Federal Reserve Vice Chairman Jefferson: Disinflation Is Slowing but Stabilizing Toward the 2% Target, No Need to Cut Interest Rates by the End of January

In a speech given at Florida Atlantic University in early 2026, Federal Reserve Vice Chair Philip N. Jefferson clearly signaled that there is no need to cut interest rates at the upcoming FOMC meeting at the end of January. Contrary to some market expectations, Jefferson expressed cautious optimism about ongoing disinflation despite its slowdown, while maintaining the federal funds rate at a neutral level.

Disinflation Slows but Remains Steady, Housing Inflation Continues to Decline

Recent data show a growing trend of disinflation. In December 2025, the CPI reached 2.7% year-over-year, unchanged from November, while Core CPI rose 2.6%. Although progress in disinflation has slowed over the past year—significantly down from its mid-2022 peak—the path remains aligned with the Federal Reserve’s 2% target.

Analyzing the Core CPI components in detail, Jefferson identified two opposing trends. Housing inflation continues to decline steadily, and core services excluding housing also show signs of decrease, albeit unevenly. Both trends are consistent with the disinflation target toward 2%. However, a significant rise in core goods price inflation—reaching 1.4% annually in December 2025—acts as a headwind, partly driven by higher import tariffs.

Jefferson projects that disinflation will continue moving forward. The baseline scenario assumes tariff impacts on inflation are one-time pass-through effects, with no ongoing influence on price levels. Short-term inflation expectations indicators have declined from their peaks last year, both in market surveys and consumer surveys. Most long-term expectation indicators remain aligned with the 2% inflation target.

Strong Economic Growth, Labor Market Stabilizing

Economic activity in Q3 2025 showed positive momentum, with annual GDP growth of 4.3%—much faster than in the first half of the year. The growth was driven by robust consumer spending and positive net export fluctuations, although residential investment remains weak. Jefferson estimates that, excluding government shutdown impacts, the economy will grow at a steady rate of around 2% in the near term.

In the labor market, the slowdown trend is controlled. Throughout 2025, job growth slowed compared to 2024, with employers adding about 50,000 non-farm jobs per month in November-December after a decline in October. The unemployment rate ended the year at 4.4%, up from 4.1% at the end of 2024. The job openings-to-unemployed ratio fell to 0.9—lower than the post-pandemic period—reflecting a rebalancing labor market without a significant crisis.

Despite weakening labor demand, layoffs remain low. Jefferson assesses that the risk of job losses has increased, but the baseline projection remains for stable unemployment throughout the year.

Monetary Policy: Staying at a Neutral Level, Data-Driven Decisions

After lowering the federal funds rate by 1.75 percentage points since mid-2024, the FOMC has set interest rates at a neutral level—neither stimulating nor restraining economic activity. Jefferson states that the current policy stance allows the FOMC to make decisions based on upcoming data and risk assessments.

This is a clear signal: there is no urgent need to adjust rates at the meeting in less than two weeks. The “wait-and-see” approach is chosen given that inflation remains slightly above target despite consistent disinflation, and the labor market shows good stability.

Key Change: Reserve Management Purchases Instead of Quantitative Easing

A significant technical development in monetary policy implementation occurred. The FOMC halted balance sheet runoff in December 2025, eradicating about $2.2 trillion of assets since mid-2022.

As the balance sheet shrank, bank reserves declined from abundant levels ($3.5 trillion) to a more adequate level, creating pressure on short-term interest rates, especially during large tax payments. The FOMC responded by launching reserve management purchases (RMP) starting December 2025—an instrument distinct from quantitative easing.

Jefferson emphasizes the critical difference: QE was an economic stimulus when the federal funds rate was at zero, aimed at lowering long-term interest rates through large-scale Treasury and mortgage-backed securities purchases. In contrast, RMP involves routine short-term Treasury purchases to maintain ample reserves and ensure effective control of short-term interest rates, without broadly altering financial conditions or shifting policy stance.

The RMP pace will be adjusted based on reserve demand and balance sheet obligations. The FOMC also removed the total cap on standing repo operations (SRO) to provide an effective tool for setting a ceiling on short-term money market rates. By the end of 2025, standing repo operations were fully utilized when repo rates faced significant upward pressure, ensuring orderly market functioning.

Outlook: Continued Disinflation, Responsive Policy

Jefferson concluded his speech with a cautious but optimistic outlook. With disinflation slowing but remaining steady toward the 2% target, strong economic growth, and a stable labor market, the Federal Reserve has a flexible policy landscape. The next interest rate adjustments will depend entirely on how the data evolve—not on a predetermined schedule.

This reflects the Fed’s now-standard data-driven approach: responding to actual economic conditions rather than theoretical projections.