Looking ahead, current Federal Reserve forecasts project only one more 0.25% rate cut in 2026 and a final 0.25% cut in 2027. In contrast, CME fed fund futures anticipate two rate cuts in 2026, with the first likely at the March or April FOMC meeting.

Long-term interest rates, as measured by the 10-year U.S. Treasury, have a strong correlation with the federal funds rate. As a result, long-term interest rates are likely to remain higher until economic risks to the outlook clear and/or the Fed resumes interest rate cuts in the second half of the year.

The fed funds rate has likely peaked, but the full economic impact of higher interest rates won’t be fully realized for at least 18 months.

Recent banking stress already includes reduced lending from commercial and community banks. With deposits being drawn down, it will be difficult for banks to lend aggressively in this environment, creating a significant headwind to economic growth.