The Congressional Budget Office (CBO) released a new economic forecast outlining expectations that the Federal Reserve will move to lower short-term interest rates by 2026. According to the report, the benchmark federal funds rate is projected to reach 3.4% by the end of President Donald Trump's current term in 2028.
This projection comes in the context of ongoing shifts within financial markets and federal monetary policy. The CBO report, issued on Thursday, also highlights a forecasted gradual increase in 10-year Treasury yields from 4.1% in the fourth quarter of 2025 to 4.3% by the end of 2028. This rise suggests that borrowing costs for mortgages may trend higher over the next two years, potentially impacting housing affordability and consumer spending.
The unemployment rate, another critical economic indicator, is anticipated to reach a peak of 4.6% in 2026 before slightly declining to 4.4% in 2028. The report attributes this trend primarily to legislative changes, specifically Trump's tax and spending law, and demographic shifts such as a decrease in migration inflows.
On the growth front, the CBO estimates real gross domestic product (GDP) to expand by 2.2% in 2026. This acceleration is supported by both the fiscal stimulus embedded in recent tax and spending policies and an economic recovery expected following a shutdown anticipated in late 2025. However, growth is projected to slow in the subsequent years, averaging 1.8% in 2027 and 2028, as fiscal incentives diminish and labor force participation growth decelerates.
These forecasts bear strong similarities to the Federal Reserve's own outlook, which anticipates economic expansion at approximately 2% in 2027 followed by a moderate slowdown to 1.9% in 2028.
These updated assessments coincide with notable developments in market expectations regarding future Federal Reserve actions. Toward the end of 2025, market participants substantially revised down the probability of an immediate rate cut in January, following statements by Fed Chair Jerome Powell advocating a "wait and see" stance. Industry expert Ed Yardeni has interpreted Powell's commentary as a strategic pause aimed at stabilizing policy after a sequence of three consecutive rate reductions.
The Federal Reserve initiated these rate cuts in December 2025, lowering the federal funds target range by 25 basis points to 3.5%-3.75%. This move marked the third sequential reduction and represents the lowest borrowing cost levels observed since 2022.
Amid these market and policy movements, President Donald Trump disclosed on Thursday his selection for the next Federal Reserve Chair, although the nominee’s identity remains confidential. As Powell's term is scheduled to conclude in May, Trump's commentary underscored the importance of the appointment, emphasizing a mandate for immediate interest rate reductions. This nomination decision is expected to have significant implications for monetary policy direction in the approaching year.