Chicago panel spars over economic outlook, Federal Reserve

The Executives' Club of Chicago's Annual Economic Outlook panel has a long track record of collegiality, but on Tuesday, the widening divides afflicting the country made their way into the panel's 2026 forecasts.

KPMG Chief Economist Diane Swonk sounded an alarm following news over the weekend that the Trump administration's Justice Department has opened a criminal investigation into Federal Reserve Chair Jerome Powell and has served the chair with grand jury subpoenas.

"The Federal Reserve is having a tough time, a really hard time," Swonk said. "History is unequivocal. Every economic research paper on the independence of a central bank says exactly the same thing, over time, over decades? If you give in to the natural desire by politicians to overstimulate, particularly in an election year, what you always find is you get a more pernicious bout of inflation, or stagflation, or worse."

Concern about inflation is "hype" and "there was a complete and total overreaction by corporate America" to Trump's tariffs, said Dr. Bob Froehlich, former vice chair at Deutsche Asset Management and owner of the independent baseball team the Kane County Cougars.

"I know people say, 'Oh, my God, the independence of the Fed.' Would you give me a break for a minute?" he said. "How do you get to be the chairperson of the Federal Reserve Board? You first have to be nominated by the most political person in the entire world? You want me to believe that a Federal Reserve Board chairperson can swim in that political water and not be political? Oh, give me a break. I got a bridge to sell you."

That was not the only disagreement that rose to the surface during the two-hour luncheon, held at a hotel in Chicago's Loop. The more jocular tone of 2025's event gave way to foreboding from some quarters and defensive cheerleading from others.

"I give the economy an A-minus," Froelich said. "I feel pretty good about where we are heading into 2026."

Swonk was more cautious, as was John Rogers, Jr., founder, chairman and co-CEO of Ariel Investments.

"Alan Greenspan talked about irrational exuberance three years before the internet bubble burst. So this will be my third year. And yeah, third year will be the charm," Rogers said. "I am tripling down today" on his earlier prediction that the valuations of the so-called Magnificent Seven high-market capitalization tech stocks represent a bubble.

He pointed out that technology and telecom now make up nearly 50% of the S&P 500 index.

"As Warren Buffett often says, you pay a high price for a cheery consensus, when you get groupthink," he added, advising the audience not to follow the crowd when investing.

Swonk called the stock market "the biggest threat to the outlook" in 2026. "The stock market is not the economy, but when so much of the economy is dependent on, in fact, things like AI investments and the wealth they generate? that's important when we look at the economy, to understand these sorts of dissonance that we're seeing out there."

While AI investments propelled record valuations and a corporate debt spree that is ratcheting up leverage ? "Speculators are entering the market and using debt; what could go wrong?" Swonk quipped ? they did so "without generating many jobs," she said.

"Inequality intensified, with the top 20% of consumers, according to the Dallas Federal Reserve, accounting for 57% of consumer spending in the U.S. economy" over the last year, Swonk said.

Employment data in 2024 saw its weakest year since 2020, and second weakest year since 2009, at the height of the global financial crisis, she added.

"Unemployment and inflation moved up in 2025 for the first time in tandem since the 1970s, and consumers took note," Swonk said. "Consumer confidence is at recession lows."

Froehlich said government spending is out of control at all levels. "In many respects, you know, (they're) spending a lot of the money that they don't have, especially at the state and local level in some parts of the country," he said. "So the challenge becomes, how do you pull back some of that government spending?"

Foreign investors "love our stocks and they love our bonds," he said. "They burn the flag in the morning, and then they buy stocks and bonds in the afternoon."

Inflation, he stressed, "is under control," and "the next Federal Reserve Board chairperson, whoever they may be, their only task is going to be moving rates down faster (rather) than slower."

Swonk, who told the audience "you're going to hear a lot about productivity growth" in 2026, said she questions whether it's real productivity growth, and she worries about inflation lingering. She also stressed the importance of confronting rising inequality.

"We've got an economy where now the break-even on unemployment, after revisions that are due next month, could move into negative territory," she said. "We've had jobless recoveries. We've never had a jobless boom."