Williams expects inflation to ease in late 2026 despite tariffs

Despite heightened uncertainty, the US economy has shown surprising resilience, with real GDP growing solidly last year and poised for further acceleration.

This strength is partly driven by robust consumer spending, particularly from higher-income households benefiting from a soaring stock market, rising home prices, and the 2020-21 mortgage refinancing boom that boosted disposable income.

Conversely, lower-income households face increasing financial constraints, evidenced by higher mortgage delinquency rates in lower-income zip codes with rising unemployment.

The labor market, after softening through much of 2025, has recently stabilized, with the unemployment rate returning to 4.3 percent in January.

However, this remains an unusual low-hire, low-fire environment, contributing to a more pessimistic household perception than other indicators suggest, a trend the Fed continues to monitor.

On price stability, Williams noted tariffs contributed an estimated 0.5 to 0.75 percentage points to the current 3 percent inflation, temporarily stalling progress toward the FOMC's 2 percent target.

Encouragingly, no significant second-round effects or supply-chain bottlenecks have emerged, wage growth remains stable, and underlying inflation moves favorably.

Most inflation expectations are well-anchored.

Williams anticipates additional tariff pass-through in early 2026 will be largely one-off.

He projects overall inflation to decline later this year, reaching 2.5 percent in 2026 and 2 percent in 2027.