An unnamed Federal Open Market Committee (FOMC) member recently provided an overview of their perspective on U.S. economic developments and monetary policy themes for 2026. The remarks clarified that the views expressed were solely their own.
Inflation Assessment
The speaker described the inflation outlook for 2026 as holding "cautious optimism." Data through September 2025 informed this assessment, with November data being complicated by a government shutdown.
- Overall PCE Inflation: Twelve-month core Personal Consumption Expenditures (PCE) inflation was 2.8 percent in September 2025, consistent with the 2.8 percent recorded for the 12 months ending September 2024.
- Goods Inflation: Increased by over 1 percent in the last year, attributed to higher tariffs on imports. This increase is expected to largely dissipate in the first half of 2026, with goods inflation returning to levels consistent with an overall 2 percent inflation rate in the second half of the year.
- Core Services Inflation (excluding housing): Eased to 3.3 percent year-over-year in September 2025, a reduction from 3.5 percent year-over-year in September 2024.
- Housing Inflation: Declined from 5.1 percent year-over-year in September 2024 to 3.7 percent in September 2025. Projections based on new market rents indicate a continued decrease towards levels consistent with 2 percent core PCE inflation throughout 2026.
The speaker anticipated that inflation could approach 2 percent on a run-rate basis by the end of 2026. The current level of the federal funds rate is considered "a little restrictive," a factor expected to aid in achieving the 2 percent inflation target. Long-term inflation expectations are reported as anchored.
Output and Employment Trends
The theme for 2026 regarding output and employment was characterized as "waiting for clarity" due to conflicting economic signals.
- GDP Growth: Third-quarter real Gross Domestic Product (GDP) growth registered at 4.3 percent, driven by strong consumption.
- Labor Market Slowdown: Payroll growth has declined substantially. Nearly 90 percent of net private job creation through November of the prior year was concentrated in the healthcare and social assistance sector. Data also indicated that larger firms added workers between August and November, while smaller firms experienced a contraction.
- Unemployment Rate: Increased to 4.6 percent in November, approximately half a percentage point higher than the range observed through July of the prior year. This deceleration is attributed to both supply and demand factors, including a reduced rate of immigration and firm uncertainty regarding trade policy, artificial intelligence (AI), and prior over-hiring.
Despite the labor market slowdown, initial unemployment insurance claims have remained largely flat, suggesting a market that is adjusting but not collapsing. The speaker cited rising labor market risks as a factor in their support for the 75 basis points of rate cuts by the FOMC in the prior year.
Potential explanations for the divergence between strong GDP growth and a slowing labor market include possible data revisions or an increase in productivity growth, potentially influenced by AI and deregulation. The speaker noted challenges for monetary policymakers in distinguishing between cyclical slowdowns and structural changes, such as those potentially driven by AI.
Monetary Policy Outlook
The speaker referenced the FOMC's successful navigation of a similar scenario in the late 1990s, under Chairman Greenspan, where patience with interest rates proved beneficial despite high growth. This outcome was linked to the FOMC's inflation-fighting credibility.
The speaker's baseline outlook for 2026 projects moderating inflation, a stabilizing labor market, and approximately 2 percent economic growth. Under these conditions, "modest further adjustments" to the federal funds rate could become appropriate later in the year.
The speaker concluded by emphasizing a continued focus on actions that promote price stability, maximum employment, and monetary policy credibility, adhering to the principle of "doing the right thing."