How Much Will the Fed Cut Interest Rates?

Wondering what’s in store for interest rates?

Rate cuts have been on pause since the last cut in December 2024, but we believe more cuts are coming over the next few years. We project another 2 percentage points in cuts to the federal-funds rate through the end of 2027, taking it to a target range of 2.25%-2.50%.

Likewise, we expect the 10-year Treasury yield to slide to 3.25% by 2028 (also our longer-run expectation), versus the 2024 average of 4.2%.

Despite a temporary uptick in inflation ahead owing to tariffs, we expect softening economic growth to push the Fed to lower rates. For the full details, see our US Economic Outlook.

Why Did the Federal Reserve Hike Interest Rates in 2022-23 and Start Cutting in 2024?

Let’s start with a recap of the Fed’s actions over the past several years.

The federal-funds rate had been near zero during the onset of the coronavirus pandemic to buffer the economy from that shock. But in 2022, inflation surged to 6.6%, the highest since 1981. The Fed responded in kind over 2022-23 by raising the federal-funds rate by 5 percentage points, the largest rate hike since 1980. From July 2023 to September 2024, it held the federal-funds rate at a lofty 5.25%-5.50%.

The Fed also has engaged in “quantitative tightening”—selling off over $2 trillion from its long-term securities portfolio since June 2022, to exert upward pressure on long-term yields (think the 10-year Treasury yield).

But when inflation began falling in 2024, the Fed pivoted to monetary easing. It enacted 1 percentage point in rate cuts over September to December, which brought the federal-funds rate back down to a target range of 4.25%-4.50%. That’s where rates stand today.

Quantitative tightening remains ongoing, although the pace of asset sales has been greatly reduced.

Even with recent cuts, interest rates are still high relative to recent history—not just when compared with the 2020-21 lows, but also compared with the 10 years or so preceding the pandemic. That’s because the US (and many other countries) experienced a decade of low interest rates after the 2008 global financial crisis and the Great Recession.

The 10-year Treasury yield averaged 2.4% from 2010 to 2019, compared with an average 4.2% in 2024 (and 4.3% as of June 2025). The federal-funds rate was near zero much of the time, averaging 0.6% from 2010 to 2019. And we did see interest rates tick up toward the end of the decade, but only slightly: The 10-year averaged 2.5% from 2017 to 2019, and the federal-funds rate averaged 1.7%.

How the Economy Has Responded to Higher Interest Rates

High interest rates are designed to slow economic growth, specifically by reducing the demand for goods and services. By reducing demand for goods and services, you also reduce inflation.

To make this more concrete: Higher interest rates mean a higher cost of borrowing for consumers and businesses.

For example, the 30-year mortgage rate stood at 6.8% as of June 2025 (and averaged 6.7% in 2024). That’s a massive jump compared with the 3.0% average in 2021 and far above the 4.2% average in the prepandemic years (2017-19). This increase has helped slow demand for new homes and thus reduce homebuilding activity, which is a major engine of economic growth.

Admittedly, the US economy proved more resilient to the impact of higher rates than expected when rates first rose over 2022-23. Widespread fears of a recession did not play out. Housing activity fell sharply, but much of the rest of the economy has been unscathed.

What Does the Inverted Yield Curve Mean for Interest Rates?

The impact of the surge in the federal-funds rate was also somewhat cushioned by the inversion of the yield curve, where short-term bond rates (such as the federal-funds rate) are higher than long-term bond rates (such as the 10-year Treasury yield).

Recall that the federal-funds rate is under the direct control of the Fed, allowing it to control short-term risk-free interest rates. Longer-run interest rates are influenced by the Fed but only indirectly.

Contrary to much commentary in the financial press, yield-curve inversion does not necessarily cause economic contraction. Rather, an inverted yield curve stimulates the economy more so than a flat yield curve (where short rates remain fixed) because it means lower borrowing rates on long-term debt.

However, since the fall of 2024, the yield-curve effect has mostly worked in the opposite direction as it did in 2022-23. While the Fed was cutting rates in fall 2024, the yield curve was moving from inverted to flat. So, long-term yields (for example, the 10-year Treasury yield) rose even as the federal-funds rate was cut. Thus, inclusive of long-term yields, US monetary policy hasn’t really eased much off of the 2023-24 peak, despite federal-funds rate cuts.

Beyond movement in the yield curve, resilient asset prices have played a major role in propelling the economy through monetary policy tightening.

Even though Fed tightening created only a minor drag on economic growth over 2023-24, inflation ended up falling dramatically anyway. This was because of supply-side improvement, which is unrelated to monetary policy.

