United States interest rate forecast: Third-party predictions

As the Federal Reserve adjusts policy, where might US interest rates be in five years?

Following three rate cuts in 2025, the Federal Reserve paused at its January 2026 meeting, leaving the federal funds rate at 3.5%–3.75%, the lowest level since 2022. With inflation still above target and the labour market showing signs of stabilisation, market participants and major financial institutions have revised their expectations for where rates may settle over the next five years.

The Federal Reserve held interest rates steady at its January 2026 meeting after cutting rates three times in 2025, bringing the federal funds rate down to a range of 3.5%–3.75%. This pause marked a shift from the easing cycle that began in late 2025, as policymakers adopted a more cautious, data-dependent approach. Chair Jerome Powell noted that the US economy was entering 2026 on a relatively firm footing and that interest rates were currently judged appropriate to support progress towards the Fed’s dual mandate.

The Fed’s December 2025 Summary of Economic Projections indicated just one additional 25-basis-point cut for 2026, which would bring the policy rate to around 3.1%–3.4% by year end. However, forecasts from major financial institutions diverge, reflecting differing views on inflation persistence, labour market dynamics and potential policy shifts.

Past performance is not a reliable indicator of future results.

Projected US interest rates in five years

Interest rate projections tend to focus on the near term, as uncertainty increases significantly over longer horizons. Current forecasts for 2026 and beyond suggest a broad convergence towards a so-called 'neutral' rate in the 3%–3.5% range, rather than a return to the ultra-low rates seen during the 2010s or the peak levels reached in 2023.

J.P. Morgan has withdrawn its forecast for further rate cuts in 2026, instead projecting that the Fed will hold rates at current levels throughout the year before raising them by 25 basis points in the third quarter of 2027, bringing the upper band back to 4%. This outlook reflects the bank’s view that the labour market may tighten by the second quarter of 2027 and that disinflation could proceed gradually (Reuters, 12 January 2026).

Goldman Sachs and Barclays have both postponed their expected rate cuts to mid-2026, now forecasting reductions in September and December rather than earlier in the year. Goldman expects the federal funds rate to end 2026 in a range of 3%–3.25% and has revised its estimated recession probability lower, from 30% to 20% (Reuters, 12 January 2026).

Bank of America forecasts two quarter-point cuts in 2026, specifically in June and July, which would bring the terminal rate to 3%–3.25%. The bank attributes this outlook primarily to anticipated leadership transitions rather than economic deterioration, while maintaining a relatively robust growth forecast of 2.4% GDP growth for 2026 (FXLeaders, 12 January 2026).

Analysts’ interest rate forecasts over a five-year horizon are inherently uncertain and may not materialise as expected. Interest rate projections should not be used as a substitute for independent research. Always conduct your own due diligence and never trade or invest money you cannot afford to lose.

Will US interest rates continue to fall?

The consensus outlook has shifted notably since late 2025, when markets largely anticipated a sustained easing cycle. Current projections instead suggest limited scope for further cuts from present levels, with most forecasts converging on a neutral range of around 3%–3.25% over the next one to two years.

Several factors underpin this pause-and-stabilise view. Inflation remains above the Fed’s 2% target, with the December 2025 projections placing core PCE inflation at 2.4% by the end of 2026. The labour market has shown signs of stabilisation rather than sharp deterioration, with job growth remaining modest and unemployment broadly steady. With five-year-forward inflation expectations near 2.2%, materially lower nominal policy rates would likely be inconsistent with the Fed’s inflation objective unless economic conditions weaken meaningfully.

Some institutions, including J.P. Morgan and Macquarie, have suggested that the next policy move could be a rate increase in 2027, reflecting expectations of economic resilience. Nonetheless, most forecasts acknowledge that a material weakening in labour market conditions or a sharper-than-expected decline in inflation could prompt the Fed to resume rate cuts at a later stage.

Interest rates and their role in financial markets

Interest rate expectations play a central role in financial markets, with decisions by the Federal Reserve influencing equities, bonds and commodities.

How the federal funds rate influences the economy

The Federal Reserve sets the federal funds rate (FFR), the benchmark interest rate that influences bank funding costs, credit conditions and broader economic activity. The process begins at Federal Open Market Committee (FOMC) meetings, of which there are eight each year, with policy decisions filtering through to the prime rate – the baseline interest rate banks charge creditworthy customers.

An increase in the FFR typically leads to higher prime rates, raising borrowing costs for loans and mortgages. Higher servicing costs can reduce discretionary spending by households and businesses, potentially dampening demand and easing price pressures.

Impact on equities and company valuations

For equity markets, this environment can create headwinds for companies reliant on consumer spending, such as those in retail and hospitality. Growth-oriented companies, which often depend more heavily on external financing, may also face valuation pressure as investors reassess discount rates and risk appetite.

