WASHINGTON—The Congressional Budget Office said Thursday it expects the Federal Reserve to cut short-term interest rates in 2026, with its key policy rate settling at 3.4% toward the end of President Donald Trump’s term in office in 2028.
Even as it projected Fed rate cuts, the CBO forecast that the yield on 10-year Treasury notes would rise gradually. It projected the 10-year yield would increase from 4.1% in the fourth quarter of 2025 to 4.3% in the fourth quarter of 2028, a path the report said could translate into more expensive mortgage borrowing over the next two years because the 10-year yield is a benchmark for mortgage rates.
In its latest economic projections, the CBO said it incorporated assumptions tied to Trump’s tariffs and immigration policies, as well as the effects of last year’s federal government shutdown. In the report, the CBO said the changes affected “the near-term path of GDP, employment, and inflation” but did not materially change the overall economic outlook through 2028.
The CBO also projected that jobless rates would increase before improving over the next two years. It expected the unemployment rate to peak at 4.6% in 2026 and ease to 4.4% in 2028, citing impacts from a tax and spending law Congress passed and that was signed in July, along with fewer migrants in the country.
On growth, the CBO projected real gross domestic product growth would rise to 2.2% in 2026. It then projected GDP growth would slow to an average of 1.8% in 2027 and 2028, as fiscal support wanes and labor force growth slows. The CBO said its projections were similar to those made by the Federal Reserve, which expected growth to reach 2% in 2027 and 1.9% in 2028.
The CBO said inflation is expected to remain above the Fed’s 2% target in the near term, before gradually falling to 2.1% in 2028. It pointed to tariffs and stronger demand as drivers keeping inflation elevated early in the forecast period.
The CBO also recently released data forecasting population growth, predicting the U.S. population would increase by 15 million people over the next 30 years. The estimate was smaller than prior projections, the CBO said, due to Trump’s hardline immigration policies and an expected lower fertility rate.
Lawmakers established the Congressional Budget Office more than 50 years ago to provide objective, impartial analysis to support the budget process.