Jefferson outlines economic outlook, defends 2025 rate cuts
Federal Reserve Governor Philip N. Jefferson shared a cautiously optimistic economic outlook for 2026, highlighting a stabilizing labor market and inflation returning to the 2 percent target. He also discussed the implications for monetary policy, including the FOMC's 2025 rate reductions.
Outlook: Growth and disinflation
Federal Reserve Governor Philip N. Jefferson began 2026 with a cautiously optimistic outlook, seeing the economy well-positioned for continued growth while inflation returns to the 2 percent objective.
He noted that economic activity remained strong, with gross domestic product rising at an annual rate of 4.3 percent in the third quarter of 2025.
Jefferson expects fourth-quarter growth to be restrained due to the government shutdown's effects, but anticipates the economy expanding at a solid pace of about 2 percent in the near term.
The labor market saw moderated job growth and an unemployment rate that edged higher to 4.4 percent by year-end 2025.
While progress on inflation slowed over the past year, with CPI at 2.7 percent and core CPI at 2.6 percent in December, Jefferson expects inflation to return to a sustainable path toward the 2 percent target.
Policy adjustments and implementation
As a monetary policymaker, Jefferson supported the FOMC's decisions to reduce the policy interest rate in 2025, viewing it as the right step to balance persistent above-target inflation and a deteriorating labor market.
Since mid-2024, the Committee reduced the policy rate by 1.75 percentage points, bringing the federal funds rate into a range consistent with the neutral rate.
The FOMC concluded reducing the Fed's balance sheet in December 2025, having cut securities holdings by $2.2 trillion.
Reserve management purchases were initiated in December 2025 to maintain ample reserves and ensure effective interest rate control, which Jefferson clarified are distinct from quantitative easing.
These purchases do not alter broader financial conditions.
Navigating the 'last mile'
Jefferson's speech provides a clear rationale for the Fed's recent policy adjustments, emphasizing a balanced approach to inflation and employment risks.
His detailed explanation of reserve management purchases clarifies their distinct purpose from quantitative easing, reassuring markets about the Fed's operational control.
This forward-looking perspective, combined with a cautious outlook, signals a continued data-dependent strategy for the upcoming policy meeting.