Williams: US economy poised for solid growth, inflation peak in 2026

John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, expects the US economy to show solid growth and inflation to peak in the first half of 2026. Speaking at the Council on Foreign Relations, he outlined a favorable economic outlook and discussed the impact of tariffs.

Tariffs shape the inflation path

Federal Reserve Bank of New York President John C Williams presented a favorable economic outlook for 2026, anticipating GDP growth to exceed 2 percent and strengthen further this year.

He expects the labor market, which cooled in 2025 with unemployment reaching 4.4 percent, to stabilize and then gradually improve.

A key aspect of his forecast is the expectation for inflation to peak in the first half of 2026, primarily influenced by the full impact of tariffs.

Williams estimates that increased tariffs have contributed approximately half a percentage point to the current inflation rate of about 2-3/4 percent.

Despite this, underlying inflation trends are described as favorable, with shelter inflation steadily declining, no significant supply chain bottlenecks emerging, and wage growth moving to levels consistent with low inflation.

Inflation expectations remain well anchored, which Williams considers critical for maintaining price stability.

Monetary policy closer to neutral

Williams explained that the Federal Open Market Committee's (FOMC) actions in late 2025, including a cumulative 75 basis point reduction in the federal funds rate target range, have moved monetary policy closer to a neutral stance.

This adjustment aims to balance the risks to maximum employment and price stability.

He stated that monetary policy is now well positioned to support labor market stabilization and the return of inflation to the FOMC's 2 percent longer-run goal by 2027. Williams also addressed the Fed's balance sheet, noting the FOMC ceased reducing its asset holdings in December.

Reserve management purchases were initiated to maintain ample reserves, an operational step to ensure effective interest rate control, not a shift in policy stance.

Standing repo operations are expected to continue functioning as designed.

Optimism hinges on tariff effects

Williams' forecast for 2026 is notably optimistic, heavily relying on tariffs having a 'one-off' effect on inflation.

This projection, while confident, might underestimate the stickiness of price pressures from other sources if underlying trends prove more resilient.

The emphasis on a 'gradual process' in the labor market also suggests a cautious approach, balancing growth with inflation risks.