Jan 8 (Reuters) - The Federal Reserve will likely cut rates a little more to "address downside risks to the labor market" and then stop there, the Congressional Budget Office forecast on Thursday, with higher tariffs and increased demand from the Trump administration's tax cuts expected to keep inflation above the Fed's 2% target for the next several years.
Short-term borrowing costs, currently in the 3.5%-3.75% range, will likely be at 3.4% in the fourth quarter, and remain there through 2028, the CBO
said in its latest view of the economy.
U.S. unemployment, it forecast, will end this year at 4.6% and fall to 4.4% in 2028, and inflation by the Fed's targeted measure will ease to 2.7% this year and fall to 2.1% by 2028.
Economic growth will likely accelerate to 2.2% this year before dropping to 1.8% on average in 2027 and 2028, it said, with higher productivity from artificial intelligence and bolstered business spending from the tax cuts offset by slower labor force growth as immigration drops.
Overall it's a slightly more pessimistic view of the economy than that reflected in Fed policymakers' own projections, published mid-December.
The median U.S. central banker view is for slightly faster growth, lower unemployment, and a quicker drop in inflation towards the Fed's 2% goal, compared with CBO forecasts, combining to push the fed funds rate to an anticipated 3.4% this year and 3.1% next year.
The median Fed view, however, masks sharp divisions among central bankers over how much or even whether they should cut interest rates this year. Those divisions likely reflect disparate forecasts for how last year's tariff hikes and this year's tax cuts will ripple through the economy, as well as competing views on whether too-high inflation or too-weak employment is a bigger threat.
(Reporting by Ann Saphir; Editing by Chizu Nomiyama)
