CBO Releases Updated Economic Outlook for 2025 to 2028

The Congressional Budget Office (CBO) has issued revised economic forecasts covering the period from 2025 to 2028, updating its earlier January 2025 baseline to reflect new legislation, trade measures, and demographic shifts. The updated outlook incorporates the effects of the One Big Beautiful Bill Act (OBBBA), newly imposed tariffs, and changes in immigration policy. These factors are expected to generate mixed economic outcomes over the next several years. n nAccording to the CBO, real GDP growth is projected to slow to 1.4 percent in 2025, down from 2.5 percent in 2024 and 0.5 percentage points below the prior forecast. This dip is primarily attributed to the inflationary and supply-side pressures from tariffs. However, growth is expected to rebound in 2026, reaching 2.2 percent—0.4 points above the previous estimate—driven by fiscal stimulus from tax reductions and increased spending under OBBBA. From 2027 onward, expansion is anticipated to stabilize at 1.8 percent annually. By 2028, overall economic output is forecast to be slightly higher—by about 0.1 percent—than previously modeled. n nInflation remains a concern in the near term. The CBO expects the personal consumption expenditures (PCE) price index to rise by 3.1 percent in 2025, up from 2.5 percent in 2024, before declining to 2.4 percent in 2026 and settling at 2.0 percent in subsequent years. This trajectory reflects upward pressure from tariffs and elevated government borrowing. Earlier projections had estimated 2025 PCE inflation at 2.2 percent, indicating a more persistent inflationary environment than initially expected. The Consumer Price Index (CPI) is also forecast to remain above target, at 2.8 percent in 2025 and 2.7 percent in 2026, before normalizing. n nLabor market conditions are expected to fluctuate. The unemployment rate, which stood at 4.1 percent at the end of 2024, is projected to rise to 4.5 percent in 2025 before dropping to 4.2 percent in 2026. It is then expected to stabilize at 4.4 percent in both 2027 and 2028. These shifts reflect the combined influence of reduced labor supply due to immigration restrictions and temporary demand boosts from fiscal policy. n nInterest rates are anticipated to decline gradually. The average yield on ten-year Treasury notes is forecast to be 4.3 percent in 2025, down slightly from 4.2 percent in 2024, and to fall further to 3.9 percent by 2028. Short-term rates are also expected to ease, with the three-month Treasury bill rate projected to decline from 5.0 percent in 2024 to 3.2 percent by 2028. The Federal Reserve’s federal funds rate is expected to follow a similar downward path, ending at 3.1 percent in 2027 and 2028. n nThe CBO’s updated baseline contrasts with more optimistic projections from the Office of Management and Budget (OMB), which forecasts 3.2 percent growth in 2026 and a faster decline in unemployment. However, CBO’s figures align closely with those of private forecasters and the Federal Reserve. n— news from Committee for a Responsible Federal Budget

