CBO Economic Outlook: Fed Rates to Reach 3.4% by 2028 as Economy Finds Its Footing

The Congressional Budget Office unveiled its latest economic forecast on Thursday, painting a picture of an economy finding its footing after years of pandemic-era disruptions and aggressive monetary tightening. The nonpartisan agency projects the Federal Reserve will continue its rate-cutting campaign, bringing its benchmark rate down to 3.4% by late 2028—a level that would represent a meaningful easing from today's 3.5% to 3.75% target range.

The projections, which factor in the Trump administration's tariff policies, immigration restrictions, and the sweeping tax legislation passed last year, suggest a gradual normalization rather than either a sharp recession or a return to the boom conditions that characterized parts of 2024.

The Rate Path Forward

At the heart of the CBO's forecast lies its interest rate projections. The agency expects the Federal Reserve to continue cutting rates throughout 2026, though at a measured pace that reflects persistent inflation concerns. By the end of President Trump's current term in late 2028, the federal funds rate is projected to settle around 3.4%.

This trajectory implies approximately 100 basis points of additional easing beyond what markets currently anticipate. With investors pricing in just two quarter-point cuts for 2026, the CBO's outlook suggests the Fed may ultimately deliver more accommodation than expected—assuming inflation cooperates.

"The path of interest rates will depend critically on how inflation evolves. Our baseline assumes the Fed achieves its 2% target by 2028, but risks remain tilted toward slower progress given tariff effects and strong consumer demand."

— CBO Economic Projections Report

For the 10-year Treasury yield, the CBO projects a gradual increase from current levels around 4.1% to approximately 4.3% by late 2028. This projection has significant implications for mortgage rates, which tend to track long-term Treasury yields.

GDP Growth: Steady but Unspectacular

Real GDP growth is projected at 2.2% for 2026, slightly below the economy's estimated potential growth rate of 2.4%. The forecast reflects a labor market that has cooled from its post-pandemic peak and the cumulative impact of higher interest rates on business investment and housing.

Key economic projections from the CBO include:

• 2026 Real GDP growth: 2.2%
• 2027 Real GDP growth: 2.3%
• 2028 Real GDP growth: 2.4%
• Average unemployment 2026: 4.5%
• PCE inflation 2026: 2.5%
• Federal funds rate 2028: 3.4%

Growth is expected to accelerate modestly in 2027 and 2028 as the effects of tight monetary policy fade and the economy adjusts to the new policy environment. The tax provisions in the "One Big Beautiful Bill" are projected to provide ongoing support, though their stimulative effect will diminish over time.

The Unemployment Trajectory

Perhaps the most closely watched element of the forecast is the unemployment trajectory. The CBO expects the jobless rate to peak at 4.6% in 2026—up from approximately 4.1% currently—before easing to 4.4% by 2028.

The projected rise in unemployment reflects several factors converging simultaneously. Reduced immigration flows are limiting labor supply growth, potentially creating mismatches in certain sectors. Meanwhile, the full impact of 2024-2025 rate hikes is still working through the economy, affecting hiring decisions in interest-sensitive industries.

Despite these headwinds, the forecast implies a relatively mild labor market softening by historical standards. A peak unemployment rate of 4.6% would be well below levels seen during typical recessions, suggesting the much-discussed "soft landing" remains the base case.

Inflation: Still Above Target

The CBO projects personal consumption expenditure (PCE) inflation—the Fed's preferred measure—will average 2.5% in 2026, gradually declining to 2.1% by 2028. This trajectory suggests the Fed won't fully achieve its 2% target until late in the forecast period.

Several factors are expected to keep inflation elevated in the near term:

• Tariff effects: Higher import duties flowing through to consumer prices
• Shelter costs: Housing inflation remaining sticky despite rate hikes
• Services inflation: Labor-intensive services maintaining pricing power
• Wage growth: Above-trend wage gains supporting consumer demand

The persistence of above-target inflation explains why the CBO projects a gradual rather than aggressive rate-cutting path. The Fed will likely want to see sustained evidence that inflation is durably returning to 2% before accelerating the pace of easing.

Policy Assumptions and Risks

The CBO's projections incorporate current policy, including the Trump administration's tariffs and immigration restrictions. These policies are assumed to remain in place throughout the forecast period, though their economic effects are subject to considerable uncertainty.

Tariffs, in particular, present a double-edged sword for the forecast. While they support domestic manufacturing and generate revenue, they also contribute to inflation and could weigh on business investment if trade tensions escalate. The CBO acknowledges that changes in trade policy could materially alter the economic outlook.

Immigration restrictions are projected to limit labor force growth, contributing to the modest rise in unemployment while also supporting wage growth. The net effect on GDP is expected to be slightly negative, as reduced labor supply constrains the economy's productive capacity.

Investment Implications

For investors, the CBO outlook suggests a modest but stable economic environment. Neither strong enough to fuel concerns about overheating nor weak enough to trigger recession fears, the projected trajectory could support risk assets—though current valuations leave limited margin for disappointment.

Bond investors face a challenging environment. With long-term yields projected to hold around current levels or rise slightly, capital appreciation potential is limited. However, income-oriented investors may find current yields attractive for locking in returns.

Equity investors should monitor the employment trajectory closely. If unemployment rises toward 4.6%, consumer spending—the primary engine of U.S. economic activity—could moderate, affecting earnings for companies with significant domestic exposure.

The Bottom Line

The CBO's latest economic forecast presents a portrait of an economy navigating between crosscurrents. Higher interest rates and policy uncertainty create headwinds, while fiscal support and strong household balance sheets provide cushions. The result is projected to be modest but positive growth, gradually normalizing inflation, and a labor market that softens without breaking.

For policymakers, investors, and households alike, the message is one of patience. The path back to a more normal economic environment—with inflation at target and interest rates at neutral—remains a multi-year journey rather than a quick fix. Those who plan accordingly will be best positioned to navigate whatever surprises the economy has in store.