@MorningstarInc Projects Fed Funds at 2.50%-2.75% by End of 2028; Terminal Rate Forecast Is 175bp Below Market Expectations
The path to get there: one more hike through end of 2026, then two cuts in the second half of 2027, then four more cuts in 2028 as unemployment averages 4.7% that year, above consensus projections of 4.2%. The 10-year Treasury yield is projected to average 3.5% by 2029, down from 5.3% as of early October 2026.
Why? The oil shock from the Iran war contributes "around 0.8 percentage points to inflation in 2026." As that fades, PCE inflation is forecast to fall from 3.4% in 2026 to 2.5% in 2027, 2.1% in 2028, and 2.0% in 2029. GDP growth slows through 2028 as the AI boost fades, then rebounds in 2029-2030.
Morningstar's stated view is that "the market's terminal rate is much too high, reflecting an overestimation of the natural rate of interest."
The path to get there: one more hike through end of 2026, then two cuts in the second half of 2027, then four more cuts in 2028 as unemployment averages 4.7% that year, above consensus projections of 4.2%. The 10-year Treasury yield is projected to average 3.5% by 2029, down from 5.3% as of early October 2026.
Why? The oil shock from the Iran war contributes "around 0.8 percentage points to inflation in 2026." As that fades, PCE inflation is forecast to fall from 3.4% in 2026 to 2.5% in 2027, 2.1% in 2028, and 2.0% in 2029. GDP growth slows through 2028 as the AI boost fades, then rebounds in 2029-2030.
Morningstar's stated view is that "the market's terminal rate is much too high, reflecting an overestimation of the natural rate of interest."