As 2025 got under way, there were muted expectations regarding Federal Reserve interest rate cuts. In fact, in early January, the CME FedWatch tool showed that the median expectation was for a single 25-basis-point cut in the federal funds rate for the entire year.
I wrote an article of bold predictions for the stock market, and one of them was that the Fed would be significantly more aggressive than most investors expected. At the time, inflation continued to slow down, and economic uncertainly was becoming more prevalent. My initial prediction was for a full percentage point of rate cuts in 2025.
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The Fed ended up cutting the federal funds rate three times, and by a total of 75 basis points (that's three-fourths of a percentage point). While I wasn't exactly right, the Fed was definitely more aggressive than most had expected, and the reasons for the cuts -- low inflation and a softening economy -- were in line with my expectations.
3 bold interest rate predictions for 2026
We got a total of 100 basis points of rate cuts in 2024 and another 75 basis points in 2025, as I already mentioned. As we head into 2026, the median expectation is for a further 50 basis points of Fed rate cuts, which would typically mean that the Fed will cut rates at two of its eight meetings throughout the year.
However, I think this is once again too mild of an expectation. In fact, I see significant economic uncertainty this year, as well as pressures on the job market. And that's not to mention the upcoming leadership change at the Fed as Chair Jerome Powell's term expires.
I also believe there will be significantly more movement in longer-term interest rates than most experts anticipate. So, I'm going on record to make the following predictions:
- The Federal Reserve will end up cutting rates four Currently, the market is only pricing in a 11% chance of four or more cuts, but I think it's far more likely than that.
- The 10-year Treasury yield, which has big implications for dividend stocks, real estate investment trusts (REITs), and corporate borrowing rates, hasn't moved too much. In fact, the 10-year yield sits at 4.19% as of this writing, and that's actually higher than it was in mid-2024, when the federal funds rate was significantly higher. I predict this will fall sharply in 2026, ending the year below 3.5%, which hasn't been seen since early 2023.
- Most experts think there will be relatively little movement in mortgage rates. The average 30-year mortgage rate was about 6.2% at the beginning of the year. Fannie Mae predicted rates dipping to 5.9% by the end of the year, and the Mortgage Bankers Association actually predicted rates would be around 6.4% for most of 2026. I'll make the bold prediction that we'll finally see significant mortgage rate relief, and that the average rate will fall to 5.5% by the end of 2026.
To be clear, these are intended to be bold predictions. But the key takeaway is that although I don't have a crystal ball, conditions appear to support a significantly lower-rate environment in 2026 than many experts think.