How Much Further Will the Fed Cut Interest Rates?

We expect the Fed to resume cutting in the second half of 2025 and continue cutting intermittently through the end of 2027.

• Federal-funds rate: We expect federal-funds rate cuts of 0.50 percentage points (across two cuts) in 2025, 0.75 points in 2026, and 0.75 points in 2027. Those 2 percentage points in cumulative cuts will drive the federal-funds rate to a target range of 2.25%-2.50% by the end of 2027.
• 10-year Treasury yield: Likewise, we expect the 10-year Treasury yield to move down to an average of 3.25% in 2028, down from an average 4.20% in 2024.
• Mortgage rate: We expect the 30-year mortgage rate to fall to 5.00% in 2028 from an average of 6.70% in 2024.

We do expect inflation to tick up from now through 2026, owing to the impact of tariffs. But the increase will be mild, and we think it will appear less threatening to the Fed than the deceleration in economic growth.

Of course, the Fed will be cautious to ensure that the tariff impact on inflation is a one-time shock and doesn’t become entrenched. Accordingly, we have delayed our expectations of rate cuts compared with our pre-tariff forecast.

We had expected rate cuts to be wrapped up in the first half of 2027, but now we expect them to extend to the end of that year. In 2027, we expect inflation to be close to converging back to the 2% target, while ongoing slack in the economy and labor markets calls for continued cuts.

Ultimately, we think the economy needs much lower interest rates to maintain a healthy growth rate.

The full effects if interest rates were to remain at today’s high levels have not played out. For example, many borrowers (from home mortgages to corporate bonds) remain locked into low rates and thus are temporarily shielded from the burden of high rates. But as that debt rolls over, more and more consumers and businesses become exposed to the burden of high interest rates.

Home mortgage affordability, as gauged by the ratio of the median home mortgage payment to household income, is at its worst level since the mid-2000s housing bubble. We think most homebuyers are placated by the promise of refinancing at lower rates a few years down the line. But fulfilling that promise—and preventing a further deterioration in the housing market—will require the Fed to cut aggressively.

How Do Our Interest Rate Forecasts Compare With Others?

Our views align with the expectations implied by the futures market through the third quarter of 2026, when we both expect a federal-funds target range of 3.25%-3.50%. After that, markets think the Fed will be done, but we disagree.

By the end of 2027, our forecast is 100 basis points below the federal-funds rate implied by futures markets. We think the market is projecting a terminal rate that’s too high, reflecting an overestimate of the natural rate of interest.

It’s worth noting that the futures market implied view is consistent with what’s priced into the rest of the yield curve. Hence, the Fed has to cut on par with the 100 basis points expected by the market merely to keep long-term bond yields stable. From this viewpoint, some measure of rate cuts is needed to keep the stance of monetary policy stable.

If the Fed were to keep rates unchanged indefinitely, this would constitute a monetary policy tightening. On the flip side, in order to conduct a substantial monetary policy loosening and stimulate the economy, the Fed has to cut by more than what’s being priced into the market.

How Do Interest Rates Relate to Economic Growth?

We expect gross domestic product growth to slow over the next two years. Part of this is attributable to the effect of tariffs. Also, the strain of high interest rates is still weighing on the economy, and consumers look overstretched, given low saving rates. The Fed will need to cut much more to offset these headwinds.

How Does Inflation Affect Interest Rate Projections?

Inflation made great progress over 2023 and 2024 in receding toward the Fed’s 2% target. And though tariffs will breathe new life into high inflation, it won’t be as severe as seen in 2021-22.

We expect the economic slack created by slowing GDP growth to drive inflation back down in 2027. As tariffs are gradually pulled back, that should further ease inflation through 2029.

Where Will Interest Rates Be in 2025 and Beyond?

Over the next two to three years, our interest rate forecast is centered on the Fed’s efforts to smooth out economic cycles.

The Fed seeks to minimize the output gap (the deviation of GDP from its maximum maintainable level) while keeping inflation low and stable. When the economy is overheated (that is, the output gap is positive and inflation is high), as it is today, then the Fed seeks to hike interest rates to slow growth.

But in the longer term, our interest rate projections are driven more by secular trends than by the Fed.

Instead, interest rates are determined by underlying currents in the economy, like aging demographics, slower productivity growth, and higher economic inequality. These forces have acted to push down interest rates in the US and other major economies for decades, and they haven’t gone away.

Regardless of what happens in the next few years, we expect interest rates to ultimately settle closer to the low levels that prevailed before the pandemic. The low interest rate regime will resume once the dust settles from the pandemic’s economic volatility.

This article was edited by Emelia Fredlick.