Good morning, everyone. It's an honor to be here at the Liberty Science Center, home to the largest planetarium in the Western Hemisphere. Today, I'll take you on a journey through the U.S. economy, exploring how the Federal Reserve is navigating its dual mandate of maximum employment and price stability. I'll also shed light on recent actions by the Federal Open Market Committee (FOMC) and offer my economic outlook for the year ahead.
Navigating Uncertainty, Embracing Resilience
As the Federal Reserve's representative in the Second District, my role involves extensive travel, 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. economic trajectory. It endured the pandemic's impact, rebounded swiftly, grappled with inflation, and then, over the past year, encountered heightened uncertainty due to geopolitical events and trade policy changes. Despite these challenges, the U.S. economy has demonstrated remarkable resilience, positioning itself for stronger growth in the coming year.
In essence, we've navigated through the twists and turns of 2025, and now, we're poised to turn a corner. While uncertainty remains, as it always does, our local, national, and global economies have proven their resilience. This resilience is what we call 'Jersey Strong.'
Current Economic Landscape
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 a long-term 2% inflation rate. We rely on a vast array of data to gauge economic performance. Despite recent government shutdowns affecting data flow, we've utilized various indicators to monitor economic health.
Trade policies have contributed to higher inflation this year, but their impact has been more gradual and less severe than initially expected. Tariffs have temporarily hindered progress toward the FOMC's 2% inflation goal, with recent inflation readings hovering around 2.75%. While precise measurement of trade policy effects is challenging, my estimate suggests they've added approximately 0.5 percentage points to the current inflation rate.
There's no evidence of tariffs causing second-round or spillover inflation effects. Supply chain bottlenecks remain absent, shelter inflation has steadily decreased, and wage growth shows a gradual slowdown, 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, a crucial factor in 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 sluggish, 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 of labor market balance show increasing slack. The Conference Board's consumer confidence survey and the National Federation of Independent Business's survey measures indicate a shift in job availability. The SCE's 'job security gap' has also narrowed significantly this year.
Labor market indicators are now at pre-pandemic levels, indicating a balanced and non-overheated market. This gradual cooling process lacks sharp layoffs or rapid deterioration signs.
Monetary Policy and the Road Ahead
Looking ahead, our priority is to restore inflation to the 2% longer-run goal while maintaining maximum employment. In recent months, downside risks to employment have increased as the labor market cools, while upside inflation risks have diminished.
Monetary policy plays a crucial role in balancing these risks. The FOMC has shifted monetary policy toward a neutral stance. Last week, the FOMC lowered the federal funds rate target range by 0.25 percentage points to 3.5-3.75%. The statement emphasized careful assessment of data, outlook, and risk balance in future adjustments.
I foresee tariffs having a one-off price level effect in 2026, with inflation declining to just under 2.5% next year, reaching the FOMC's goal in 2027. Real GDP growth is projected at 2.25% in 2026, surpassing this year's 1.5% pace, influenced by fiscal policy, financial conditions, and AI investments.
The unemployment rate is expected to rise to 4.5% by year-end, with some government shutdown effects. Above-trend GDP growth will lead to a gradual decrease in the unemployment rate over the next few years.
Fed's Balance Sheet
Before concluding, let's briefly touch on the Fed's balance sheet. On December 1, the FOMC halted Treasury securities and agency debt reductions, initiating reserve management purchases to maintain ample reserves. This step ensures effective interest rate control as bank reserves stabilize.
The decline in reserves has led to upward repo rate pressure in recent months. The Fed's standing repo operations act as a buffer, preventing excessive money market rate pressure from liquidity demand or market stress. These operations will remain actively utilized.
Conclusion
As we embrace 2026, the economy stands resilient, poised for solid growth and price stability. However, the road ahead may still present unpredictable challenges. My monetary policy views will remain data-driven, considering economic outlook and risk balance. We must be prepared to adjust our course as needed to reach our goals of maximum employment and price stability.
