Williams: Unwavering Dedication

Introduction

Good afternoon. It's a pleasure to be back at the University at Buffalo. During my tenure as President of the New York Fed, I've enjoyed and learned so much from my trips to Western New York-including a "virtual visit" during the pandemic.

And while I'm pleased to be here in person today, I just can't seem to get my timing right. I missed Wing Fest. I couldn't make the Lucille Ball Comedy Festival. And I didn't even arrive in time to join the table-slamming at the tailgate on Sunday.

At least I've gotten the other aspects of my itinerary down, because an important part of my job is to meet with business, community, and civic leaders from throughout the Federal Reserve's Second District to learn more about our local and regional economies.

And I always enjoy meeting with students. I'd like to thank the economics and management students here at UB for hosting me for lunch. Our in-depth conversation reminded me that there's a lot of interest in what's going on in the economy. So, I won't try out new comedy routines or opine on sports; instead, you get to hear me discuss two of my other favorite topics: the U.S. economy and monetary policy.

This is as good a time as any to give the official disclaimer, which is that the views you will hear today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.

The U.S Economy

Whenever a student solicits my advice in assessing the U.S. economy, I say this: Focus on the totality of the data.

Right now, the data indicate that, despite large shocks and elevated uncertainty, the underlying momentum in the U.S. economy is solid and even showing signs of strengthening. Like Bills Mafia, it's been resilient in the face of adversity.

Real GDP has been growing at about 2 percent for the past year. Productivity growth is running above pre-pandemic levels. And business investment has surged, powered by the ever-increasing AI buildout. Expectations of solid growth and high productivity have, in turn, fueled stock market gains, leading to robust consumer spending, particularly from higher-income households and homeowners.

Given these developments, I'm often asked, "Why can't the economy grow even faster?" After all, GDP growth averaged over 4 percent per year during the internet boom starting in the late 1990s. That's twice the rate we're experiencing today.

There are a few reasons for this difference.

First, owing to immigration policy and the aging of the population, the labor force is no longer contributing much to the economy's underlying growth. That means real GDP growth is almost entirely driven by gains in productivity. This stands in contrast to the internet boom period, when the labor force grew by more than 1 percent per year.¹

Second, although annual productivity growth has improved to just above 2 percent in recent years, it has yet to match the heady days of the last productivity boom, when it averaged 3 percent per year. And, unlike the late 1990s and early aughts, a significant share of AI-related investment is now being met with imported goods and therefore not contributing as much to U.S. GDP growth.

So, while demand is healthy, underlying fundamentals imply that this translates to trend growth of only about 2 percent. Looking ahead, with all the AI investment underway, hopefully we will see an improving trend in productivity and the economy's potential, but it may take a while for these benefits to be fully realized.

The Labor Market

As all economics majors know, the Fed has a dual mandate to achieve maximum employment and price stability. On the employment side of that mandate, the data show that the labor market continues to be solid-and has even strengthened a bit on the margin.

A number of indicators bear this out. The unemployment rate has edged down to where it was in the first half of 2025. Layoff rates are near historic lows nationwide. Payroll employment gains have been positive. And survey measures of job and worker availability have improved somewhat.

Closer to home, the New York Fed's regional business surveys indicate that employment in the Second District is picking up at a solid clip in the manufacturing sector and holding steady in the services sector.²

Inflation

The other side of the dual mandate is where the challenge lies. The Fed defines price stability as 2 percent inflation over the longer run.³ At 3.7 percent, inflation is unquestionably too high. So I'm going to spend some time discussing why inflation is elevated and what that means for future inflation.

Over the past year and a half, inflation has increased by about one percentage point, owing to three primary drivers. The first is higher tariffs on imported goods. The second is supply-chain disruptions and higher energy and commodity prices owing to the conflicts in the Middle East and elsewhere. And the third is robust demand for certain categories of goods and services associated with the surge in AI-related investments.

Among these three, one piece of good news is that tariffs are no longer adding to inflation in goods prices.⁴ Of course, that may change if new tariffs are instituted.

