Fed official forecasts bold path for interest rates, GDP in 2026
Mary Helen Gillespie
Tue, December 16, 2025 at 9:33 AM EST
5 min read
Let’s ponder for a moment what might happen to interest rates in 2026.
The past 12 months have been quite an economic ride: Historic in some respects, hyberbolic in others.
New York Fed President John C. Williams thinks the next 12 will provide fewer bumps on Wall Street and Main Street.
“If I had to choose one word to describe 2025, it is uncertainty,’’ Williams said Dec. 15 in prepared remarks. “What’s striking is that despite all the uncertainty, the U.S. economy has shown considerable resilience and looks poised to pick up steam next year.”
For households and investors, does this mean borrowing costs may ease only gradually, while job growth remains fragile?
Williams discusses inflation, jobs
Williams provided an outlook on monetary policy for 2026 that takes into consideration both sides of the Fed’s mandate: price stability and low unemployment.
That’s a tricky balance especially given the current tension with both employment and inflation risks.
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Lower interest rates support hiring but can fuel inflation.
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Higher rates cool prices but can weaken the job market.
The two goals often conflict, operate on different timelines and are influenced by unpredictable global events.
Labor market risks spark concern
Fed Chair Jerome Powell spoke about both risks to the mandate after the Dec. 10 Federal Open Market Committee meeting which ended with an expected cut to the benchmark Federal Funds Rate.
The December cut trimmed the target range to roughly 3.50%–3.75%.
It was the third quarter-percentage-point cut of the year with policymakers signaling there would be a high bar for additional cuts in the near term.
It was also a 9-3 vote, with two dissents over inflation concerns and one urging a larger reduction because of labor market concerns.
Williams, whom Fed watchers see as closely aligned with Powell, voted for the interest-rate cut.
“The data show that the labor market has continued to cool, with labor demand softening more than supply,” Williams said. “Job growth has been anemic, and the unemployment rate has moved up steadily in recent months.”
(New jobs figures for November plus revisions will be released by the Bureau of Labor Statistics on Dec. 16.)
Tariff inflation's role in 2025 interest-rate cuts
The benchmark Federal Funds Rate controls the cost of short-term borrowing like credit cards and auto loans, and can influence the cost of longer-term borrowing like mortgages.
The FOMC held the rate steady for most of the year.
This “wait-and-see” approach was driven by caution over tariff inflation and trade policy.
It then lowered it by a quarter percentage point in both September and October over labor market concerns.
Story Continues
Related: Fed faces 2026 upheaval as economy shifts, Powell exits
In its Dec. 10 announcement, the FOMC signaled it may be pausing cuts in the short term:
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
The CME Group FedWatch Tool estimates a 24.4% likelihood of another quarter-percentage-point rate cut in January.
Williams issues his 2026 economic forecast
Williams said he expects:
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Inflation to decline to just under 2.5% next year before reaching the FOMC’s 2% target in 2027.
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Real GDP to rise from about 1.5% in 2025 to around 2.25% in 2026, in part due to the effects of the government shutdown as well as from tailwinds from fiscal policy, favorable financial conditions and increased investments in artificial intelligence.
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The unemployment rate to rise to around 4.5% at the end 2025, reflecting some additional effects from the government shutdown before gradually declining over the next few years.
Impact on monetary policy and risks
“Monetary policy is well positioned as we head into 2026,’’ Williams said, adding that the upside risks to inflation “have lessened somewhat.”
“Monetary policy is very focused on bringing these risks into balance,” Williams said.
Bloomberg reported when answering questions after his speech, the New York Fed chief indicated monetary policy is now calibrated to address either key risk to the central bank’s main goals — inflation being too high or the job market being too weak.
“This year we’ve — based on the data, based on the outlook — adjusted interest rates down in a way that we think positions us really well to have these two competing kind of risks be roughly in balance,” Williams said. “We can’t know exactly what’s going to happen with trade policy, inflation or the economy next year, but I think we‘re well positioned for that.”
What this could mean for investors
Ben Fulton, CEO of WEBs Investments, said he agreed with Williams that 2025 was driven by uncertainty, or what Fulton would call “unpredictability.”
“Now we enter 2026, and I concur that employment will soften slightly and inflation will continue to drop,’’ Fulton said. “What this means for the market is that earnings should be solid, yet emotions around new technology may tend to overheat markets, at times, while the economy becomes more predictable, which will be welcome news.”
Robert Conzo, CEO & managing director of The Wealth Alliance, said Williams appears to echo Powell's observations for the economy in 2025.
“Inflation due to tariffs is unlikely,’’ Conzo said. “Tariffs typically result in a one-time inflationary effect. As the U.S. moves into 2026, the inflationary effect felt in 2025 could lessen. The result would be a decrease in inflation, getting closer to the Fed's 2% target.”
Related: Fed cuts rates as dissents loom at key December meeting
This story was originally published by TheStreet on Dec 16, 2025, where it first appeared in the Fed section. Add TheStreet as a Preferred Source by clicking here.
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