Fed to cut rates slightly this year, CBO forecasts

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)

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