But the other two drivers remain. The ongoing conflict in the Middle East and severe capacity constraints in oil refining are driving up not only crude oil prices, but also the spreads of prices for refined products like gasoline and diesel fuel relative to oil prices.

In addition, the AI boom has resulted in a race between available supply and surging demand in certain categories of goods-and so far, demand is winning. As a result, we are seeing sharp increases in the prices of goods essential for the AI buildout. These goods are also inputs into other products purchased by consumers and businesses, and therefore the higher costs are starting to affect those prices, too.

Fortunately, other indicators are more encouraging regarding the inflation outlook. Prices for housing services have decelerated, and there is no evidence that the labor market is adding to inflationary pressures. This conclusion is supported by a wide range of data on labor compensation, as well as the New York Fed's HPW Labor Market Tightness Index.⁵ In addition, survey- and market-based measures show that inflation expectations remain well anchored.⁶

Importantly, although we are seeing the effects of tariffs, the conflicts, and the AI surge on prices of certain categories of goods, we have not seen evidence of these spilling over into broader and more persistent inflation.

Monetary Policy and the Economic Outlook

What does this all mean for monetary policy?

Based on the totality of the data, the balance of risks to achieving our dual mandate has evolved in recent months. With the economy proving resilient in the face of shocks and with underlying demand strengthening, the risk to maximum employment has receded. At the same time, the risk to achieving price stability has increased. In particular, the inflationary impact of the AI-related demand shock is increasingly salient, and I now expect somewhat larger and longer-lasting effects from energy prices on inflation.

It is imperative that we return inflation to our 2 percent target on a sustained basis. To do so, we must make certain that adverse inflationary disturbances do not become entrenched, and that any second-round effects on inflation remain muted.

Given that context-and to support a timelier return to 2 percent inflation-the FOMC recently raised the target range for the federal funds rate by 1/4 of a percentage point to 3-3/4 to 4 percent.⁷ While monetary policy cannot move ships or reopen pipelines and refineries, it can diminish the risk that these supply shocks spill over into broader and more persistent inflation.

In terms of my outlook, I expect real GDP growth to average about 2-1/4 percent this year and next year-slightly above its longer-run trend pace. With this ongoing momentum in the economy, I expect the unemployment rate to edge down to about 4 percent over the next year.

Reflecting the effects of elevated energy and AI-related goods prices, I expect overall inflation to come in at 3-1/2 percent this year. As the effects of tariffs move further into the rearview mirror, energy prices normalize, and the demand and supply of AI-related goods move back toward better balance, I anticipate inflation will slow to just above 2 percent next year, then reach our longer-run inflation goal of 2 percent in 2028.

Conclusion

The overall economy is on a solid footing; therefore, getting inflation back to 2 percent is job No. 1. With unwavering dedication like that of Bills Mafia, I am firmly committed to achieving the Fed's dual mandate goals of maximum employment and price stability.

As I consider the future path of monetary policy, I will continue to assess the underlying trends in inflation and the balance of supply and demand in the economy. With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information. The accumulation of more data should provide greater clarity on the underlying trends in the economy and the associated risks to achieving our goals-and thereby the appropriate setting of monetary policy.

If the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target. But that is just my forecast, and time-and the totality of the data-will tell.

And as this trip to Buffalo comes to a close, I'll be collecting data from all of you on where to find the best beef on weck.

¹ Congressional Budget Office.The Budget and Economic Outlook: 2026 to 2036. Washington, DC: Congressional Budget Office, February 2026.

² See the latest results from the New York Fed's Empire State Manufacturing Survey (September 2026) and Business Leaders Survey (September 2026).

³ As measured by the Personal Consumption Expenditures (PCE) Price Index.

⁴ See Amiti, Mary, Sebastian Heise, and David E. Weinstein. 2026. "The Anatomy of Tariff Pass-Through into Consumer Prices." Federal Reserve Bank of New York Staff Reports, no. 1201, revised September 2026.

⁵ Federal Reserve Bank of New York, Heise, Pearce, Weber (HPW) Labor Market Tightness Index (July 2026).

⁶ Federal Reserve Bank of New York, Survey of Consumer Expectations (August 2026).

⁷ Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement, September 16, 2026.