Economic Outlook & Monetary Policy: Key Takeaways from Vice Chair Philip N. Jefferson

At the start of 2026, Vice Chair Jefferson strikes a cautiously optimistic tone on the U.S. economy, emphasizing stabilization in the labor market, gradual progress on inflation, and a monetary policy stance that is now closer to neutral.

1. Economic Outlook: Growth Slowing but Still Solid

• Growth remains resilient: GDP grew at a strong 4.3% annualized rate in Q3 2025, driven by consumer spending and exports. Near-term growth is expected to moderate to around 2%, partly due to the temporary effects of the federal government shutdown. 
• Labor market is cooling, not collapsing: Job growth has slowed, unemployment edged up to 4.4%, and hiring has softened—but layoffs remain low. Jefferson expects unemployment to remain broadly stable in 2026.
• Labor supply constraints matter: Lower immigration and participation have reduced labor force growth, contributing to slower job creation.

2. Inflation: Progress, but Uneven

• Inflation has fallen significantly from its 2022 peak, with CPI inflation at 2.7% and core CPI at 2.6% in December 2025.
• Disinflation has slowed: While shelter and services inflation continue to ease, core goods inflation has risen, partly due to tariffs.
• Tariff effects seen as temporary: Jefferson views recent tariff-driven price increases as a one-time level shift, not a persistent inflation driver.
• Inflation expectations remain anchored, reinforcing confidence that inflation will return sustainably toward the 2% target

3. Monetary Policy: Rates Near Neutral

4. Monetary Policy Implementation: Balance Sheet and Reserves

• The Federal Reserve has ended balance sheet runoff, concluding a $2.2 trillion reduction in assets that began in 2022.
• As reserves declined toward “ample” levels, money market pressures increased, which is consistent with how the Fed’s operating framework is designed to function.
• To maintain effective rate control, the Fed began reserve management purchases in December 2025

5. Reserve Management ≠ Quantitative Easing

Jefferson makes a clear distinction:

• Quantitative Easing (QE) is used when rates are near zero to stimulate the economy by lowering long-term yields.
• Reserve management purchases are technical operations using short-term Treasuries to ensure ample reserves and smooth control of short-term interest rates.
• These purchases do not change the stance of monetary policy.

6. Standing Repo Operations Strengthened

• The Fed eliminated limits on standing repo operations, reinforcing them as a ceiling for money-market rates.
• Increased usage during year-end 2025 helped keep markets orderly, even amid heavy Treasury settlements.

Bottom Line