Good morning, everyone. It’s an honor to stand here at the Liberty Science Center, home of the largest planetarium in the Western Hemisphere. Today, I want to delve into the U.S. economy and the Federal Reserve's efforts to achieve its dual mandate of maximum employment and price stability. I'll also discuss recent actions by the Federal Open Market Committee (FOMC) and provide my economic outlook for the year ahead.
Navigating Uncertainty and Resilience
One of my key responsibilities is to travel across the Federal Reserve's Second District, allowing me to engage with business, community, and government leaders. This firsthand experience has given me a deep understanding of the challenges and opportunities our region faces.
In recent years, North Jersey has mirrored the broader U.S. economy's trajectory. It faced significant setbacks due to the pandemic, quickly rebounded, grappled with inflation, and then encountered heightened uncertainty stemming from geopolitical events and trade policy changes.
Despite all the uncertainty, the U.S. economy has demonstrated remarkable resilience and is poised to gain momentum in the coming year. This resilience, known as 'Jersey Strong,' has helped us navigate through the challenges of 2025 and turn a corner.
Current Economic State and Dual Mandate
Before delving into my economic outlook, let's explore the current state of the economy, focusing on the two sides of the Fed's dual mandate: maximum employment and price stability.
Price Stability:
The FOMC defines price stability as 2% inflation over the long term. We rely on a vast array of data to monitor economic performance. While official data has been limited due to the government shutdown, we can use various indicators to assess the economy's health.
Trade policies have contributed to higher inflation this year, but their effects have been more gradual and less severe than initially expected. Tariffs have temporarily hindered progress toward the FOMC's 2% inflation goal, with the latest inflation reading at around 2.75%, similar to the previous year.
I estimate that trade policies have added approximately 0.5 percentage points to the current inflation rate. There are no signs of second-round or spillover effects on inflation. Supply chain bottlenecks have not emerged, shelter inflation has decreased, and wage growth is slowing gradually, aligning with reports from the Second District.
Importantly, inflation expectations remain well-anchored. The New York Fed's Survey of Consumer Expectations (SCE) indicates that inflation expectations are within pre-Covid ranges, which is crucial for maintaining low and stable inflation.
Employment and Labor Market:
On the employment front, the labor market has cooled, with labor demand outpacing supply. Job growth has been weak, and the unemployment rate has steadily risen in recent months. This trend is evident in North Jersey, where employment has slightly declined since January, and regional contacts report job losses.
Survey-based measures show increasing slack in the labor market. The Conference Board's consumer confidence survey and the National Federation of Independent Business's survey indicate a decline in job availability. The SCE's 'job security gap' has also decreased significantly this year.
Labor market indicators are now at pre-pandemic levels, indicating a balanced and non-overheated market. The cooling process has been gradual, with no sharp rise in layoffs or rapid deterioration.
Monetary Policy and the Road Ahead
To restore inflation to our 2% goal, we must balance risks to employment and price stability. In recent months, employment risks have increased as the labor market cools, while inflation risks have lessened. Monetary policy aims to achieve this balance.
The FOMC has shifted monetary policy toward a neutral stance, lowering the federal funds rate target range by 0.25 percentage points to 3.5-3.75%. The FOMC statement emphasizes careful assessment of data and outlook, ensuring a balanced approach.
Looking ahead, tariffs will have a one-off price effect in 2026, with inflation expected to decline to just under 2.5% before reaching the 2% goal in 2027. Real GDP growth is forecast at 2.25% in 2026, up from 1.5% this year, driven by fiscal policy, financial conditions, and AI investments.
The unemployment rate is projected to rise to 4.5% by the end of this year, influenced by the government shutdown. However, with above-trend GDP growth, the unemployment rate is expected to gradually decrease over the next few years.
Fed's Balance Sheet
The FOMC has paused Treasury securities and agency debt reductions, opting for reserve management purchases to maintain ample bank reserves. This step ensures effective interest rate control as we move forward.
The decline in reserves has led to upward pressure on repo rates, which the Fed's standing repo operations can mitigate, acting as a shock absorber for money market rates.
Conclusion
As we approach 2026, the economy is poised for solid growth and price stability, having navigated through a year of uncertainty. However, the road ahead may still present unpredictable challenges. My monetary policy views will remain data-driven, focusing on the economic outlook and risk balance to achieve our employment and price stability goals. We must be prepared to adjust our course as needed to reach our destination.
