Congressional Budget Office Projects Modest Fed Rate Cuts Amid Inflation Concerns

Economic Outlook Points to Labor Market Support

The Congressional Budget Office delivered its latest economic forecast this week, suggesting the Federal Reserve will pursue measured interest rate reductions throughout the year. Rather than aggressive easing, the C-BO expects the central bank to take a cautious approach focused on supporting employment levels while grappling with persistent inflation headwinds.

The Rate Picture Through the End of the Decade

Currently hovering between 3.5% and 3.75%, short-term borrowing rates are anticipated to settle at 3.4% by the final quarter of this year, where they’re expected to stabilize and remain through 2028, according to the C-BO assessment. This relatively flat rate trajectory reflects the challenge of balancing growth concerns against the sticky inflation backdrop.

What’s Driving the Inflation Narrative?

The outlook assumes that higher tariffs—combined with increased fiscal stimulus from recent tax policy—will continue exerting upward pressure on prices well above the Fed’s preferred 2% level. These supply and demand dynamics are expected to keep inflation elevated in the near term, influencing the central bank’s cautious stance on monetary easing.

Employment and Inflation Forecasts

On the labor market side, unemployment is projected to end the current year at 4.6%, gradually declining to 4.4% by 2028. Meanwhile, inflation measured by the Fed’s core metric is forecast to ease to 2.7% this year before eventually reaching 2.1% toward the end of the decade. These dual objectives—stable employment and controlled inflation—remain central to Federal Reserve decision-making.

The Congressional Budget Office’s projections underscore the delicate balancing act facing monetary policymakers: addressing emerging labor market weakness while preventing inflation from becoming further entrenched.