Fed Rates Could Fall To 3.4% By End Of Trump’s Term In 2028: CBO

by | Jan 9, 2026 | General

The Congressional Budget Office (CBO) has projected that the Federal Reserve will likely reduce short-term rates in 2026, with the key interest rate anticipated to settle at 3.4% by the end of President Donald Trump‘s term in 2028.

CBO Flags Higher Yields, Slower Growth Ahead

The CBO’s Thursday report projects a gradual rise in 10-year Treasury yields, from 4.1% in Q4 2025 to 4.3% by Q4 2028, which could drive higher mortgage borrowing costs over the next two years.

The report also predicts that the unemployment rate will peak at 4.6% in 2026 before dropping to 4.4% in 2028. This is largely attributed to the effects of Trump’s tax and spending law, as well as a decrease in the number of migrants in the country.

The CBO forecasts real GDP growth of 2.2% in 2026, supported by the tax and spending law and a rebound from the late-2025 shutdown. Growth is then expected to ease to an average of 1.8% in 2027 and 2028 as fiscal stimulus wanes and labor force expansion slows.

These projections align with the Federal Reserve’s outlook, which expects economic growth to reach 2% in 2027 and ease slightly to 1.9% in 2028.

Fed rate Cut Bets Shift As Powell Waits

The CBO’s projections come in the wake of significant shifts in market expectations regarding the Federal Reserve’s rate decisions. In late 2025, traders drastically reduced the odds of a January rate cut after Chair Jerome Powell signaled a “wait and see” approach. Veteran Wall Street analyst Ed Yardeni said the Fed is well-positioned to pause, reading Powell’s tone as an effort to steady policy after three straight rate cuts.

The Fed lowered rates by 25 basis points in December 2025 to 3.5%–3.75%, marking a third consecutive cut and pushing borrowing costs to their lowest level since 2022.

Meanwhile, Trump revealed on Thursday that he has chosen the next Federal Reserve Chair but has not disclosed the name. Powell’s term expires in May, and Trump has said any nominee must cut rates immediately, underscoring how pivotal the choice will be for the direction of monetary policy in 2026.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.