Fed Vice Chair Jefferson on economic outlook and policy implementation
Federal Reserve Vice Chair Philip N. Jefferson presented a cautiously optimistic economic outlook for 2026, highlighting the Fed's policy rate reductions in 2025 and recent developments in monetary policy implementation.
Economic resilience meets inflation's final mile
Federal Reserve Vice Chair Philip N. Jefferson expressed cautious optimism for the 2026 economic outlook, projecting continued growth and a return to the 2 percent inflation target.
He highlighted robust Q3 2025 GDP growth of 4.3 percent, driven by consumer spending, and anticipated a solid 2 percent expansion near term despite government shutdown effects.
The labor market showed moderation, with job additions of 50,000 in November and December, and the unemployment rate edged up to 4.4 percent by year-end.
Jefferson expects the unemployment rate to hold steady, noting low layoffs despite softened labor demand.
Inflation, measured by CPI, stood at 2.7 percent in December, with core CPI at 2.6 percent.
Progress on disinflation slowed due to rising core goods prices, partly from tariffs, offsetting declines in services inflation.
Jefferson anticipates inflation will resume its path toward the 2 percent target, viewing tariff effects as temporary.
Policy adjustments and reserve management
Vice Chair Jefferson supported the FOMC's 2025 policy rate reductions, totaling 1.75 percentage points since mid-2024, to balance inflation risks with labor market concerns.
He views the federal funds rate as now neutral, enabling data-dependent adjustments at future meetings.
On implementation, the FOMC concluded its $2.2 trillion balance sheet reduction in December 2025, which began mid-2022. This brought reserves to an ample level, prompting reserve management purchases in December 2025. Jefferson distinguished these from quantitative easing (QE), emphasizing their role in maintaining ample reserves and controlling short-term rates, rather than providing broader economic stimulus.
Clarity amidst evolving challenges
Jefferson's speech offers a crucial window into the Fed's evolving policy calculus, particularly the shift in risk balance that justified 2025 rate cuts.
His detailed explanation of reserve management purchases, distinct from QE, provides essential clarity for market participants.
However, persistent core goods inflation, despite tariff effects, suggests underlying price pressures that may challenge the optimistic outlook.