political polarization “augurs against near-term results.”
Inu Manak, a senior fellow with the institute, and Johns Hopkins economics professor Michael Clemens, spoke to ongoing trade and immigration challenges.
Trump chose not to renew the United States-Mexico-Canada Agreement that his administration negotiated in his first term, and instead, entered negotiations with Canada and Mexico that “have to be resolved for the renewal to actually take place,” according to Manak.
Though Trump is reshaping many of America’s trade agreements, Manak argued that the USMCA is the “central plot in U.S. trade policy,” and that more resilient supply chains, greater economic independence from China and enhanced economic competitiveness actually require “closer cooperation” with both U.S. neighbors due to more than three decades of “deep economic integration.”
Clemens addressed some of the macroeconomic impacts of restrictions on the immigration of high-skill immigrants.
As the Trump administration has worked to curtail illegal immigration, it has also significantly restricted legal immigration, including pathways for high-skilled workers, which Clemens argued could come at an economic cost.
High-skilled immigrants in science, technology, engineering and math fields account for only 1.6% of total U.S. employment but disproportionately large shares of innovation and entrepreneurship in those fields, according to Clemens.
