The Congressional Budget Office has mapped out a path for interest rates over the next several years, and the message is pretty clear: rates are coming down, just not dramatically fast. According to the CBO's latest report released Thursday, the Federal Reserve's key interest rate should settle at 3.4% by the end of 2028.

Higher Yields and Softer Growth on the Horizon

While short-term rates are heading down, longer-term borrowing costs tell a different story. The CBO projects that 10-year Treasury yields will gradually climb from 4.1% in the fourth quarter of 2025 to 4.3% by the fourth quarter of 2028. That's not great news for anyone shopping for a mortgage over the next couple of years.

On the employment front, the CBO sees unemployment peaking at 4.6% in 2026 before easing to 4.4% in 2028. The forecast attributes these shifts to President Trump's tax and spending legislation, combined with reduced migration flows affecting labor supply.

Economic growth should get a boost in 2026, with real GDP projected to expand 2.2% thanks to fiscal stimulus and recovery from the late-2025 government shutdown. But that momentum won't last forever. Growth is expected to settle back to an average of 1.8% in 2027 and 2028 as the fiscal tailwinds fade and labor force growth slows. Those numbers line up reasonably well with the Federal Reserve's own projections of 2% growth in 2027 and 1.9% in 2028.

The Fed's Waiting Game

The CBO's forecast arrives as market expectations around Fed policy have been shifting rapidly. Late last year, traders dramatically scaled back bets on a January rate cut after Chair Jerome Powell signaled a "wait and see" stance. Veteran Wall Street analyst Ed Yardeni suggested the Fed is comfortable pausing after three consecutive rate cuts, interpreting Powell's messaging as an attempt to stabilize policy.

The Fed's most recent move came in December 2025, when it trimmed rates by 25 basis points to a range of 3.5%-3.75%, bringing borrowing costs to their lowest level since 2022.

Adding another layer to the story, President Trump revealed Thursday that he's chosen his pick for the next Fed Chair but isn't saying who yet. With Powell's term ending in May, and Trump making clear he wants a nominee willing to cut rates immediately, the selection will have major implications for where monetary policy heads in 2026 and beyond.