A new report from the United States Congressional Budget Office (CBO) has outlined a significant shift in monetary policy, forecasting that the Federal Reserve will begin cutting short-term interest rates in 2026. This move is expected to see the key rate settle at 3.4% by the end of a potential second term for former President Donald Trump in 2028.
Interest Rate Paradox: Cheaper Short-Term Loans, Costlier Mortgages
While the Federal Reserve's anticipated rate cuts might suggest easier borrowing, the CBO report presents a more complex picture for long-term debt. The budget office projects that the yield on the benchmark 10-year Treasury note will actually increase gradually over the coming years.
The yield is expected to climb from 4.1% in the last quarter of 2025 to 4.3% by the fourth quarter of 2028. Since the 10-year Treasury yield directly influences mortgage rates, this forecast implies that borrowing for home loans in the US could become more expensive over the next two to three years, even as the Fed eases its policy stance.
Economic Outlook: Growth, Jobs, and Inflation Trends
The CBO's latest economic projections, released on Thursday, incorporate the potential impacts of several policy factors, including Trump's proposed tariffs, immigration policies, and the effects of last year's federal government shutdown. The report notes that while these adjustments affect the near-term path of GDP, employment, and inflation, they do not materially alter the overall economic outlook through 2028.
On the employment front, the report indicates a temporary rise in joblessness. The unemployment rate is projected to peak at 4.6% in 2026 before easing to 4.4% in 2028. This trajectory is attributed largely to the impacts of the tax and spending law passed in July, coupled with a reduction in migrant numbers due to stricter immigration policies.
Economic growth, measured by real gross domestic product (GDP), is expected to receive a boost. GDP growth is forecast to rise to 2.2% in 2026, supported by the fiscal stimulus from the new law and a rebound from the late-2025 shutdown. However, growth is then set to slow to an average of 1.8% in 2027 and 2028 as fiscal support diminishes and labor force expansion slows.
Inflation and Demographic Shifts in the Forecast
Inflation is expected to remain a concern in the near term, staying above the Federal Reserve's 2% target due to tariffs and robust demand. The CBO anticipates a gradual decline, with inflation reaching 2.1% by 2028.
Separately, the CBO released demographic data pointing to a significant long-term shift. The US population is now projected to grow by 15 million people over the next 30 years, a smaller increase than previously estimated. This revision is driven by the assumption of continued hardline immigration policies and an expected lower fertility rate.
These projections from the nonpartisan CBO, an office established over five decades ago to provide objective budget analysis, offer a crucial roadmap for global markets. For Indian investors and policymakers, understanding these US economic undercurrents is vital, as shifts in Treasury yields and Fed policy have profound implications for global capital flows, currency valuations, and international trade dynamics.
