Resilience and Hidden Risks Coexist: A Review of the U.S. Economy in Late May 2026

In late May 2026, the U.S. economy presents a complex landscape featuring sustained resilience, rebounding inflation, a hawkish policy shift and widening structural divergence. Fueled by booming AI investment and loose fiscal policies, economic growth holds steady. Meanwhile, geopolitical tensions have driven up energy inflation. Following the leadership transition at the Federal Reserve, monetary policy has turned cautiously hawkish. Sustained high interest rates and mounting debt pressure continue to weigh on the economy. Beneath the seemingly stable performance lie multiple lurking risks, including renewed inflation, slowing growth and heightened financial fragility.

The U.S. economy maintains growth momentum, with the AI sector emerging as the core driver amid deepening structural divides. The annualized quarter-on-quarter growth rate of U.S. real GDP stood at 2.0% in the first quarter of 2026, and the Atlanta Fed’s GDPNow model projected a rise to 4.3% for the second quarter. Three major factors underpin the solid growth. First, capital spending across the AI industrial chain has surged. Top five cloud service providers have raised their annual capital expenditure plans, with massive investment pouring into AI-related hardware and power infrastructure, which has become the strongest engine for economic expansion. Second, persistent fiscal easing has delivered tangible effects. Tax cuts and tariff rebates have been implemented, and personal tax refunds have boosted domestic consumption, while increased government spending has further underpinned aggregate demand. Third, the labor market remains resilient. The U.S. economy added 115,000 nonfarm payroll jobs in April, with the unemployment rate holding steady at 4.3%. The year-on-year growth of average hourly earnings moderated to 3.6%, pointing to a balanced labor market without overheating. Nevertheless, economic divergence has become prominent. While the AI and high-end manufacturing sectors enjoy strong prosperity, traditional industries such as real estate and retail remain sluggish, forming a pattern of a two-speed economy.

Inflationary pressures have flared up again, mainly driven by rising energy and housing costs. In April, the U.S. Consumer Price Index (CPI) jumped 3.8% year-on-year, hitting a nearly three-year high, with a month-on-month increase of 0.6%. The core CPI rose 2.8% year-on-year and 0.4% month-on-month, both exceeding market expectations. The rebound in inflation is primarily attributed to energy shocks triggered by geopolitical frictions. Tensions around the Strait of Hormuz have pushed up international oil prices. Energy-related CPI soared 3.8% month-on-month in April, and gasoline prices surged 28.4% year-on-year, contributing over 40% to the overall CPI growth. Additionally, housing inflation remains stubborn. Rents and owners’ equivalent rent climbed 0.5% to 0.6% month-on-month, continuously propping up core inflation. More notably, inflation is spreading from energy products to service sectors, with prices of catering, medical services and air tickets moving higher. The year-on-year growth of core Personal Consumption Expenditures (PCE) reached 3.2%, far above the Federal Reserve’s 2% inflation target. Market participants have revised up inflation forecasts for the whole year, projecting the annual CPI and core PCE at 3.7% and 3.2% respectively, indicating that elevated inflation may become a medium-to-long-term challenge.

With a new leadership at the helm, the Federal Reserve has adopted a hawkish stance, trapped in a monetary policy dilemma. Kevin Walsh officially took office as Fed Chair on May 22. Holding a hawkish stance, he opposes excessive liquidity expansion and prioritizes curbing inflation. Faced with rebounding inflation and resilient economic growth, the Fed has rapidly adjusted its policy orientation. It has scrapped guidance for interest rate cuts. Three voting members at the April FOMC meeting already dissented against dovish policy wording, and the federal funds rate is widely expected to stay within the range of 3.5% to 3.75% at the June meeting. Markets even price in two interest rate hikes in 2027. The Fed has also accelerated its balance sheet reduction to push deleveraging in the shadow banking system and ease structural inflation. Fed Vice Chair Jefferson stated that the current interest rate range is appropriate. Policymakers are reluctant to cut rates for fear of stoking inflation, nor will they hike rates aggressively to avoid dragging down economic growth. The Federal Reserve is caught in a tough spot: rate cuts may lead to runaway inflation, while further hikes will exacerbate debt burdens, leaving limited room for policy maneuver.

Rising debt and accumulating financial risks have increased market vulnerability. The U.S. fiscal deficit and national debt keep expanding. In a high-interest-rate environment, financing costs for treasury bonds have climbed sharply, with the yield on 30-year U.S. Treasury bonds approaching 5.19%, a recent peak. Soaring interest payments on public debt have squeezed fiscal space. Meanwhile, rising marginal costs for AI investment have put pressure on corporate earnings. The capital market shows a clear divergence between sectors. AI concept stocks continue to rally, and the proportion of S&P 500 companies reporting better-than-expected earnings in the first quarter has hit a four-year high. However, bond market volatility has intensified, and the U.S. dollar index has strengthened, drawing global capital back to the United States and bringing pressure to emerging economies. Financial markets have become far more sensitive to shifts in the Federal Reserve’s monetary policy.

Looking ahead, the short-term resilience of the U.S. economy will persist, yet intertwined risks remain prevalent. Booming AI investment and continued fiscal easing will sustain growth, with the full-year GDP growth rate projected at around 2.2%. Nonetheless, four major risks — rebounding inflation, prolonged high interest rates, mounting debt pressure and geopolitical uncertainties — cannot be overlooked. Economic growth is likely to slow to 1.4% in the second half of the year. The Federal Reserve will maintain a cautiously hawkish stance, with no rate cuts expected within the year and potential rate hikes to resume in 2027. The U.S. economy is now in a fragile equilibrium featuring robust growth, high inflation and elevated interest rates. How to contain persistent inflation and strike a balance between growth stability and price control will be the core challenge for the Federal Reserve under the new leadership, and its policy moves will also profoundly shape the trends of the global economy and financial markets.