The Congressional Budget Office is projecting the Federal Reserve will respond to slowing inflation and rising unemployment by starting to lower the federal funds rate in the second quarter, with the effective fed funds rate averaging 5.1% for the year, a tenth higher than its 2023 average, then falling to annual averages of 4.1% in 2025 and 3.3% in 2026.

In CBO’s projections, overall PCE inflation is seen easing to 2.1% around the end of the year. The updated projections from the nonpartisan budget referee agency Wednesday also included real GDP growth steadily slowing over the next ten years to an annual average of 1.9% in the early 2030s.

The CBO expects the U.S. federal budget deficit to total USD1.6 trillion in fiscal year 2024, rise to USD1.8 trillion in 2025, and then return to USD1.6 trillion by 2027.

Source: CBO