Viewpoints: March 2026

The concept of “core” inflation, that is, a measure of inflation excluding food and energy prices, came into fashion in 1973. In 1972, there was an El Nino weather phenomenon, which decimated the sardine school off the coast of Peru. Sardines were ground into fishmeal, which, in turn, was used as animal feed. The dearth of sardines resulted in an increase in the price of land-animal protein in 1973. Energy prices soared in late 1973 as a result of the OPEC oil embargo in the aftermath of the Yom Kippur War between Israel and its neighbors. (It has been argued that the catalyst for the OPEC oil embargo was the decline in the foreign-exchange value of the US dollar. OPEC nations were being paid in US dollars, which reduced their purchasing power for goods and services sold in other currencies). The chairman of the Federal Reserve at that time was the venerable Arthur Burns – he who must be obeyed. Burns argued that the increases in food and energy prices being experienced in 1973 were not the result of the current stance of monetary policy, but were caused by exogenous factors. Therefore, according to Burns, monetary policy decisions should be based on some concept of the underlying rate of inflation, not price increases resulting from exogenous factors.

Let’s fast forward to today. Energy prices have shot up in the past week or so coinciding with the US and Israel shooting up Iran. Less reported, El Nino is once again plaguing Peru. I have not read that El Nino has adversely affected the sardines, but it is producing severe flooding in Peru, which is playing havoc with Peruvian agriculture. I bet you didn’t know that Peru is a major world exporter of blueberries, grapes, avocados, coffee and asparagus. Neither did I until I started writing this commentary. We do not know how long this military “excursion” into Iran will last and, therefore, how long the resulting increase in energy prices will last and/or how high they will go. But I suspect that we will hear Fed policymakers and financial media talking heads say that Fed policy should be guided by the current and expected behavior of core inflation. That is, the inflation rate excluding the prices of food and energy items because the current increases in food and energy items have not been caused by monetary policy and might be transitory. I’ll bet that at least one Fed policymaker whose term has been extended (and whose initials are SM) will argue that monetary policy should be eased because of the negative effects these food and energy price increases will have on real economic growth.

Let’s look at what happened to core inflation in the early 1970s when food and energy prices flared higher (see Chart 1). In 1972:Q4, year-over-year core Personal Consumption Expenditures (PCE) inflation was 3.05%, food inflation 5.14% and energy inflation was 3.10%. By 1974:Q4, year-over-year core PCE inflation was 9.84%, food inflation was 14.10% and energy inflation was 25.80%. So, during this period, not only did food and energy price inflation soar, so, too, did core inflation.

United States & Europe

In the United States—where the fiscal year begins in September—fiscal policy remains expansionary, with Trump’s One Big Beautiful Bill setting the overall policy direction.

The European Commission projects the euro-area fiscal deficit at around 3.3% of GDP in 2026 and insists the year will not be one of fiscal stimulus. Whether this proves accurate remains uncertain.

Within the euro area, Germany’s fiscal plans centre on a major investment push, including the €500bn infrastructure fund, alongside significantly higher defence spending. Germany’s Draft Budgetary Plan suggests the general government deficit could rise to around 4¾% of GDP, driven by spending on infrastructure, innovation, security and defence.

France has also adopted a 2026 budget that reflects political constraints as much as fiscal priorities. Defence spending is rising, but the consolidation path is slower than previously envisaged. As part of a compromise with the left, plans to raise the pension age from 62 to 64 and to cut production taxes have been abandoned.

Italy’s 2026 Budget Law includes measures worth roughly €22bn over 2026–28, though the deficit is still projected to narrow slightly to 5% of GDP in 2026, from about 5.4% in 2025.

Spain, by contrast, faces less need for fiscal support and remains focused on consolidation as pandemic-era emergency measures expire.

Taken together, fiscal policy across the euro area remains broadly restrained, though increasingly shaped by defence priorities. Even so, these developments appear modest when set against fiscal policy elsewhere—particularly Japan.

Japan’s Expansionary Turn

Japan’s government approved a US$135bn fiscal stimulus package in late 2025, the largest in years, aimed at supporting households and economic growth. Around US$118bn comes through general-account spending, with the remainder delivered through tax measures and related initiatives.

