Williams Says Latest Rate Cut Leaves Fed Well Positioned as Inflation Outlook Improves

New York Federal Reserve President John Williams said the U.S. central bank’s quarter-point interest-rate reduction last week places monetary policy in a favorable spot to navigate 2026, adding that he expects price pressures to keep easing while the labor market cools.

Speaking on Monday at a New Jersey Bankers Association gathering in Jersey City, Williams described the recent decision by the Federal Open Market Committee (FOMC) to trim the target range for the federal funds rate to 3.50%–3.75% as a move that shifts policy from “modestly restrictive” toward neutral. He emphasized that bringing inflation back to the 2% goal remains essential, but said the task must be accomplished without generating unnecessary strains on employment.

Inflation Picture and Growth Prospects

Williams projected that inflation will moderate to 2.5% in 2026 and reach the central bank’s 2% objective in 2027, citing diminishing upward pressure from tariffs and a gradual cooling in domestic demand. He noted that import levies, which initially pushed some prices higher, appear to have produced mostly one-time increases rather than a continuing rise in broader inflation. According to his assessment, the tariff-related impact on consumer prices will be fully realized during 2026.

On economic activity, Williams said he is “more upbeat” about next year, forecasting real gross domestic product growth of roughly 2.25%. He attributed the stronger outlook to waning uncertainty, an improving supply chain environment, and signs that inflation expectations remain anchored. The New York Fed chief acknowledged that risks persist but argued that the overall balance of risks has become more favorable.

Labor Market Continues to Cool

Turning to employment conditions, Williams observed that downside risks to jobs have increased because the labor market is clearly cooling. He expects the unemployment rate to rise to about 4.5% by the end of this year. Over the subsequent few years, however, he anticipates a gradual decline in joblessness as growth firms and policy becomes less restrictive.

Despite the slowing momentum, Williams said recent data show no indication of a sharp spike in layoffs or other signs of rapid deterioration. He characterized the current labor-market adjustment as an orderly transition from the exceptionally tight conditions seen earlier in the cycle toward more sustainable levels that align with long-run economic fundamentals.

Policy Outlook and January Meeting

The December 10 rate cut marked the first downward adjustment since the Federal Reserve began tightening policy in 2023. During the post-meeting press conference, Chair Jerome Powell said the future path for rates remains uncertain and declined to signal whether the FOMC will ease again at its next gathering in late January. Williams did not offer specific guidance about the upcoming meeting but reiterated that policymakers will continue to assess incoming data on prices, employment, and financial conditions.

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In addition to lowering the policy rate, the central bank last week unveiled a reserve-management program that involves purchasing Treasury bills to rebuild short-term liquidity within the banking system. The Federal Reserve described these purchases as a technical step aimed at preserving firm control over the federal funds rate. Some market participants nonetheless view the operation as a form of incremental stimulus because it adds cash to the financial sector. Details on the size and pace of bill acquisitions have not yet been announced.

Comparison With Previous Cycles

Williams’s comments highlight a shift from earlier tightening phases, when officials focused primarily on restraining demand to combat inflation that was running well above target. With headline inflation now easing and official projections pointing to further moderation, the policy debate has moved toward balancing remaining price risks against the possibility of weaker employment.

Fed officials have repeatedly said that future decisions will hinge on data rather than a preset course. Market pricing currently implies a roughly even chance of another quarter-point reduction in January, though projections vary widely depending on incoming reports on consumer prices, wage growth, and labor-market turnover.

Williams stressed that the central bank will proceed carefully, aiming to maintain the economic expansion while ensuring inflation returns to its 2% mandate. He said the current stance gives policymakers flexibility to adjust as conditions evolve, whether that means additional easing if inflation falls faster than expected or a pause should price pressures prove more persistent.

Crédito da imagem: Reuters