We have revised the FRB-US baseline scenario to incorporate recent data on labor market developments and the implementation of the One Big Beautiful Bill (OBBB). Overall, the baseline has undergone only minor adjustments, as several provisions of the OBBB were already implicitly embedded in the model’s prior assumptions.
Updated baseline
OBBB Implementation and the Revised FRB-US Baseline
We have updated the FRB-US baseline scenario to incorporate the full implementation of the One Big Beautiful Bill (OBBB), aligning our fiscal projections with the Congressional Budget Office’s (CBO) estimated budgetary effects. It is important to emphasize that several OBBB policy components had already been partially embedded in the previous baseline—most notably, the assumption that tax cuts would be permanent. For example, in our January 2025 update, we noted: “The model forecast [for debt/GDP] is more pessimistic than CBO for two reasons: (i) taxes do not increase going forward in FRB-US, and (ii) the path of interest rates is higher in FRB-US than in CBO.” Consequently, the debt-to-GDP trajectory projected by FRB-US at that time was more adverse compared to CBO’s outlook. With the current update, however, the fiscal dynamics of the two projections have become more closely aligned.
In this revised baseline, we have synchronized the timing of policy implementation with OBBB’s stipulations, incorporated the reductions in government spending, and updated labor market indicators through the second quarter. (Readers may refer to the projected primary balance in the model at the provided link.)
Figure 1 illustrates the updated baseline projection (solid red line), the previous baseline (dashed red line), and two alternative scenarios featuring different average tariff rates: a higher rate of 25% (purple line) and a lower rate of 10% (green line). For reference, the baseline scenario assumes an average tariff rate of 15%.
As noted earlier, the net impact of this update is a modest negative drag on output growth, as evidenced by the comparison between the solid and dashed red lines. This limited effect arises because the expansionary components of the legislation had already been largely incorporated into the prior simulations.
Figure 2 presents the trajectories of selected financial variables that are consistent with both the revised baseline and the alternative tariff scenarios.
Overall, the model suggests that resolving the debt sustainability challenge through economic growth alone remains highly implausible. As emphasized in previous analyses, the FRB-US framework indicates that stabilizing the debt-to-GDP ratio is virtually unattainable without an increase in taxation.
Real GDP growth is projected to remain subdued in 2025, with the unemployment rate peaking at 4.6% before gradually declining. Meanwhile, core inflation is expected to persist above the Federal Reserve’s target throughout the forecast horizon.
The projected path of the federal funds rate under the revised baseline is nearly identical to that of the previous baseline for 2025, and only slightly more accommodative in 2026 and 2027.
Figure 1. Update FRB-US forecast – real-side variables.
Note: Real GDP growth and core inflation are expressed on a year-over-year basis. Core inflation refers to core PCE price inflation. The red solid line is the current baseline, the red dashed line is the previous baseline. The green and purple line are two scenarios assuming lower and higher tariff rates.
Figure 2. Update FRB-US forecast – financial variables.
The red solid line is the current baseline, the red dashed line is the previous baseline. The green and purple line are two scenarios assuming lower and higher tariff rates.