In remarks in New York City on January 12, New York Fed President John C. Williams discussed what he expects to see this year for the U.S. economy and for monetary policy.
He said:
“Monetary policy is now well positioned to support the stabilization of the labor market and the return of inflation to the FOMC’s longer-run goal of 2 percent.”
“My base case for the economic outlook is quite favorable.”
“[T]he resilience we have been seeing means the economy is poised for solid growth and a return to price stability.”
“In assessing the future path of monetary policy, my view, as always, will be based on the evolution of the totality of the data, the economic outlook, and the balance of risks to the achievement of our maximum employment and price stability goals.”
President Williams began his remarks by sharing a snapshot of the current state of the economy. He said that although the government shutdown has impeded the normal flow of official data, based on the totality of the available data, “the economic outlook is quite favorable.” For the year ahead, he sees GDP growth picking up some, the labor market stabilizing, and inflation peaking sometime in the first half.
He then discussed tariffs and their likely effects on inflation. “My current estimate is that the increase in tariffs to date has contributed around one half of a percentage point to the current inflation rate of about 2-3/4 percent,” he said. He noted that underlying inflation trends have been favorable, there are no signs of broader inflationary pressures, and inflation expectations remain well anchored.
Turning to the labor market, President Williams said that labor demand is not keeping up with supply, and survey-based measures show increasing slack. But he did emphasize that although the labor market has clearly cooled, “this has been a gradual process, without signs of a sharp rise in layoffs or other indications of rapid deterioration.”
He also spoke about the global picture. “We’re seeing broadly similar patterns of resilience in many economies around the world, which likewise have navigated the effects of U.S. trade policy uncertainty reasonably well,” he said.
On the monetary policy front, he reiterated the imperative to restore inflation to the FOMC’s 2 percent longer-run goal on a sustained basis, while noting that it is “equally important to do so without creating undue risks to the Federal Reserve’s maximum employment goal.” He added that the FOMC’s actions in the latter part of 2025 “have brought these risks into better balance” and that monetary policy is “well positioned” to support the Committee’s goals.
At its meeting on December 10, the FOMC lowered the target range for the federal funds rate by 1/4 percentage point to 3-1/2 to 3-3/4 percent.
In addition, the FOMC stopped reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at the start of December and decided to initiate reserve management purchases to maintain an ample supply of reserves on an ongoing basis. “This is the natural next step in the implementation of our ample reserves framework to ensure effective interest rate control, and it in no way reflects a shift in the stance of monetary policy,” President Williams said.
“With the steady decline in the level of reserves, we have observed upward pressure on repo rates at times in recent months,” he said. “When this occurs, the Fed’s standing repo operations can act as a shock absorber by capping pressures on money market rates resulting from strong liquidity demand or market stress.” He said that he fully expects standing repo operations to continue to be actively used in this way. “In fact, we just saw this in action over year-end when some of the usual market pressures arose,” he added.
In terms of his economic outlook, President Williams said he expects:
- Inflation to peak at around 2-3/4 to 3 percent sometime during the first half of this year, before starting to fall back. He forecasts inflation to be just under 2-1/2 percent for this year as a whole, before reaching the FOMC’s longer-run 2 percent goal in 2027.
- The economy to grow above trend this year, with real GDP growth between 2-1/2 and 2-3/4 percent. This pickup from last year’s pace in part will be due to a first-quarter rebound from the effects of the government shutdown, and also will be fueled by tailwinds from fiscal policy, favorable financial conditions, and increased investments in artificial intelligence.
- The unemployment rate to stabilize this year and then gradually come down over the next few years.
Julie Lasson is an executive communications specialist at the New York Fed.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
