Williams says Fed policy in good position, sees inflation moderation in 2026

By Michael S. Derby

JERSEY CITY, New Jersey, Dec 15 (Reuters) – New York Federal Reserve President John Williams said on Monday the U.S. central bank’s interest rate cut last week was the right move and leaves it in a good position to deal with an economy that’s on track to perform fairly well next year.

“Monetary policy is well positioned as we head into 2026,” Williams said at an event held by the New Jersey Bankers Association in Jersey City. With the recent easing, the rate-setting Federal Open Market Committee “has moved the modestly restrictive stance of monetary policy toward neutral.”

Williams said it is “imperative” to get inflation back to the Fed’s 2% target while not “creating undue risk” to the job market. “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.”

“I was very supportive of the decision we made” to cut rates, Williams told reporters after his remarks, while declining to say what’s next for the Fed. Looking to the January 27-28 policy meeting, “we’re going to wait and collect all that data” and “it’s too early to say” what the next monetary policy call needs to be.

Williams’ comments were his first since the Fed cut its benchmark overnight interest rate by a quarter of a percentage point to the 3.50%-3.75% range on December 10, in an effort to balance rising risks to the job market with inflation levels that remain problematically above 2%.

Fed Chair Jerome Powell told reporters in a post-meeting press conference that what lies ahead for monetary policy is uncertain, leaving it unclear whether the central bank will lower rates again at its next meeting in late January.

‘LABOR MARKET IS CLEARLY COOLING’

In his speech, Williams said he was more upbeat on U.S. economic growth for next year as uncertainty eases and inflation pressures moderate, and he called the central bank’s outlook a “pretty good outcome” after the uncertainty that hung over much of 2025.

He noted that tariffs have not impacted prices as much as he had expected, adding that the import levies appear to have led to one-time price increases that do not translate into persistent gains in price pressures. The tariff impact on price pressures “will be fully realized in 2026” and inflation will moderate to 2.5% next year and to 2% in 2027, Williams said.

He also said he sees the jobless rate ticking up to 4.5% this year, but added that with his forecast of 2.25% growth next year, “I expect the unemployment rate to gradually come down over the next few years.”

“The labor market is clearly cooling, I should emphasize that this has been an ongoing, gradual process, without signs of a sharp rise in layoffs or other indications of rapid deterioration,” Williams said.

Williams told reporters that market “valuations are elevated, in a way, if you look at standard measures,” although he added there are reasons why that may be the case. The official also said “I do think that stock market wealth is one factor that will boost growth next year.”

The Fed also announced at the end of its policy meeting last week what it called reserve management asset buying, which is the purchase of Treasury bills to rebuild financial sector liquidity to ensure the central bank keeps firm control of its interest rate target. While the Fed billed the buying as purely technical in nature, some observers view it as a kind of stimulus.

“This is the natural next step in the implementation of our ample reserves framework to ensure effective interest rate control,” Williams said of the asset buying. He added that he expects active usage of the Fed’s liquidity-providing Standing Repo Facility when banks need cash.

He told reporters what constitutes the right amount of liquidity for markets can change over time.

(Reporting by Michael S. Derby; Editing by Paul Simao)