For business owners, interest rates affect more than just the cost of borrowing. Rates influence hiring decisions, capital investments, consumer demand and overall business planning. At the beginning of 2026, uncertainty around the path forward for interest rates is making it difficult for businesses to plan ahead.

Let’s look at the factors that could influence rates over the next 12 months, and where we expect them to go from here.

Short-Term vs. Long-Term Rates

Short-term interest rates are set by the Federal Reserve based on expectations for employment and inflation. A common line of thinking is that if short-term interest rates move lower, long-term interest rates will follow. Recent data shows, however, that is not always the case.

In September 2024, the Fed funds rate was 5.5% and the 10-year U.S. Treasury bond rate was 3.65%. As of the time of this writing in late 2025, the Fed funds rate is 3.75% and the 10-year U.S. Treasury bond rate is 4.15%. Instead of decreasing along with the Fed funds rate as one might expect, the long-term rate has instead gone up. Why has this happened? In short, this is the market’s response when it does not fully agree with the actions of the Fed.

The Fed has stated that its actions are “data dependent,” and the data currently occupying the top spot on the Fed’s agenda is job creation. The market, meanwhile, appears to believe that inflation and its impacts may not be contained and remain an elevated threat. Why? First, we’d point to years of significant federal government deficit spending. This adds to economic demand, which results in prospective upward price pressures. It also adds to increased U.S. Treasury bond issuance and creates more supply than investors have an appetite for, while crowding out other potential bond issuers.

Two other reasons why inflation may continue to be a risk in 2026: Artificial intelligence (AI) investment spending appears to remain strong and continues to have related impacts on building and power consumption. Additionally, the Fed’s monetary policy may provide more economic stimulus at a time when inflation is already elevated.

Consumer Challenges

We expect gross domestic product (GDP) to grow 2.5% in 2026. Various business segments will have better growth prospects while others will be more muted. Research from Moody’s Analytics suggests that up to 50% of current consumer spending comes from the top 10% of wage earners. If that is the case, then 90% of consumers may be nearing their limits for increased purchases and may be constrained when it comes to their buying power. This could have implications for businesses in consumer discretionary sectors.

If job creation is a matter of demand, the recent reduction in immigration combined with a declining U.S. birth rate suggests that fewer new jobs are needed than in the past. Economists debate the level of new job creation needed for the country going forward, with some estimates consolidating between 0 and 20,000 new jobs per month, while some even suggest a monthly decline. We suspect there is some near-term influence from the prospect of implementing AI, but that may be premature.

2026 Estimates

Our estimate for the Fed funds rate for the course of 2026 is a range of 3.25% to 3.5%. This estimate assumes Fed independence without undue influence from politics. Inflation as measured by the consumer price index could see some decline, as oil prices have moderated and new monthly rent prices appear to be declining. This could result in inflation moving to the 2.5% to 2.75% range.

Within the Fed funds rate and inflation ranges, we expect the 10-year Treasury bond yield to be in the range of 4% to 4.5%. We’d add a note of caution here surrounding continued federal deficit spending and elevated U.S. Treasury bond issuance, which may influence higher longer-term interest rates.

In summary, the yield curve looks to be normally sloped throughout most of 2026. In other words, short-term interest rates will likely be lower than long-term interest rates for the year ahead. Fixed 30-year mortgage rates use the 10-year Treasury as the base level, so we anticipate 30-year mortgages to be in the range of 5.75% to 6.5%, with the lower range being possible if mortgage bond demand increases.

Looking Ahead

With uncertainty likely to continue, it’s important to work closely with your Bell banker to understand how interest rate changes can impact your business’s financing decisions in 2026. Your banker can help you review your options and make informed decisions about borrowing, spending and investing for the year ahead.