Fed Chair Signals Stronger Economic Outlook Heading Into 2026
Federal Reserve Chair Jerome Powell delivered a cautiously optimistic message after the Federal Reserve kept interest rates unchanged at 3.5%-3.75%, signaling growing confidence in the economic outlook while maintaining a firm stance on inflation.
Powell said the U.S. economy is starting 2026 with stronger momentum, as economic activity continues to expand at a solid pace.
- The Fed sees the U.S. economy entering 2026 on stronger footing, supported by solid growth and resilient consumers.
- Labor market conditions are stabilizing, with reduced risks compared to earlier in the tightening cycle.
- Inflation has eased but remains above the 2% target, keeping policy cautious and data-dependent.
- A rate cut in the first half of the year is possible, but decisions will be made meeting by meeting.
Consumer spending remains healthy, helping offset weakness in certain interest-sensitive sectors. He added that the overall outlook for economic activity has improved clearly, which should support labor market conditions over time.
The labor market featured prominently in Powell’s remarks. He pointed to signs that employment conditions are stabilizing, with labor demand softening and growth in the labor force slowing. While some indicators still show continued cooling, Powell emphasized that the balance between job supply and demand appears to be improving, reducing downside risks for employment compared to earlier periods.
Inflation easing, but still above target
Inflation has come down significantly since its 2022 highs, Powell said, but remains elevated relative to the Fed’s 2% goal. While several measures are moving closer to target, progress has not been uniform. As a result, the Fed remains focused on ensuring that inflation continues to trend lower in a sustainable way.
Powell acknowledged that the housing sector remains weak under the weight of higher interest rates. However, he contrasted this with solid growth in the broader economy, noting that consumer activity has held up better than expected despite tighter financial conditions.
Policy decisions remain data-driven
On monetary policy, Powell stressed that decisions will continue to be made on a meeting-by-meeting basis. With data distortions from the government shutdown beginning to fade, policymakers are gaining a clearer picture of underlying trends. He said the Fed is well positioned to respond to risks as they emerge.
When asked about further rate cuts, Powell described the current outlook as stronger overall. With the economy growing steadily, inflation broadly tracking expectations, and the labor market relatively stable, he suggested conditions could eventually support a rate cut at some point in the first half of the year, without committing to a specific timeline.
Tariffs, debt, and broader risks
Powell said policymakers generally expect any tariff-related price increases to be a one-time effect, assuming no unexpected shocks. He added that upside risks to inflation and downside risks to the labor market have diminished, though they remain present. On fiscal policy, Powell warned that while U.S. government debt is currently sustainable, the path of rising debt levels is not, urging lawmakers to address the long-term trajectory.
Powell declined to comment on the recent drop in the U.S. dollar and avoided questions about his position after his mandate ends.
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