CBO Forecasts Fed Rate Cuts Through 2028: What the Economic Outlook Means for Your Money

The Congressional Budget Office delivered its first major economic forecast of 2026 this week, painting a picture of an economy navigating a delicate transition from the high-rate environment of recent years toward more normalized conditions. For American households making financial decisions about mortgages, savings, and investments, the projections offer important guidance on what to expect.

The nonpartisan agency's report, "CBO's Current View of the Economy From 2026 to 2028," projects the Federal Reserve will gradually lower its benchmark interest rate to 3.4% by the end of 2028—down from the current range of 3.5% to 3.75%. That's a measured pace of easing that suggests borrowing costs will remain elevated compared to the near-zero rates that prevailed before the pandemic.

Key Economic Projections

The CBO's economic framework rests on several interconnected forecasts that reveal how policymakers expect the economy to evolve:

Interest Rates

The Federal Reserve is expected to continue its easing cycle, though at a gradual pace. The CBO projects the federal funds rate will settle around 3.4% by late 2028, implying roughly 35 to 40 basis points of additional cuts from current levels. This slower trajectory reflects the Fed's cautious approach following Friday's stronger-than-expected jobs report.

Unemployment

The labor market is projected to soften modestly before stabilizing. The CBO expects unemployment to peak at 4.6% sometime in 2026—up from the current 4.4%—before easing back to 4.4% by 2028. This suggests a gradual cooling rather than a sharp deterioration in hiring conditions.

Economic Growth

Real GDP growth is forecast to reach 2.2% in 2026, supported by the effects of last year's tax legislation and a rebound from the late-2025 government shutdown. Growth is then expected to moderate to an average of 1.8% in 2027 and 2028 as fiscal stimulus fades.

"The projections reflect an economy that has achieved a soft landing but hasn't fully normalized. We're in a transition period where policy will gradually become less restrictive."

— Phillip Swagel, CBO Director

What It Means for Borrowers

If you're considering a major purchase that requires financing, the CBO outlook suggests patience may be rewarded—but don't expect dramatic rate drops.

Mortgages

Despite Fed rate cuts, the CBO projects 10-year Treasury yields will actually increase slightly, from 4.1% in late 2025 to 4.3% by late 2028. Since mortgage rates are closely tied to the 10-year Treasury, this suggests 30-year fixed rates may remain in the 6% to 7% range for the foreseeable future.

The persistence of elevated mortgage rates reflects several factors: ongoing federal deficits requiring heavy Treasury issuance, unwinding of the Fed's balance sheet, and term premiums that have risen as investors demand more compensation for holding long-dated bonds.

Auto Loans and Credit Cards

Short-term borrowing costs are more directly influenced by Fed policy, so auto loans and credit cards should see modest relief as the benchmark rate declines. However, with the Fed funds rate settling around 3.4%—still well above the pre-pandemic normal—don't expect a return to the ultra-cheap financing of the 2010s.

What It Means for Savers

The flip side of elevated rates is that savers have enjoyed yields not seen in nearly two decades. The CBO projections suggest this window of opportunity will narrow but not close entirely.

High-yield savings accounts currently offering 4% to 5% APY will likely see rates drift lower as the Fed cuts, potentially settling in the 3% to 4% range by 2028. That's still significantly better than the sub-1% rates that prevailed for most of the 2010s.

For those with cash to deploy, the message is clear: lock in current rates where possible through certificates of deposit or Treasury bonds, while recognizing that the era of exceptional savings yields is gradually drawing to a close.

What It Means for Investors

The CBO's growth projections—2.2% in 2026, moderating to 1.8% thereafter—suggest an economy that can support corporate earnings growth without overheating. This backdrop has historically been favorable for equities, particularly when combined with gradual monetary easing.

However, the persistence of elevated long-term rates presents a headwind for valuation-sensitive growth stocks. Companies that rely heavily on borrowing to fund expansion will continue to face higher financing costs, while the discount rate applied to future earnings remains elevated.

The Fiscal Wild Card

The CBO's full budget and economic outlook for 2026-2036, scheduled for release on February 11, will incorporate the fiscal effects of recent legislation. Early indications suggest the agency will project significantly higher deficits than in its prior baseline, reflecting extended tax cuts, expanded defense spending, and higher interest costs on the national debt.

These fiscal dynamics introduce uncertainty into the economic picture. Larger deficits could crowd out private investment, put upward pressure on interest rates, or eventually constrain the government's ability to respond to future recessions. For now, the CBO's core economic projections assume these pressures remain manageable—but the agency has signaled it will be watching closely.

The bottom line: the U.S. economy appears poised for a period of modest growth with gradually declining interest rates. That's a favorable environment for financial planning, though one that requires adjusting expectations from both the ultra-low rate era and the aggressive hiking cycle that ended it.