Remarks as prepared for delivery.
Good morning! And thank you for that kind introduction. It’s great to be here with you. I’d like to thank Chellie1 and the Chamber team for the invitation to speak today.
The Chamber and the Philly Fed have a long-standing and important partnership on many programs and that includes the annual Chamber State of the Economy survey that many of you will have filled out. Your input helps us understand the economy and the range of ways organizations and individuals are experiencing and shaping it. You provide the stories behind the data that are a key input into my thinking about monetary policy.
My goal today is to leave you with a sense of the important national economic trends and how those trends are playing out here in Philadelphia. I’ll also share some findings from a recent survey that our team did to identify barriers to employment for Philadelphia residents. I hope this will provide good background for the panel discussion focusing on opportunities to create great jobs here in the region.
Before I get into the details, please note that I am speaking just for myself and that my views don’t necessarily reflect those of any of my Federal Open Market Committee (FOMC) colleagues.
Economic Outlook
As many of you know, Congress has charged the FOMC with delivering maximum employment and price stability. We define price stability to mean inflation of two percent, as measured by the change in the personal consumption expenditure price index, affectionately known as PCE inflation.
If I had to pick a theme for inflation for 2026 it would be “cautious optimism.” I am going to focus on PCE inflation data through September of 2025 because the lack of data collection during the government shutdown complicates the interpretation of some more recent data.
Twelve-month core PCE inflation came in at 2.8 percent in September. And it was also 2.8 percent for the 12 months ending in September of 2024. On the surface, it looks like we made little to no progress in getting inflation down last year.
However, when we dig into the components, I see some progress and reasons for my cautious optimism.
First, while goods inflation is clearly up, it seems likely to return to normal over the next 12 months. Goods prices have increased more than 1 percent over the last year or so after declining in 2024. We know why this is happening: Higher tariffs on imports are showing up in goods prices.
Based on my reading of the evidence, I expect that we’ve already seen a lot of the price adjustments. That being said, producers may still have some more price changes to make. The data for January will be especially useful for gauging this because the beginning of the year is a natural time for firms to change prices.
All in all, though, I see an environment where tariff-induced price adjustments are largely confined to goods, as would be the case if tariffs lead to a shift in the price level but do not create sustained inflation. I expect the shift in the price level to run its course in the first half of this year and for goods inflation to return to levels consistent with overall inflation being near 2 percent sometime in the second half of the year.
It is also encouraging that core services inflation excluding housing eased a bit last year, coming in at 3.3 percent (year over year) in September of 2025 compared to 3.5 percent (year over year) in September of 2024. It’s still elevated, but it is moving in the right direction.
The remaining component of inflation is housing, and here the news is unambiguously good. Housing inflation has gone from 5.1 percent (year over year) in September of 2024 to 3.7 percent in the 12 months ending in September of 2025. And data on new market rents that feed into housing inflation mean that, going forward, it should continue its return to levels consistent with 2 percent core PCE inflation as we go through 2026.
So, I am feeling cautiously optimistic on inflation, and I see a decent chance that we will end the year with inflation that is close to 2 percent on a run-rate basis; that is, 12-month inflation may still be a little elevated, but three-month inflation will be 2 percent by the end of the year. Yesterday’s CPI inflation release for December doesn’t change my assessment.
I view the current level of the federal funds rate as still a little restrictive. So, the combination of past and current monetary policy restrictiveness will help to bring inflation all the way to two.
We’ve seen progress on underlying inflation that is likely to continue and there is no evidence to date that tariff-induced price increases are leading to broader inflation. In addition, long-term inflation expectations are anchored at levels consistent with a gradual return to 2 percent inflation. These trends, especially given labor market developments, argue against tighter monetary policy.
Turning to output and employment, I think the theme for 2026 will be “waiting for clarity.” Currently, we are receiving divergent signals on growth and the labor market. Gross domestic product (GDP) growth has been very strong, with third quarter real GDP growth coming in at an above-trend 4.3 percent, with continued strong consumption. Preliminary data point to strong growth in the fourth quarter as well. But this growth is happening against the backdrop of a slowing labor market.
In 2024, the economy created about 2 million jobs and, in 2025, we created only about six hundred thousand jobs. In addition, the base for job creation has narrowed. Nearly 95 percent of net private job creation in 2025 occurred in a single sector: healthcare and social assistance.
Here in the city of Philadelphia, about 27 percent of employment is in healthcare and social assistance, compared to 16 percent nationally. This means that we have been somewhat insulated from the national slowdown in job creation.
I see the broad deceleration in the national labor market as stemming from both supply and demand factors. On the supply side, the sharp drop in immigration has slowed the growth of labor supply. On the demand side, firms — both nationally and here in Philadelphia — tell us that uncertainty is holding back hiring as they consider a range of factors, including trade policy and the potential for artificial intelligence (AI) to transform the need for workers. Employers also point to over-hiring during the pandemic recovery as a restraint on labor demand. I expect that monetary policy restrictiveness is also playing a role. On net, the slowdown in demand appears to have outpaced the slowdown in supply, with the unemployment rate up to 4.4 percent in December. This is up somewhat from the rate of around 4 percent that we saw in the first half of last year.
While the labor market is clearly bending, it is not breaking. We can see this in the unemployment insurance (UI) claims data. Initial claims have been essentially flat over the last year. Still, labor market risks have risen and that has been an important factor in my support for the 75 basis points of cuts that the FOMC did last year. I will be monitoring labor market developments closely.
What could reconcile strong growth, with apparent momentum from consumer spending, and the slowing labor market? It’s possible that some combination of the growth data being revised down or the labor market data being revised up could move the two trends into better alignment. If the patterns of the last couple of years hold, though, I would expect job gains to be revised down and not up. And, typically, when GDP and labor market signals are in conflict, the labor market signal turns out to be more accurate.