Resilience and Outlook: The Fed Eyes Steady Growth and Price Stability in 2026

As 2026 begins, the U.S. economy enters the new year following a period marked by resilience amid global uncertainties and shifting trade policies.

Despite a temporary drought in official data due to the recent government shutdown, incoming numbers and alternative economic indicators suggest a favorable outlook. GDP growth topped 2 percent last year and is anticipated to accelerate, buoyed by stabilizing labor markets and steady improvements in inflation. While tariffs have contributed to inflation—accounting for about half a percentage point of the current rate—underlying trends remain consistent with the Federal Reserve’s long-term goals, with no signs of broader inflationary pressures. Notably, shelter inflation is easing, supply chains remain robust, and wage growth is aligning with an environment of low inflation, reinforcing well-anchored inflation expectations.

The labor market has experienced a moderate cooling, with the unemployment rate edging up to 4.4 percent—levels last seen before the pandemic—yet no sharp deterioration is evident. Internationally, the resilience seen in the U.S. is echoed, with other economies navigating trade policy challenges without substantial new tariffs and associated price increases.

On the policy front, the Federal Reserve has responded to these dynamics by trimming its policy rate by 75 basis points last year, moving monetary conditions closer to neutral. This aims to support ongoing labor market stabilization and guide inflation back toward the long-term 2 percent target, which is projected to be achieved by 2027. Economic growth is expected to exceed trends this year, partly reflecting a rebound from the shutdown and solid momentum from fiscal policy, favorable financial conditions, and rising investments in artificial intelligence. Unemployment is forecast to stabilize and gradually fall in the coming years.

Turning to the Federal Reserve’s balance sheet, reserve levels are now considered ample. The Fed has shifted from asset reduction to active reserve management, designed to ensure effective rate control without signaling a change in the stance of monetary policy. Standing repo facilities have proven effective in smoothing occasional market pressures, functioning as intended during periods of heightened liquidity demand.

Looking ahead, the Federal Reserve remains vigilant, with policy decisions set to remain driven by the latest data and evolving risks to employment and price stability. The message for 2026 is clear: with a resilient foundation, the economy is well-positioned for stable growth and a return to price stability in the face of ongoing uncertainties.