Will Interest Rates Keep Declining? 2026 Rate Cut Forecast Goes Beyond Market Consensus

When 2025 opened, Wall Street wasn’t optimistic about interest rate cuts. The CME FedWatch tool suggested traders were betting on just a single 25-basis-point reduction for the entire year. However, the actual monetary policy path proved more accommodative. The Federal Reserve ultimately lowered rates three times, bringing a cumulative 75-basis-point decrease—signaling that interest rates would go down more aggressively than conventional wisdom anticipated. As we navigate 2026, a similar disconnect between market expectations and likely policy outcomes appears to be taking shape.

2025 Proved the Fed Was Ready to Cut

The journey from early 2025 expectations to year-end reality tells an important story. At the start of the year, most investors expected minimal action from the Federal Reserve. The official consensus centered on a single modest reduction. Yet when inflation continued its downward trajectory and economic headwinds intensified, the central bank responded decisively.

Over the full course of 2025, the Fed delivered 75 basis points of relief—three separate cuts of 25 basis points each. This followed the prior year’s 100-basis-point reduction in 2024, establishing a clear pattern: the Federal Reserve has demonstrated willingness to pivot toward accommodation when growth concerns mount. The reasons underlying these cuts aligned with what many market participants had underestimated—sustained disinflation and softening economic momentum created genuine pressure for monetary ease.

Three Bold Calls for 2026: More Rate Relief Ahead

Entering 2026, the median Wall Street forecast calls for just 50 additional basis points of Fed reductions. This typically translates to rate cuts at only two of the central bank’s eight scheduled meetings throughout the year. Yet current conditions suggest room for significantly greater monetary relief than the consensus expects.

First, expect the Federal Reserve to lower rates four times rather than two. While options traders currently assign just an 11% probability to four or more cuts, the economic data and policy environment could easily support more aggressive action. Emerging uncertainty around leadership transitions—Jerome Powell’s tenure as Fed chair is expiring—adds complexity to the rate-setting process, potentially tilting toward caution expressed through increased cuts.

Second, longer-dated interest rates face downward pressure not widely anticipated by market observers. The 10-year Treasury yield, a crucial benchmark influencing dividend-paying stocks, REITs, and corporate borrowing costs, has remained stubbornly elevated. Currently trading near 4.19%, this yield sits higher than levels seen in mid-2024 despite the Fed’s multiple rate cuts. A significant compression lower appears likely, with a target of below 3.5% by year-end—a level unseen since early 2023.

Third, mortgage market expectations appear overly conservative. Industry forecasters have painted a modest picture: Fannie Mae anticipated 30-year rates drifting only to 5.9%, while the Mortgage Bankers Association projected rates would hover around 6.4% through most of 2026. Given the supportive backdrop for broader interest rate declines, a more pronounced drop toward 5.5% for the average 30-year mortgage by December 2026 seems plausible.

The Economic Backdrop Supporting Lower Rates

These predictions aren’t simply contrarian market calls. The fundamental case rests on demonstrable pressures: job market softening continues to raise recession concerns, while policy uncertainty at the Fed creates additional reason for accommodation. Historical patterns suggest that when real economic stress builds alongside disinflationary trends, central banks ultimately cut rates more than initial forecasts suggest.

The outlook for 2026 may ultimately prove that, once again, interest rates have further room to decline beyond what most experts currently project. While the future remains inherently unpredictable, the convergence of economic challenges and monetary policy flexibility points toward a lower-rate environment for both borrowers and savers alike.