The programme focuses heavily on household relief and strategic investment. Measures include utility and gasoline tax relief, subsidies and transfers to support consumption, and expanded investment in infrastructure, AI, semiconductors and other strategic sectors. Support for local governments and small and medium-sized enterprises has also been increased.

The government is also considering a two-year suspension of the 8% consumption tax on food and drinks, though the proposal remains under debate.

Asia: A Measured Fiscal Approach

Compared with advanced economies, Asia’s fiscal position remains relatively strong, reflecting both smaller pandemic stimulus programmes and a longstanding preference for fiscal restraint.

During the Covid-19 crisis, fiscal support in advanced economies averaged about 28% of GDP, while Asian economies averaged only 8.4% (Figure 1).

In an interview last week, Jamie Dimon, CEO of JPMorgan, said "banking rivals are doing dumb things" and drew parallels between current credit conditions and those in the years leading up to the 2008-2009 Great Financial Crisis. Immediately following Dimon's interview, the FDIC issued its "Quarterly Banking Profile", which provided evidence that commercial banks are in sound shape financially, with relatively high levels of capital and fairly low loan delinquencies. Private credit has also been in the news, fueling fears of real problems. Private credit is not supervised and there are no reliable sources of data for evaluating private credit. This makes financial markets vulnerable to speculation and anecdotal evidence.

Are current credit conditions worrisome? My current assessment is that as long as the economy continues to expand, with aggregate demand growing anywhere near its recent pace, commercial bank credit is not worrisome, and credit conditions are far different than the problems and risks that characterized the pre-GFC period. If the economy were to fall into recession, resulting in a decline in business revenues and profits, credit problems would obviously emerge, but current monetary and fiscal policies suggest the probability of that outcome is low.

The rapid growth of private credit may be a problem. However, if problems exist, most likely they are largely concentrated in the debt-financed AI infrastructure buildout, and a deterioration in private credit conditions would have localized economic and financial impacts, unlike the GFC. Unfortunately, there is insufficient collected information and data to assess the situation, so understanding the scope of the credit issue must be based on specific credits, cash flows and capital of companies.

Dimon's concerns about parallels to the pre-GFC credit markets seem overstated. Consumer and business debt and debt-service are in fairly good shape and current credit conditions and banking practices are far different than during the pre-GFC. Corporate America has been deleveraging for years, household debt remains relative low compared to disposable personal income, and commercial banks are largely well capitalized and have a better understanding of the risks in their balance sheets.

In the years leading up to the GFC, nearly the opposite unfolded. There was an explosion of mortgage debt during an unruly bubble in housing activity (national outstanding mortgages rose 75% in the years 2002-2008) driven by rapidly rising home values and excessively loose credit standards (mortgages, HELOCs, home equity loans); a proliferation of overly-complex MBS and ABS derivatives that created tranches of income-yielding securities that were widely held by banks and investors who didn't know their risks; and insufficient bank capital and lax definitions of capital held by banks. Expectations that home values would continue to rise forever were the catalyst that drove the housing and mortgage demand and loose bank credit standards and willingness to hold complex and risky MBS derivatives. There was a high degree of interconnectedness of systematically important financial institutions (SIFIs) that risked contagion.

When home prices and expectations of future values began to fall in Spring 2006, the entire mortgage market began to unravel. Collapsing values of MBS derivatives and massive mortgage defaults resulted in back-breaking losses for banks, revealing insufficient bank capital bases. Widespread uncertainties about banks' capital led to a short-term funding crisis for large banks, a dramatic spike in uncertainty and broader financial paralysis and deep economic contraction. In sum, real estate loans were at the heart of commercial banking portfolios, and the credit quality of the loans were rotten.

The most recent Federal Reserve reports on commercial bank balance sheets and household debt along with the FDIC Report show that household and business debt levels are not high relative to economic activity and disposable personal income, and banks remain healthy and well-positioned. Chart 1 shows total household debt including mortgages as relatively low as a share of disposable income while Chart 2 shows that business debt is falling as a share of GDP. Chart 3 shows the shares of consumer loans by type: excluding the policy-induced spike in student loan delinquencies, the only concern is credit card debt where seriously-delinquencies are uncomfortably high.