Interest rates, yield curves and discounting

Policy rates anchor the yield curve by shaping short-term money-market rates and expectations for future monetary policy. These dynamics influence benchmarks for Treasury yields, mortgages and corporate borrowing costs. Through this discounting mechanism, higher rates tend to reduce the present value of future cash flows, weighing on equity valuations and other long-duration assets, while lower rates generally provide relative support.

Effects on bonds and fixed-income markets

Rising interest rates also affect bond prices. When rates increase, existing bonds with lower yields become less attractive relative to new issuance, which can lead to price declines. This effect is typically more pronounced for longer-dated bonds, where the impact of rate changes compounds over time.

Fixed-income securities more broadly may lose value as interest rates rise, reflecting the higher opportunity cost of holding assets with fixed returns. As a result, expectations for interest rates over the next five years are often monitored as a broad indicator of financial market conditions.

A brief history of the Fed’s interest rate policy

Understanding how US interest rate policy has evolved over time provides context for current projections and longer-term expectations.

Post-war period and early rate cycles

Like many advanced economies, the US has experienced extended periods of relatively low inflation and interest-rate volatility. The federal funds rate remained below 2% during much of the 1950s, supported by post-war stimulus and income growth. Over the following two decades, rates fluctuated widely, ranging between 3% and 10% throughout the 1960s and 1970s.

The Volcker era and inflation control

In the early 1980s, under then-chair Paul Volcker, the Fed raised the funds rate to as high as 19%–20% to address entrenched double-digit inflation. During that decade, the effective rate averaged close to 10%. As inflation moderated, the federal funds rate generally hovered around 5% throughout the 1990s.

Financial crises and ultra-low rates

The 2008–09 global financial crisis marked a turning point, with rates cut to near zero and unconventional policies such as quantitative easing introduced to support economic recovery. A similar response followed the Covid-19 pandemic, when rates again approached 0%.

The post-pandemic tightening cycle

After gradually lifting rates between 2015 and 2018, and cutting again during the pandemic, the Fed tightened policy aggressively in 2022–2023 in response to post-pandemic inflation pressures. The federal funds rate peaked at 5.25%–5.5% during this cycle before the Fed began cutting rates in late 2025, bringing them down to the current 3.5%–3.75% range by early 2026.

Key factors that could influence interest rates in five years

Several structural and cyclical factors are likely to shape interest-rate outcomes over the medium term.

Inflation and expectations: if inflation and longer-term expectations remain near 2%–2.5%, the Fed may keep nominal rates close to its estimated neutral level of around 3%, adjusting modestly as conditions evolve. Persistent inflation above target could justify higher rates for longer, while sustained disinflation may allow further easing.

Economic growth: the Fed’s baseline projections assume real GDP growth of roughly 2%–2.3% and unemployment around 4%–4.5%. Strong growth could reduce the need for aggressive rate cuts, whereas stagnation or recession may prompt faster and deeper easing.

Labour market conditions: wage growth and unemployment trends remain central to monetary policy decisions, given their influence on inflation and economic momentum. Recent data suggest a stabilising labour market, with modest job gains and steady unemployment.

Fiscal stance and term premia: elevated public debt and persistent fiscal deficits can raise the term premium on longer-dated bonds, even if policy rates remain near neutral. This dynamic affects mortgage rates and corporate borrowing costs, alongside government spending and tax policies.

Global economic developments: geopolitical events, supply-chain dynamics and international monetary policies can influence US interest rates. Global demand for US assets, external shocks and shifts in global growth all factor into the Fed’s policy considerations.

Structural factors: demographics, productivity trends and global savings patterns help determine the underlying neutral real rate of interest, which most estimates place above zero but below historical averages. The Cleveland Fed’s model currently estimates the medium-run nominal neutral rate at approximately 3.7%.

FAQ

How often do interest rates change?

Interest rates do not change on a fixed schedule and are adjusted at the discretion of central banks. In the US, the Federal Reserve reviews policy at scheduled Federal Open Market Committee (FOMC) meetings, which take place eight times a year. Rates may be raised, lowered or left unchanged depending on economic data, including inflation, employment and growth. In some periods, rates can remain unchanged for extended periods if economic conditions are broadly stable.

Where will interest rates be in five years?

Interest rate forecasts beyond a few years involve a high degree of uncertainty. Current third-party projections broadly suggest that US interest rates could settle near a longer-term 'neutral' range, often estimated at around 3%–3.5%, assuming inflation moderates and economic growth remains steady. However, outcomes will depend on future economic conditions, policy decisions and global developments. For this reason, longer-term forecasts are generally best viewed as indicative rather than predictive.

Will interest rates go up or down?

Whether interest rates rise or fall depends on how economic conditions evolve over time. If inflation remains elevated or economic activity proves resilient, rates may stay higher for longer or potentially rise further. Conversely, weaker growth or easing inflation could create scope for rate cuts. Many current projections point to limited movement from current levels in the near term, but central bank policy remains data-dependent, meaning future decisions may change as new information emerges.