Key Takeaways from President Williams’s Speech on the Economic Outlook and Monetary Policy

Judy DeHaven

In remarks in New Jersey on December 15, New York Fed President John C. Williams discussed the U.S. economy and how the Federal Reserve is working to achieve its dual mandate of maximum employment and price stability. He also provided his economic outlook.

He said:

“If I had to choose one word to describe 2025, it is uncertainty. What’s striking is that despite all the uncertainty, the U.S. economy has shown considerable resilience and looks poised to pick up steam next year.”

“My assessment is that in recent months, the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat. Monetary policy is very focused on bringing these risks into balance.”

“Monetary policy is well positioned as we head into 2026.”

President Williams began his remarks by discussing price stability, which the Federal Open Market Committee (FOMC) defines as 2 percent inflation over the longer run. He said that while the effects of trade policies have boosted inflation this year, “these effects have been more muted and drawn out than I originally anticipated.”

As a result, progress toward the FOMC’s 2 percent longer-run inflation goal has temporarily stalled. While it is not possible to precisely measure the effects of tariffs, President Williams estimates that they have contributed around one half of a percentage point to the most recent inflation reading of about 2-3/4 percent.

President Williams added that he did not see signs of tariffs “contributing to second-round or other spillover effects on inflation.”

“This is consistent with reports from around the Second District, where several of my business contacts have noted that, while tariffs continue to drive up their input costs, the pace of price increases has eased slightly,” he said.

With regard to employment, “the data show that the labor market has continued to cool, with labor demand softening more than supply,” President Williams said. “Job growth has been anemic, and the unemployment rate has moved up steadily in recent months.”

In addition, many labor market indicators are now at the same levels as before the pandemic, “a time when the market was not overheated,” he said.

North Jersey’s employment trends mirror the U.S. “Many of our regional contacts, including those responding to our business surveys, are reporting job losses,” President Williams said.

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 determined that bank reserves have declined to ample levels, and it said it will initiate reserve management purchases to maintain those levels. “This is the natural next step in the implementation of our ample reserves framework to ensure effective interest rate control,” 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. I fully expect that standing repo operations will continue to be actively used in this way.”

In terms of his economic outlook, President Williams said he expects:

• Inflation to decline to just under 2-1/2 percent next year before reaching the FOMC’s 2 percent longer-run goal in 2027
• Real GDP to rise from about 1-1/2 percent in 2025 to around 2-1/4 percent in 2026, in part due to the effects of the government shutdown, as well as from tailwinds from fiscal policy, favorable financial conditions, and increased investments in artificial intelligence
• The unemployment rate to rise to around 4-1/2 percent at the end 2025, reflecting some additional effects from the government shutdown, before gradually declining over the next few years

Read the full speech.