Federal Reserve’s Williams Makes Positive Economic Predictions for 2026

By George N. Saliba, Contributing Writer On Dec 16, 2025

Tariffs are expected to mostly have a non-repeating price level effect that will be fully realized during 2026, and inflation is expected to decline to under 2.5% in the new year before further moderating to 2% in 2027, according to John C. Williams, president and CEO of the Federal Reserve Bank of New York.

Speaking at a New Jersey Bankers Association (NJBA) event held yesterday at the Liberty Science Center in Jersey City, Williams additionally said the national unemployment rate will slightly increase before gradually decreasing over the next few years in relation to his forecast of “above-trend GDP growth.”

Williams meanwhile noted that job growth has been anemic and unemployment rising in 2025, including in Northern New Jersey.

Williams said overall, “So, after a year of uncertainty (2025), we will be starting 2026 from a place of resilience. But, as 2025 has shown, the road may shift in unpredictable ways.”

Tariffs

For 2025, Williams additionally explained that while tariffs resulted in increased inflation and stalled progress toward the Federal Open Market Committee’s (FOMC’s) “2% longer-run inflation goal,” the inflationary effect of trade policies was nonetheless “more muted and drawn out than I originally anticipated.”

He added, “While it is not possible to precisely measure the effects of trade policy actions, my estimate is that they have contributed around one half of a percentage point to the current inflation rate.”

Better Paths Ahead

More broadly, while New Jersey has generally mirrored the US economy’s struggles with inflation as well as uncertainly arising from geopolitical events and tariffs, Williams told a breakout group of journalists that manufacturing, trade and financial services are important for our region and his “expectation is we’ll have some tailwinds behind this for new growth next year (2026), and New Jersey’s economies are very much centered on the industries that I think will share [in the growth.]”

A K-Shaped Economy

Williams acknowledged that US economic prosperity is not impacting all Americans the same way: While AI, tech sectors and the stock market are performing well, a “K-shaped economy” means that some Americans are having a difficult time with healthcare costs and housing affordability, with Williams saying that “a lot of people are struggling to make ends meet.”

Responding to a question from New Jersey Business Magazine about whether the segment of Americans who are struggling could adversely impact the overall economy, Williams said, in part, “I think it just shows that the strength of underlying economy, or the momentum of growth, is not as solid as maybe the GDP number suggests, at least for this group [of people]. In other words, if the economy took a turn for the worse, in terms of jobs or earning power, it would hit this very large group of families pretty hard, and could have a negative effect on their standard of living, but also in terms of the economy. There’s just not as much potential resilience for these families and households.”

He added, “What’s striking is that the labor market is pretty good. Unemployment is relatively low. Real earnings had picked up after the pandemic. So, it’s not like we are seeing the deterioration today, but I think there’s just more of a downside risk in there.”

Artificial Intelligence (AI) and the Workforce

Another economic consideration is artificial intelligence (AI). It is impacting the labor market, with Williams indicating that while firms are not laying off workers in significant numbers due to AI at this time, they are nonetheless being cautious about hiring for positions that could be replaced by AI. Companies are also interested in retraining or preparing their labor forces for AI.

He added, “[Firms] also mentioned that that they do expect layoffs in the future from AI, where AI is replacing some types of work.”

He added, “We’ll definitely want people who can use AI to be more productive, rather than do things that AI can do more easily or more quickly.”

More broadly, he explained that AI is a boon to the economy via investment, and will boost corporate productivity, although it is not clear how great an effect will transpire. “The last big productivity boom we had in our lives ran from 1995 to 2005 [and] was only a decade,” Williams said. “It was great; it was strong productivity growth.”

Conclusion

As the Federal Reserve is striving to achieve a dual mandate of maximum employment and price stability, Williams concluded his initial speech by telling the audience: “In assessing the future path of monetary policy, my views, as always, will be based on the evolution of the totality of the data, the economic outlook, and the balance of risks to the achievement of our maximum employment and price stability goals. We must be ready to adjust our route as needed to reach our destination.”

Yesterday, Williams also separately: heard from government officials about economic activity and challenges across the region; met with the New York New Jersey Host Committee for the 2026 FIFA World Cup to highlight “the economic impact of the event on the New Jersey economy, as well as the preparations being made for transportation, security, and fan engagement;” traveled to Newark to “hear from local business association leadership about economic conditions in the state’s largest city;” joined community development leaders to hear about key issues affecting households in the region, including housing affordability, food insecurity, and financial and mental health; and met with leaders from the pharmaceutical and life sciences industries to hear about how their businesses contribute to the region’s economy.

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