Torsten Slok’s Macro Update: Higher for Longer and the Road to 2027

Diana Sands (0:03)

Welcome to another episode of The Allocation. I'm Diana Sands, your host for this episode. The economic picture has continued to evolve with good debate on topics of inflation, the health of the consumer, interest rates, AI. Joining me to discuss his latest views on the economy, on markets is our chief economist here at Apollo, Torsten Slok. Torsten, it's great to have you back, and especially good timing as we roll into the end of 2026

First off, I did go back and listen to your last podcast with us last quarter, and the topics were AI super cycle, geopolitics, rising inflation, and rising interest rates. We're very much so pulling those forward.

Torsten Slok (0:43)

Those are still the topics today.

Diana Sands (0:45)

Perfect. We can re-record. This was a good episode. We can cut and go home.

But rising rates being front and center. Let's start there with the Fed. What does this week's decision tell you about the Fed's view of the economy, where rates are going from here?

Torsten Slok (0:58)

Yeah, it tells you something very important, because the Fed decided to raise interest rates, which was, of course, a little bit unusual, because the previous move that they did was to cut interest rates. And we came into this year, the market, the Fed, everyone expecting that the Fed would be cutting this year. In fact, the dot plot, meaning the Fed's expectation on their own, was expecting that the Fed will be cutting three times. Now, we're sitting here today in September 2026, and now the market is pricing that the Fed will be hiking three times more, in addition to what we just got from the Federal Reserve. So it's a pretty dramatic change in the Fed's overall look at what the economy is doing and what their expectations are to what it will be doing going forward. And it's mainly driven by two things, namely the AI spending boom and by the one big bill for bill.

We calculate that the AI spending boom is adding at the moment about 1% of GDP growth. Normal GDP growth is 2

And now we're adding 1% because of AI spending. And AI spending is not only data centers and energy, but it's also spending on tokens. Businesses are spending a lot of money on tokens, consumers spending a lot of money on tokens. But it's also spending on software tools for AI, for consumers and for corporates. So that tailwind to growth continues to be very, very strong. While at the same time we have a second tailwind, namely we have one big bill for bill, fiscal expansion, that also is adding in round numbers, roughly around 1% as point to GDP growth. So with that backdrop, inflation has just been a bit higher than what the Fed would like, namely around three and a half. It should be two. And that was the reason why the Fed raised interest rates. And therefore the short answer to your question is, we expect this to continue, namely that the economy continues to do well, mainly during by the AI spending boom.

Diana Sands (2:37)

And what do you think about inflation? Where do you think inflation goes from here? They continue to struggle to pull back towards the 2% target?

Torsten Slok (2:44)

Yeah, what's unusual exactly about that is that we should go from the levels of inflation we had during the pandemic, which was 9%.

We should go down towards the 2% target, and at the moment we're at 3.5%.

But it's turning out that the last mile is a lot more difficult than what the Fed expected and what we also had expected. And the reason for that is that there are three reasons why inflation is high. Number one, we still have some delay effects of tariffs putting up by pressure on inflation. We also have number two, oil prices are going up. That's also putting up by pressure on inflation. And number three, because of restrictions on immigration, you're beginning to see wages go up in sectors where unauthorized immigrants are working. So that's especially construction, agriculture, hotel and restaurants. And for those three reasons, the inflation outlook is unfortunately still more sticky. It's just turning out to be much more complicated to get from three and a half down to two. So for that reason, inflation has been above the Fed's 2% target since 2021 And we're still above the target for the next 12 months, according to the consensus and our forecast. And that is the reason why the Federal Reserve is acting, because we just still have, unfortunately, an inflation problem that they need to deal with.

Diana Sands (3:52)

And you've highlighted a number of things impacting that oil, probably front and center for a lot of people listening. But AI has clearly been a huge focal point as well. What do you think about AI's impact on jobs, on wages and then inflation in turn?