U.S. Economic Outlook for 2025 Shared at Lafayette College Lecture

At the Economics Department Special Lecture, Lafayette College, Easton, Pennsylvania.

Thank you, Professor Smith. It is an honor to be speaking to you today here at Lafayette College. I am glad to have the opportunity to return to such a historically important place as Easton, Pennsylvania, and the Lehigh Valley. This area was part of this country's colonial beginnings, it was instrumental in the rising of the industrial age, and, as the home to Crayola, it very literally played a role in coloring how we see the world. Today, this region is leading the way forward with its many outstanding institutions of higher education, very prominently including, of course, Lafayette College.

Today, I would like to take this opportunity to share with you my outlook for the U.S. economy and my views of appropriate monetary policy. This is a useful time to do that, as my colleagues and I on the Federal Open Market Committee (FOMC), the Federal Reserve's primary monetary policymaking body, held our first meeting of 2025 just last week.

Overall, the U.S. economy is starting the year in a good position. I expect inflation's slow descent to continue, and I anticipate that economic growth and labor market conditions will remain solid. I have learned, however, that it is wise to be humble about my projections. There is always a great deal of uncertainty around any economic forecast, and currently we face additional uncertainties about the exact shape of government policies, as well as their economic implications.

Last week, my FOMC colleagues and I discussed the latest economic developments and reviewed data that arrived since our previous policy meeting in December. At the conclusion of that meeting, I voted in support of the Committee's decision to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. This decision was made in support of our goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run. I remain focused on setting policy to achieve the dual-mandate goals given to us by Congress: maximum employment and stable prices. Sound monetary policy and positive supply-side developments have contributed to the achievement of sustained economic growth in recent years, the return of low unemployment, and inflation moving sustainably toward our 2 percent objective. I remain committed to returning inflation to our target while sustaining the solid labor market. Now is an appropriate time to assess the path forward for the economy. I am happy to be here today to share my views with you.

Economic Activity

The U.S. economy appears to be maintaining its momentum after growing at a solid pace last year. Last year's growth was notable because many private forecasters in 2023 projected a significant downturn sometime in 2024. However, data over the past year painted a very different picture. GDP grew 2.3 percent in the fourth quarter of 2024, according to last week's data release. As you can see, that extends a stretch of solid quarterly growth over the past couple of years. For all of 2024, the economy grew 2.5 percent, which is a modest slowing from the 3.2 percent growth in 2023. The economy has been benefiting from positive supply developments, including more workers joining the labor force and higher labor productivity.

The resilience of American consumers is the driving force behind the solid economic growth seen in recent quarters. Household spending, adjusted for inflation, grew 3.2 percent in 2024, slightly stronger than in 2023. The consumer spending data we have received recently have surprised me to the upside. Personal consumption increased at a faster pace each quarter last year. Nominal retail sales rose briskly in the second half of last year. Private-sector data are consistent with GDP figures. Activity in the services sector, which accounts for about two-thirds of all consumer spending, has been on a general upward trajectory since mid-2020.

Elsewhere in the economy, growth has been less robust. Residential investment has been fairly flat over the past three quarters, and growth of business fixed investment cooled last year from its strong 2023 pace. Overall, I see the economy as continuing to grow at a healthy pace this year, though I anticipate growth to be slightly lower than what we observed in 2024. Households and firms face an uncertain environment, which tends to lower consumer spending and business investment.

Labor Market

Turning to employment, I see the labor market as being in a solid position, with conditions broadly returning to balance after a period of being overheated. The unemployment rate surged in early 2020, peaking at 14.8 percent during the onset of the COVID-19 pandemic. The unemployment rate subsequently fell swiftly as the economy recovered. By April 2023, it touched 3.4 percent, a half-century low. I view that as a sign that downside risks in the labor market have abated.

The latest jobs report showed that the unemployment rate was 4.1 percent in December. In the three months ending in December, payrolls rose by an average of 170,000 jobs a month. While employment growth has eased somewhat from earlier in the year, the steady unemployment rate suggests that payroll gains have been sufficient to absorb new entrants to the labor market.

Looking at the quality of employment data, I see a labor market that is not a source of significant inflationary pressure. While the downside risks of a rapidly weakening labor market appear to have lessened, I expect some further softening that could cause the unemployment rate to edge slightly higher this year.

Inflation

Inflation has come down significantly but remains somewhat elevated relative to our 2 percent objective. The inflation rate peaked at 7.2 percent in June 2022 but has since declined to 2.6 percent as of December 2024. I observe a pattern of disinflation that has been bumpy. I expect that to continue as housing services inflation remains somewhat elevated.

With supply and demand conditions having moved into better balance, I see a path for inflation to continue its progress toward our longer-run goal. I expect the momentum of inflation to gradually turn toward our target.

Monetary Policy

In considering additional adjustments to the federal funds rate, I will carefully assess incoming data and the evolving outlook. The FOMC has maintained a cautious approach in its policy stance, resulting in a solid labor market and normalized inflation levels. I conclude that sustaining maximum employment and bringing inflation to our 2 percent goal remains imperative.

Thank you.