Jefferson Emphasizes that the disinflation process is slowing down, but the economy remains stable at the beginning of 2026.

Vice Chair of the Federal Reserve Philip N. Jefferson emphasized in his speech on January 16, 2026, that although the disinflation process is slowing down, the U.S. economy remains in a strong position to continue growing. This statement serves as an important signal that the Federal Reserve (Fed) is not in a rush to cut policy interest rates at the upcoming late-January meeting. Jefferson indicated that the current benchmark interest rate is already at a neutral level—neither encouraging nor restraining economic growth—leaving room to observe economic developments further before making additional adjustments.

This speech was delivered at Florida Atlantic University with attendees from the American Institute for Economic Research and the Shadow Open Market Committee, reflecting the Fed’s effort to provide transparency regarding economic outlook and monetary policy decisions in the first quarter of 2026. Jefferson emphasized that his views are personal and do not represent the official stance of the FOMC as a whole, but the substance of his remarks reveals the Fed’s policy orientation moving forward.

Economic Growth Remains Strong Despite Weakening Labor Market

Jefferson began his analysis with an “optimistic but cautious” tone about the economic outlook. Recent data show that economic activity still exhibits positive momentum: annual GDP growth in the third quarter of 2025 reached 4.3%, significantly faster than mid-year periods. This surge was primarily driven by strong consumer spending and positive net export fluctuations, although residential investment remains weak.

However, not all economic signals are bright. The labor market shows signs of more tangible weakness. Throughout 2025, non-farm employment growth slowed considerably compared to 2024, with employers adding only about 50 thousand jobs per month in November and December. The unemployment rate increased to 4.4% at the end of 2025, up from 4.1% a year earlier. The job vacancy-to-unemployment ratio fell to 0.9, much lower than the highly tight labor market conditions at the start of the post-pandemic recovery. This situation adds to the risk of further job losses, although Jefferson projects the unemployment rate will remain stable throughout 2026.

Disinflation Slows, Goods Inflation Becomes New Barrier

Jefferson’s main focus on inflation was explaining why the disinflation process has lost momentum. Recent data show that Consumer Price Index (CPI) inflation in December 2025 rose by 2.7% year-over-year, while Core CPI (excluding food and energy) increased by 2.6%—stable compared to November but still above the Fed’s 2% target.

The slowdown in the disinflation process can be traced to three main components. First, housing inflation continues to decline, aligning with the target. Second, core non-housing services inflation also shows a downward trend, albeit with some fluctuations. Third, and this is problematic—inflation of core goods prices actually increased significantly. In December 2025, core goods inflation reached 1.4% annually, a sharp rise from pre-pandemic levels. Jefferson linked this increase to higher import tariffs, which have been passed on to consumer prices for certain goods.

Nevertheless, Jefferson remains confident that disinflation will return to a sustainable path toward the 2% target. The premise is that tariff impacts on inflation are one-time adjustments—merely leveling prices rather than causing ongoing increases. Short-term inflation expectations indicators have declined from their peaks last year, and most long-term expectation indicators remain aligned with the Fed’s 2% target.

Policy Rate Already at Neutral Level, No Further Cuts Needed

Jefferson explained that the Fed has lowered the policy rate by 1.75 percentage points since mid-2024. According to Jefferson, this reduction has placed the federal funds rate within a range consistent with a neutral stance—neither providing stimulus nor hindering economic activity. That’s why Jefferson stated that the current policy position “allows us to make decisions regarding the pace and timing of future rate adjustments based on upcoming data.”

This statement implicitly suggests there is no urgent need to cut rates at the FOMC meeting on January 28-29, 2026. With rates already at a neutral level and inflation risks still present, Jefferson seems to be saying that the Fed can wait and observe further economic developments before making additional moves.

Operational Changes: Fed Begins Reserve Management Purchases

In the second part of his speech, Jefferson discussed an important development in monetary policy implementation. By December 2025, the Fed had completed the balance sheet reduction process initiated in mid-2022, successfully reducing securities holdings by about $2.2 trillion. With this reduction complete, the level of bank reserves has fallen to an “ample” level from the previously “abundant” level.

The decline in reserves has put pressure on the money markets, especially during tax payments or government bond settlements, when large sums flow into the Treasury General Account. To address this challenge, the Fed began Reserve Management Purchases (RMP) in December 2025. It is important to note that RMP is not quantitative easing (QE). QE is a stimulus tool used when interest rates hit the lower bound and aims to push down long-term interest rates. In contrast, RMP involves routine purchases of Treasury securities and short-term securities to maintain reserves at an adequate level and ensure effective control of the federal funds rate.

Jefferson emphasized that RMP will be accelerated in the first few months to ease short-term money market pressures, then slow down over time as reserve needs fluctuate. This process will not alter the overall stance of monetary policy.

In addition to RMP, the Fed also eliminated the total limit on standing repo operations (SRP) in December 2025. SRP functions as an important tool to set a ceiling on short-term interest rates, ensuring the federal funds rate remains within the target range even under increased pressure. At the end of 2025, when large Treasury settlements occurred, Fed’s use of SRP increased, demonstrating that this tool is functioning as designed.

Data-Driven Monetary Policy and Risk Balance

Jefferson reaffirmed that the Fed’s decision to cut rates last year was based on a shift in risk balance. With rising risks of employment decline amid persistent inflation risks, rate cuts were viewed as an appropriate step to balance these risks. Now, with rates at a neutral level and economic data continuing to arrive, the Fed has the flexibility to adjust policy as conditions evolve.

Outlook and Implications for Future Monetary Policy

Entering 2026, Jefferson stated that the labor market appears to be stabilizing, and the economy is well-positioned to continue growing as inflation and disinflation return to the target path. However, he also acknowledged risks on both sides of the Fed’s dual mandate—employment and price stability.

To achieve maximum employment and price stability, the Fed will continue to monitor upcoming economic data carefully. The main commitment is to ensure the Fed can implement monetary policy decisions efficiently and smoothly through proper operational arrangements, including careful balance sheet management and effective short-term interest rate control.

Jefferson’s speech reflects the Fed’s cautious yet optimistic stance, ready to adjust policies as economic data evolve, prospects develop, and risks remain dynamic throughout 2026.