Fed’s Williams sees rates as modestly restrictive, expects economy to pick up steam in 2026

New York Federal Reserve president John Williams said Monday that the central bank is closer to neutral on its benchmark policy rate, and he expects the economy will “pick up steam next year.”

“After a year of uncertainty, we will be starting 2026 from a place of resilience. The economy is poised to return to solid growth and price stability,” Williams said in a speech in New Jersey. “We now appear to be turning the corner.”

The Fed raised its forecast for growth for 2026 at its policy meeting last week after officials lowered interest rates to a range of 3.5% to 3.75% — a range that Williams says has moved the Fed’s “modestly restrictive stance … toward neutral.” That Williams still sees rates as “modestly restrictive” suggests that there’s more room for rates to fall before reaching neutral — a level designed to neither spur nor slow economic growth.

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

Williams reemphasized that in recent months, the downside risks to employment have increased as the job market has cooled, while the upside risks to inflation have lessened somewhat.

He noted that many measures of the job market are now at levels seen before the pandemic, a time when the labor market was not overheated. And while the job market is clearly cooling, he stressed it’s been an ongoing, gradual process, without signs of a sharp rise in layoffs or other indications of rapid deterioration.

Williams noted that the impact of tariffs on inflation has been more muted and drawn out than expected. He estimates tariffs have contributed about a half a percentage point to inflation.

Looking ahead, he said he doesn’t see any signs of tariffs contributing to second-round or other spillover effects on inflation, noting that he doesn’t see any broad-based supply chain bottlenecks. He also noted that shelter inflation has declined steadily, and measures of wage growth indicate a continued gradual slowing.

He expects GDP growth adjusted for inflation to be about 2.25% in 2026, thanks to tailwinds from fiscal policy, favorable financial conditions, increased investment in AI, and a rebound from the government shutdown. That growth forecast is well above his forecast for this year’s pace of around 1.5%.

Williams anticipates inflation will drop to just under 2.5% next year and finally reach the Fed’s 2% goal in 2027.

He expects the unemployment rate to rise to around 4.5% at the end of this year on account of the government shutdown, but then expects it to fall over the next few years due to stronger growth.