Bolded opening: The core issue is clear: despite 2025’s turbulence, resilience is paving the way for a steadier 2026—and this balance between growth and restraint is what really matters. But here's where it gets controversial: the Fed’s path hinges on inflation returning to 2 percent without sacrificing jobs. Let’s dive into what’s happening, why it matters, and how the Fed plans to steer toward its dual mandate.
Introduction
Hello everyone. It’s a pleasure to speak at Liberty Science Center, famed for housing the largest planetarium in the Western Hemisphere. While the science center’s wonders remind us of big, complex systems, today I’ll focus on the economy and how the Federal Reserve is pursuing its two primary goals: maximum employment and price stability. I’ll also outline recent FOMC moves and share my current outlook for the economy.
Disclaimer: The views expressed here are my own and not necessarily those of the FOMC or the Federal Reserve System.
Turning the Corner
A key part of my role is visiting the Fed’s Second District, meeting with business leaders, community groups, and government officials to gain a firsthand understanding of local challenges and opportunities.
In recent years, North Jersey has largely mirrored the national economy: the pandemic hit hard, a rapid rebound followed, inflation rose, and over the past year uncertainty has grown due to geopolitical events and trade policy shifts.
If I had to pick one word for 2025, it would be uncertainty. Yet, despite these uncertainties, the U.S. economy has shown notable resilience and is positioned to gain momentum next year.
So, after navigating 2025’s hurdles, we seem to be turning the corner. There will always be unknowns ahead—what we in New Jersey like to call the Turnpike ahead. Still, the mix of local, national, and global activity over the past year demonstrates resilience, which we proudly call “Jersey Strong.”
Temporarily Stalled
Before outlining my forecast, I want to describe the economy’s current state by the two sides of the Fed’s mission: price stability and maximum employment.
Price stability means keeping inflation near our longer-run target of 2 percent. Policy relies on a broad set of data. Although the government shutdown disrupted the usual data flow, we still track a wide range of indicators to monitor economic performance.
From the data, it appears that tariff-driven policy changes have nudged inflation higher this year, but the impact has been more modest and slower to unfold than I initially expected. As a result, inflation has not yet returned to the 2 percent goal, hovering around roughly 2.75 percent. Tariffs likely contributed about half a percentage point to the current rate, though precise measurement is challenging.
There is no sign that tariffs are triggering second-round inflationary effects or widespread supply-chain bottlenecks. Shelter inflation has declined steadily, and wage growth suggests a gradual easing. In the Second District, many business contacts note higher input costs from tariffs, but price increases have moderated somewhat.
Most importantly, inflation expectations remain well anchored. The New York Fed’s Survey of Consumer Expectations shows expectations within pre-pandemic ranges, which helps keep actual inflation near target.
Gradual Cooling
On the employment front, the labor market has cooled, with demand softening more than supply. Job growth has slowed, and the unemployment rate has edged higher recently. North Jersey reflects this trend, with slight job declines and regional surveys noting layoffs.
Survey indicators of demand-supply balance also point to more slack in the job market. Consumer confidence metrics, such as the Conference Board’s measure of job prospects, have deteriorated over 2025. The National Federation of Independent Business reports similar difficulties in filling jobs, and the SCE’s “job security gap”—the difference between job-finding expectations and job-loss expectations—has narrowed meaningfully this year.
Many labor-market indicators are now at levels seen before the pandemic, a period when the market was not overheated. Although cooling is evident, it has been gradual, with no signs of sharp layoffs or abrupt deterioration.
Monetary Policy and the Road Ahead
Looking forward, restoring inflation to the 2 percent target on a sustained basis, without jeopardizing maximum employment, is essential. In recent months, the downside risks to employment have risen as the labor market cools, while upside risks to inflation have lessened somewhat.
Policy is aimed at balancing these risks. The Fed has shifted from a modestly restrictive stance toward neutral. At the latest meeting, the target range for the federal funds rate was trimmed by 0.25 percentage point to 3.50–3.75 percent. The statement that accompanied the decision emphasized careful data review, evolving conditions, and risk balance when deciding on future adjustments. This positions monetary policy to support the 2026 outlook.
Looking ahead, I expect tariffs to exert a mostly one-off price effect realized in 2026. Inflation is projected to fall to just under 2.5 percent next year, then return to the 2 percent target in 2027.
Real GDP growth is anticipated to run about 2.25 percent in 2026, higher than this year’s roughly 1.5 percent pace. This pickup reflects not only the effects of the previous government shutdown but also fiscal policy tailwinds, favorable financial conditions, and rising investments in artificial intelligence.
The unemployment rate is forecast to rise to roughly 4.5 percent by year-end, reflecting shutdown-related effects, with unemployment then gradually easing over the following years as growth remains above trend.
Balance Sheet
Regarding the Fed’s balance sheet, on December 1 the FOMC halted the gradual reduction of Treasury securities, agency debt, and agency mortgage-backed securities. With ample bank reserves, the Fed will initiate reserve-management purchases to maintain a comfortable reserve level. This aligns with our ample-reserves framework to ensure effective control of interest rates.
As reserves have declined, there has been occasional upward pressure on repo rates. When that happens, standing repo operations serve as a backstop to cap money-market rate pressures during periods of liquidity demand or stress. I expect these standing repo operations to remain a key tool.
Conclusion
After a year of uncertainty, 2026 starts from a position of resilience. The economy should resume solid growth and price stability.
Yet 2025 has shown that the path forward can shift suddenly. In forecasting monetary policy, I will continue to base decisions on the full suite of data, the evolving outlook, and the balance of risks to our two goals. We must stay ready to adjust course as needed to reach our destination.