Chart 4 shows delinquencies of business loans: delinquencies of commercial real estate loans have risen only modestly since the Covid-related spike in commercial real estate vacancies in big cities and remain below delinquencies of residential real estate loans. Recent indicators suggest that the problems in commercial real estate are now diminishing. Chart 5 shows commercial bank charge-off rates, which remain low.

Charts 6-7 are from the recent FDIC Report: they show that banks' reserve coverage ratio is relatively high; and their unrealized capital losses of investment securities is shrinking (banks have reduced the duration of their securities and longer-term yields have declined). The FDIC tabulation of problem banks is low. All-in-all, commercial banks are in relatively good shape.

The private credit market remains murky, except for those who are directly involved--the lenders and their sources of capital and leverage--and have access to the financials of the credits they are involved in. The lower costs and higher efficiencies of private lending that stems from lower costs of supervision and government regulatory oversight has a downside: lack of knowledge of data and transparency. In a recent study by the Alternative Credit Council and Houlihan Lukey, Financing the Economy 2025, the private credit market is described in broad terms and includes many interviews with active private creditors, but it does not include the sufficient data to analyze and evaluate private credit. (In a recent article I co-authored with Amit Seru, “The Fed Needs to Earn Its Independence. Just Setting Rates Isn’t Enough”, we argued that the Federal Reserve should seek to obtain information on the credit activities of the private lenders.)

It's important to distinguish between the different kinds and structures of private credit. Some (many?) private creditors are basically making the loans that commercial banks used to make, benefiting from the lower costs of supervision, compliance and regulation. They raise private capital, leverage it with loans from commercial banks, and provide credit to borrowers at healthy spreads. They conduct credit analyses of their clients. Presumably, the credit quality of their loans does not deviate significantly from the commercial and industrial (C&I) loans of commercial banks, although that is not ensured. Also, it is likely that most private creditors are less leveraged than banks.

Two of the largest concerns with private credit are 1) that the proliferation of private lending may be diluting the quality of the private creditors and lessening their credit standards and oversight of the loans, and 2) some private lenders have a narrow focus of their lending activities, and their lack of sufficient diversification may generate concentrations of defaults.

Currently, there's a ton of news on the rising debt used in the AI infrastructure buildout, including data centers and energy production facilities. Sorting out the corporate finances of the companies leading the AI capital spending buildout is difficult. For many companies involved in the AI buildout, much of the capital spending on data centers and energy related buildouts has been financed with internal capital and cash flows. More recently, however, a significant amount has been financed by debt. At the same time, the revenues and free cash flows generated by AI-related products are accelerating dramatically. Based on standard business metrics, a snapshot of the finances of many of the largest AI firms are reasonable or even good. Several may be problematic.

The pace of implementation of AI into commerce and society is stunning. Most likely it will add materially to productivity, economic growth and profits, and will disrupt labor markets. As with all other innovations in U.S. history, disruptions will result in some jobs lost and other new jobs created. I take a positive view of longer-run outcomes. In weighing current commentary on the labor market outcomes stemming from AI innovations, be careful in extrapolating anecdotal evidence to the entire economy, and remember the adage “bad news sells”.

As with all episodes of technological innovation in the U.S., there will be some failures among the AI innovators, and some of the providers of capital and credit will incur losses. However, in contrast to the GFC, the losses will be incurred by a narrow group of capital and credit providers and will not be pervasive and unhinge society and commercial banking. Consider an insurance company or a state pension that finances an AI project and incurs a sizable loan default or capital loss. The jarring impacts of the losses will be narrowly focused and would be relatively minor to the broader commercial banking industry. Similarly, the impacts of the large losses stemming from the Covid-initiated collapse of commercial real estate in big cities were relatively narrow and didn’t unhinge the banking industry. The private credit industry and AI require scrutiny. A close assessment of individual company products, revenues and profits and capital spending is required. This may be a time to be cautious in private lending. But starting with the premise that we should be fearful because it has parallels to the pre-GFC period is not particularly instructive.