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CBO Releases Economic Projections From 2025 to 2028
The Congressional Budget Office (CBO) recently released its updated economic projections for 2025 through 2028, updated from its January 2025 baseline to include new economic data and new policies as the One Big Beautiful Bill Act (OBBBA), tariffs, and immigration changes. n nYou can read more about the fiscal effects of these policies in the CRFB Adjusted August 2025 Baseline. n nCBO’s economic projections show a temporary economic slowdown this year followed by a boost in 2026 and seemingly stable growth thereafter – driven by offsetting headwinds and tailwinds. Projections also show above-target inflation over the next two years due largely to new tariffs and increased borrowing with normalization of inflation thereafter. CBO projects the labor force will continue to soften in 2025, will temporarily strengthen in 2026, and then will soften again. And interest rates will decline slowly over the next few years but at a slower pace than previously expected. n nComparing Economic Projections, 2025-2028 n nCalendar Year 2025 2026 2027 2028 Real GDP Growth (Q4 over Q4) CBO (Sep. 2025) 1.4% 2.2% 1.8% 1.8% CBO (Jan. 2025) 1.9% 1.8% 1.8% 1.7% Federal Reserve 1.6% 1.8% 1.9% 1.8% OMB (Sep. 2025) 1.8% 3.2% 3.1% 3.1% CPI Inflation (Year over Year) CBO (Sep. 2025) 2.8% 2.7% 2.2% 2.2% CBO (Jan. 2025) 2.2% 2.4% 2.3% 2.3% OMB (Sep. 2025) 2.5% 2.2% 2.3% 2.2% PCE Inflation (Q4 over Q4)* CBO (Sep. 2025) 3.1% 2.4% 2.0% 2.0% CBO (Jan. 2025) 2.2% 2.1% 2.0% 2.0% Federal Reserve 3.0% 2.6% 2.1% 2.0% OMB (Sep. 2025)* 2.4% 2.0% 2.0% 2.0% Unemployment Rate (Q4)^ CBO (Sep. 2025) 4.5% 4.2% 4.4% 4.4% CBO (Jan. 2025) 4.3% 4.4% 4.4% 4.4% Federal Reserve 4.5% 4.4% 4.3% 4.2% OMB (Sep. 2025)^ 4.1% 3.9% 3.7% 3.7% Interest Rate on Ten-Year Treasury Notes (Annual Average) CBO (Sep. 2025) 4.3% 4.2% 4.0% 3.9% CBO (Jan. 2025) 4.1% 3.9% 3.9% 3.9% OMB (Aug. 2025) 4.3% 3.8% 3.6% 3.5% n nSource: Congressional Budget Office, Federal Reserve, Office of Management and Budget n n*OMB projects PCE inflation on an average year-over-year basis. n n^OMB calculates unemployment rate as the annual average n nRecent Policy Changes Will Have Offsetting Economic Effects n nCBO’s updated economic projections have changed primarily due to the implementation of new tariffs, numerous tax and spending changes from the One Big Beautiful Bill Act (OBBBA), and significant reductions in net immigration. Over the long run, these policies can lead to significant changes in work, savings, and investment. As a result, the tariff and immigration changes are likely to reduce total long-run output, while OBBBA will have an ambiguous effect – with lower taxes encouraging work and investment but higher debt stifling it. n nThrough 2028, however, CBO projects these changes will influence the economy mainly through their impact on demand. Changes that increase taxes or reduce spending tend to reduce demand and slow growth, while tax cuts and spending increases tend to increase growth. Specifically, CBO finds that tariffs will reduce near-term output while the change in OBBBA will boost output. Because the tariffs go into effect before the tax cuts, the combined effect of these changes is likely to reduce 2025 growth and maintain or boost 2026 output. Tariffs also increase near-term inflation by pushing up after-tariff prices. Meanwhile, border and immigration changes are expected to reduce the total size of the labor force and therefore output. n nEconomic Growth Will Slow, Accelerate, Then Normalize n nAfter growing by 2.5 percent in 2024, CBO projects real Gross Domestic Product (GDP) will grow by only 1.4 percent in 2025 – 0.5 percentage points lower than previously projected. In 2026, conversely, CBO expects 2.2 percent growth – 0.4 percentage points higher than previously projected. Beyond that, CBO projects growth to normalize at about 1.8 percent per year. By 2028, CBO projects output to be about 0.1 percent higher than previously estimated. n nThe slower growth in 2025 is driven mainly by tariffs while the faster growth in 2026 is mainly due to a sugar high from the OBBBA tax cuts and spending. Beyond 2026, the effects of these two changes and immigration are largely offsetting. n nCBO’s projections are relatively similar to those of the Federal Reserve and most outside modelers. However, the Trump Administration expects much higher growth; the Office of Management and Budget (OMB) projects about 3 percent annual growth over the next few years, while the Council of Economic Advisers appears to predict roughly 4 percent annual growth. n nInflation Will Remain Elevated Through 2026 n nAfter spiking in 2022, inflation has been on a downward path for the last few years and was previously projected to approach its 2 percent target level by this year. CBO now expects inflation to remain elevated in the near term due to the effects of tariffs on prices and, to a lesser extent, the effect of higher deficits on increased demand for goods and service. n nCBO projects the personal consumption expenditure (PCE) price index will rise from 2.5 percent in 2024 to 3.1 percent this year, then fall to 2.4 percent next year and 2 percent per year thereafter. CBO had previously projected PCE inflation of 2.2 percent this year and 2.1 percent next year. n nCBO’s projections follow closely those of the Federal Reserve, which expects inflation to total 3.0 percent in 2025, 2.6 percent in 2026, and 2.0 percent in the long run. OMB, by contrast, estimates inflation will total 2.4 percent this year and fall to the 2.0 percent target rate starting in 2026 and throughout the rest of the decade. n nLabor Conditions Will Soften n nThe unemployment rate was 4.1 percent at the end of 2024 and has been slowly rising from a 50-year low of 3.6 percent at the end of 2022. CBO now projects a much higher spike in the unemployment rate this year to 4.5 percent, a drop in unemployment in 2026 to 4.2 percent, and then a stabilization at 4.4 percent in 2027 and 2028. n nCBO’s projections in 2025 closely match those of many private sector forecasters and the Federal Reserve, though the Fed expects that the unemployment rate will decline more gradually to 4.4 percent by the end of 2026, 4.3 percent in 2027, and 4.2 percent in 2028. OMB differs from both CBO and the Federal Reserve, projecting that unemployment will average 4.1 percent in 2025, 3.9 percent in 2026, and stabilize at 3.7 percent in 2027 and 2028. n nInterest Rates to Remain Elevated for Longer n nThe average rate on the ten-year Treasury was below 3 percent for most of the 2010s but averaged 4.0 percent in 2023 and 4.2 percent in 2024. CBO projects the average annual yield on the ten-year Treasury note will remain high but decline modestly over the next few years, averaging 4.3 percent in 2025 and slowly declining to 3.9 percent by 2028. (Because inflation is projected to fall over that period, this represents a rise in real interest rates.) CBO previously projected rates to fall more quickly to 3.9 percent. n nContrary to CBO and outside modelers, OMB expects that the yield on the ten-year Treasury note will fall 0.8 percentage points from 4.3 percent in 2025 to 3.5 percent 2028. n nAs inflation eases and the Federal Reserve continues its rate-cutting cycle, CBO projects rates on the three-month Treasury bill to decline from 5.0 percent in 2024 to 4.1 percent in 2025, 3.5 percent in 2026, and 3.2 percent by 2028. CBO previously projected rates would fall from 5.0 percent to 3.8 percent in 2025, 3.3 percent in 2025, and 3.2 percent by 2028. n nSimilarly, the Federal Reserve estimates the federal funds rate to go from 4.1 percent at the end of 2024 to 3.6 percent in 2025, 3.4 percent in 2026, and 3.1 percent in 2027 and 2028. n n***

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