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The Federal Reserve is expected to implement cuts to short-term interest rates by 2026, with its key rate projected to settle at 3.4% by the end of President Donald Trump’s term in 2028, according to a new report released Thursday by the Congressional Budget Office (CBO).
Despite these anticipated rate cuts, the nonpartisan budget office forecasts that yields on 10-year Treasury notes will gradually increase from 4.1% in late 2025 to 4.3% by the fourth quarter of 2028. This trend carries significant implications for consumers, as the 10-year Treasury yield serves as a benchmark for mortgage rates, suggesting homebuyers may face higher borrowing costs over the next two years.
The CBO’s latest economic projections account for several key factors that will shape the economic landscape through 2028, including Trump’s tariff policies, immigration reforms, and the effects of last year’s federal government shutdown.
“Together, those adjustments affected the near-term path of GDP, employment, and inflation but did not materially change the overall economic outlook through 2028,” the report states.
The labor market is expected to face challenges before improving. Unemployment rates are projected to climb to a peak of 4.6% in 2026, reflecting the transitional effects of new economic policies. However, the rate should subsequently ease to 4.4% by 2028. The CBO attributes these shifts primarily to the impact of Trump’s recently enacted tax and spending law, along with demographic changes resulting from reduced immigration.
On the growth front, real gross domestic product (GDP) is forecast to strengthen to 2.2% in 2026, bolstered by the fiscal stimulus of the tax and spending law and recovery from the anticipated late-2025 government shutdown. This growth momentum is expected to moderate to an average of 1.8% in 2027 and 2028 as fiscal support diminishes and labor force growth slows due to demographic constraints.
These projections largely align with Federal Reserve forecasts, though the Fed maintains a slightly more optimistic outlook, anticipating growth to reach 2% in 2027 and 1.9% in 2028. Notably, the CBO’s GDP growth projections remain consistent with those issued in its previous three-year outlook last September.
Inflation pressures are expected to persist above the Federal Reserve’s 2% target in the near term. The CBO attributes this to the inflationary effects of tariffs and stronger consumer demand. Gradually, inflation is expected to cool, reaching 2.1% by 2028 – still marginally above the Fed’s preferred target.
In a complementary report released Wednesday, the CBO presented demographic projections showing the U.S. population growing by 15 million people over the next three decades. This estimate represents a downward revision from previous forecasts, reflecting the impact of Trump’s restrictive immigration policies and expectations of lower fertility rates across the country.
The potential economic effects of these demographic shifts are substantial. A slower-growing population could exacerbate labor shortages in key industries and potentially limit long-term economic growth prospects, particularly as the aging Baby Boomer population continues to exit the workforce.
Established by lawmakers more than five decades ago, the Congressional Budget Office provides objective, nonpartisan analysis to support federal budget processes. Its projections are closely watched by policymakers, financial markets, and business leaders as reliable indicators of economic trends and fiscal challenges facing the nation.
The latest CBO report offers a roadmap of what Americans might expect economically during Trump’s second term, highlighting both opportunities for growth and structural challenges that will shape the nation’s economic trajectory through the remainder of the decade.
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10 Comments
The CBO’s projections provide a useful long-term perspective, but of course a lot can change between now and 2026/2028. Curious to see how this plays out and how the Fed responds to evolving economic conditions.
It will be fascinating to see how the various economic and policy factors – from tariffs to immigration reform – ultimately shape the Fed’s decisions on interest rates and the broader economic outlook. Lots of moving pieces to watch.
While the CBO’s forecasts provide a useful economic snapshot, it will be important to see how actual conditions unfold relative to these projections. Policymakers and consumers alike will need to adapt to the shifting landscape.
It will be important to watch how the Fed navigates the economic landscape over the next several years, with factors like tariffs, immigration reforms, and the lingering effects of the government shutdown. Their policy decisions will have far-reaching impacts.
The 10-year Treasury yield forecast is notable – if it does rise as projected, that could put pressure on borrowing costs for consumers and businesses. I wonder how that will impact investment and spending in the coming years.
Interesting to see the CBO projecting rate cuts by 2026. Given the Fed’s recent hikes, I’m curious to see what factors they expect to drive that reversal. Homebuyers may have a challenging couple of years ahead with higher mortgage rates.
The implications for mortgage rates and consumer borrowing costs are significant. Homebuyers and other borrowers may want to closely monitor the trajectory of the 10-year Treasury yield in the coming years.
The CBO’s outlook for the labor market is concerning, projecting challenges before improvement. I’m curious to see what specific headwinds they foresee and how that may influence the Fed’s approach to monetary policy.
Agreed, the labor market projections are worth keeping a close eye on. Unemployment trends typically play a major role in the Fed’s decision-making.
The potential for rate cuts in 2026 is an interesting twist, given the recent rate hike cycle. I wonder what specific economic factors the CBO expects will drive that policy reversal at the Fed.