Interest Rate Forecast by Kiplinger: Rates to Remain within a Limited Range
In the coming years, the 10-year Treasury yield and Federal Reserve interest rates are expected to follow a gradual trajectory, influenced by various economic factors such as inflation, tariffs, and economic growth.
According to forecasts, the 10-year Treasury yield is expected to decline gradually. Deloitte predicts it to fall to 4.1% by 2027 and remain stable through 2029, while another projection suggests it could decline to 3.25% by 2028. However, if the economy continues to grow strongly and investors perceive fiscal policy as unsustainable, the yields could exceed 5%.
The Federal Reserve is expected to proceed with cautious rate cuts. By the first quarter of 2027, the federal funds rate is projected to be between 3% and 3.25%. Some forecasts suggest the federal funds rate could drop to a range of 2.25%-2.50% by the end of 2027. The pace of rate cuts will depend on inflationary pressures and economic growth.
Inflation is expected to rise temporarily due to tariffs but should decline to around 2% by 2027. This trend will influence the Fed's decision-making on interest rates. The impact of tariffs on inflation and economic growth will be significant, potentially slowing investment and hiring.
Real GDP growth is forecast to be modest, around 1.4% in 2025 and 1.5% in 2026, with potential acceleration in later years. Robust economic performance could keep long-term yields higher.
By the end of 2026, the yield curve is expected to be consistently upward-sloping along its entire length, for the first time since 2021, resulting in a U-shaped yield curve with higher short and long yields than medium-term ones. The Federal Reserve is not expected to cut short-term rates until closer to the end of 2025.
The bond market expects an economic slowdown, as shown by lower yields on one- to seven-year Treasury notes compared to short-term Treasury bills. As tariff policy uncertainties resolve, fears of a recession will diminish, and medium-term rates are likely to pick up.
In the corporate bond market, BBB-rated corporate bond yields are at 5.3%, while CCC-rated corporate bond yields have eased to 12.5% from their 15.2% peak in April on reduced recession fears. Top-rated corporate bond yields (AAA) are yielding 4.9%.
In the housing market, 30-year fixed-rate mortgages are currently around 6.7%, having changed little during the past nine months. 15-year loans are at 5.9% for borrowers with good credit.
Fed Chair Jerome Powell has stated that the Fed won't cut rates until it has a clearer understanding of how higher tariffs affect consumers' longer-term inflation expectations. The bond market's cautious stance reflects these concerns, with the 10-year Treasury note's yield remaining in a narrow range for now.
In conclusion, the forecasts suggest a gradual decline in the 10-year Treasury yield and a cautious approach by the Federal Reserve on interest rates, influenced by economic conditions and inflationary pressures.
In light of the forecasts, an opportunity may present itself for individuals interested in personal-finance and investing to consider defi finance, due to the potential stability or even decline in long-term interest rates. The gradual trajectory of the 10-year Treasury yield and the cautious approach by the Federal Reserve on interest rates could have a direct impact on personal-finance decisions such as borrowing, saving, and investing.
