At the dawn of 2025, market participants generally anticipated minimal adjustments to the Federal Reserve’s benchmark interest rates. Early January assessments, such as those derived from the CME FedWatch tool, indicated a median expectation of only a single modest 25-basis-point reduction throughout the entire year.
Contrary to these conservative projections, an analysis from early 2025 posited that the Federal Reserve would pursue a more assertive approach to rate cuts than most investors foresaw. This projection was grounded in observed economic trends at the time, particularly decelerating inflation rates and a climate of increasing economic uncertainty. Specifically, the forecast called for a cumulative reduction of one full percentage point in the federal funds rate during 2025.
Throughout the year, the Federal Reserve indeed implemented three rate reductions totaling 75 basis points, falling slightly short of the original prediction. Nonetheless, these adjustments were still more aggressive relative to the prevailing consensus among market watchers. The motivations for easing monetary policy—consisting primarily of subdued inflation and a softening economy—largely corroborated the initial analytical framework.
Interest Rate Outlook for 2026
Looking at the preceding years, 2024 witnessed an aggregate of 100 basis points in rate cuts, followed by the 75 basis points in 2025. As 2026 approaches, the market’s median forecast anticipates an additional 50 basis points of decreases in the Federal Reserve’s rate-setting activities. This forecast aligns with the expectation of two rate cuts spaced across the Fed’s eight scheduled meetings for the year.
However, this prevailing market sentiment might be understated. Several factors point to a heightened level of economic volatility for 2026, encompassing significant uncertainties regarding the broader economic landscape and mounting challenges within the labor market. Adding to these dynamics is the anticipated leadership transition at the Federal Reserve, as Chair Jerome Powell’s current term concludes.
Beyond short-term adjustments, there is also the prospect of considerable fluctuations in longer-dated interest rates. For instance, the yield on the 10-year Treasury note, a critical determinant for sectors such as dividend-oriented equities, real estate investment trusts (REITs), and corporate borrowing costs, has remained relatively unchanged, standing at approximately 4.19% at present. This sits notably higher than figures seen in mid-2024, despite the federal funds rate having been quite elevated at that point.
The forecast presented here envisages a pronounced decline in the 10-year Treasury yield during 2026, with an expectation that it will fall below 3.5% by year-end—a level not reached since early 2023.
Regarding mortgage interest rates, prevailing expert opinions suggest only modest movement. At the start of the year, the average 30-year mortgage rate hovered around 6.2%. Projections from Fannie Mae anticipate a slight decline to 5.9% by the end of the year, while the Mortgage Bankers Association foresees rates remaining near 6.4% through much of 2026.
In contrast, this analysis proposes a more substantial easing in mortgage costs, predicting that average 30-year fixed mortgage rates will drop significantly, reaching approximately 5.5% by the conclusion of 2026.
Summarized Predictions for 2026
- The Federal Reserve is likely to surpass current market pricing for rate cuts and may implement four or more reductions within the year. Market data assigns a relatively low probability to this scenario, approximately 11%, but the likelihood is judged to be considerably greater.
- Long-term borrowing costs, particularly the 10-year Treasury yield, will experience a notable decline, falling below 3.5% by the end of 2026.
- Mortgage interest rates will likely see more meaningful relief than currently forecasted, with average rates decreasing to the mid-5% range.
These projections are deliberately bold, underscoring the possibility that monetary conditions in 2026 may evolve into a notably more accommodative stance than many in the market presently expect.