A higher-for-longer economy.

Cat: Hello, I'm Cat Von Alst, client service director at SEI. I'm here with client portfolio strategist Art Patten for his third quarter 2026 economic outlook. Art, the Federal Reserve raised its policy rate for the first time in several years over the past quarter. Why would they do that? Aren't financial conditions tight enough?

Art: Hi, Cat. A number of central banks raised interest rates in recent months out of precaution over inflation, given AI build out demands and higher energy and related prices arising from wars in the Middle East and Eastern Europe. However, by almost any measure, financial conditions are still quite accommodative. Taken together, these dynamics point to ongoing upward pressure on interest rates.

Cat: Can you speak a little bit more about the current financial conditions? Aside from the AI boom, aren't other parts of the economy struggling?

Art: Admittedly, the growth dynamic is still somewhat narrow. It's heavily dependent on the AI build out and central government expenditures. And some areas such as residential real estate, consumer borrowing, lower quality debt, and industries dependent on falling interest rates will continue to face headwinds in this environment. But in the aggregate, the global economy appears strong enough to absorb the regime shift in interest rates.

Cat: When you say regime shift, that's a pretty big deal. What guidance do we have for investors?

Art: Given the dynamics we discussed, investors need to be selective and remain attuned to likely winners and losers in what has become a very different economic and financial environment than the one that prevailed for most of the 21st century. In the current environment, that means watching inflation risks closely.

Cat: Okay, so what do we think is next for inflation?

Art: Despite tariffs, wars, stubbornly high energy prices, and AI-driven demands for materials and electricity, we have yet to see significant knock-on effects on broader measures of inflation. Somewhat encouragingly, most inflation measures have cooled over the past year, but that's not true across the board and inflation is still well above where central bankers would prefer to see it. It would require quite a leap of faith, which is never a good basis for investment strategy, to assume recent improvements will continue unabated, especially given that we've already started to see second-order effects of the energy shock in various measures of transport prices, the AI build out in manufacturing prices, and tariff impacts in the prices of some goods. Weather risks related to an especially intense El Nino are a wild card with regards to certain prices. And with low immigration rates and shrinking workforces, labor markets could also be an important area to watch in the years and decades ahead.

Cat: Could you tell us a little bit more about the second-order effects?

Art: The second-order effects are the most immediate risk to inflation pushing higher. Diesel prices are at all time highs and other critical energy and agricultural inputs are expensive. Fortunately, the pass through of energy prices into broader inflation measures tends to be modest overall. But that said, businesses, farmers, consumers are clearly struggling with higher prices for certain goods, and this could impact upcoming elections in a number of countries. The potential for additional tariffs from the US administration and countermeasures from its trade partners add another near-term risk to the outlook for prices.

Cat: Thanks, Art, we always appreciate your insights. SEI is focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process as the impact varies based on each client's goals. For more of SEI's insights, read our latest economic outlook available on our website.