CBO outlook: lower short-term rates, but pressure on long-term borrowing
The Congressional Budget Office has released economic projections that expect the Federal Reserve to cut short-term interest rates in 2026. The projections anticipate the Fed’s key rate will move lower, while the yield on 10-year Treasury notes rises gradually over the next few years, creating a scenario in which some household borrowing costs, including mortgage rates, may remain stubbornly high even as the Fed eases.
In the CBO’s forecast, the yield on 10-year Treasury notes—often used as a benchmark for mortgage pricing—climbs from roughly 4.1% in late 2025 to about 4.3% in late 2028. Meanwhile, the Fed’s short-term policy rate is projected to decline, with the agency suggesting a path toward a lower level by the end of President Donald Trump’s term.
Why long rates can rise even as the Fed cuts
Long-term yields are shaped by more than the current federal funds rate. Markets also price in inflation expectations, the supply of Treasury debt, global demand for safe assets, and uncertainty about fiscal policy. When investors expect higher deficits or stickier inflation over time, long yields can drift upward even if the central bank begins cutting short rates.
For consumers, this matters because the interest rate on many loans—especially fixed-rate mortgages—depends more directly on long-term Treasury yields than on the overnight rate set by the Fed. That means the housing market may not see the same relief that credit cards, auto loans, or short-term financing sometimes feel when policy rates fall.
Implications for households and businesses
If the Fed cuts in 2026, interest costs on new variable-rate borrowing could ease. But if the 10-year yield trends higher, refinancing may stay unattractive for homeowners locked into low rates from prior years, and new buyers could still face challenging affordability. Businesses planning multi-year investments may also watch long rates closely, because they influence corporate bond yields and the overall cost of capital.
The CBO projections add another data point to an already complex picture: inflation has eased from prior peaks but remains a central concern, while growth, hiring, and policy uncertainty—especially around tariffs and fiscal decisions—continue to shape expectations about where rates settle over the medium term.
A forecast, not a promise
The outlook is inherently uncertain and depends on how inflation, employment, and financial conditions evolve in 2026. Still, the CBO’s baseline view highlights a key risk for the economy: even with Fed cuts, households may not experience a broad-based drop in borrowing costs if longer-term yields remain elevated.