Muni growth predicted despite Fed shakeup

The Bond Buyer's 2026 Predictions Report

The state of the muni industry for 2026

Key takeaway: At least 65% of all respondents predict growth within their organizations and across the industry.

Municipal finance experts are optimistic that the U.S. economy, domestic muni industry and even their businesses are all on the road to growth in 2026.

More than half (65%) of respondents predict some degree of growth in the U.S. economy this year, while 5% expect no change and 30% predict varying degrees of contraction.

When asked how the municipal finance industry will perform over the coming months, 72% of municipal finance professionals say the sector will grow to some degree across the next several months. About 14% say there will be neither growth nor contraction in 2026 and 15% expect contraction.

When asked specifically about their business, 68% of respondents said they anticipate growth at some level this year. Roughly 24% expect business performance to remain unchanged and 8% forecast a degree of contraction.

These findings are a notable improvement from results found in The Bond Buyer's 2025 Infrastructure Report, wherein respondents were downcast about resilient investments, the potential demise of FEMA, funding losses and other market factors heading into 2026.

These worries didn't seem to impact muni industry performance in 2025, however, as bond insurance was up 4% year-over-year and the education and healthcare sectors saw sizable growth, at 33.8% and 26.2% respectively.

In an opinion article for The Bond Buyer, Bo Daniels, former chair of the MSRB's board of directors, explained that while "record issuance and trade volume are certainly positives for the industry," a fluid regulatory environment means there's still work to be done.

"Going forward, we are facing a changing regulatory environment, an altered work landscape post COVID-19, the growth of AI and algorithmic trading and shifting market dynamics," Daniels said.

Which municipal finance trends will come true, and which won't?

Key takeaway: Interest rate cuts are a highly certain trend for 2026.

The industry is keeping a close eye on the Federal Reserve's interest rate stance in 2026, as forecasts suggest decreases.

Municipal finance professionals are quite certain (83%) of continued interest rate decreases by the Federal Reserve Board, while only 17% believe this trend won't come to pass this year.

The next most likely scenario is continued inflation in the U.S., with 75% saying the trend will definitely or probably happen and 25% saying it won't.

Other trends likely to be realized include an economic recession (52%), the bursting of an "AI bubble" (51%) and global recession (51%). Stagflation in the U.S. economy was the only scenario where the share of doubters (52%) outweighed those predicting it would happen (48%).

The announcement of former Federal Reserve Gov. Kevin Warsh as the choice to succeed outgoing Fed Chair Jerome Powell has generated a fair amount of skepticism from the industry, as change of any degree means reconfiguring expectations for the path of the central bank.

Mark Malek, CIO at Siebert Financial, told The Bond Buyer there will be uncertainty at the start of Warsh's tenure, "and markets hate uncertainty far more than they hate high rates, low rates, or even bad data."

"When regimes change, multiples wobble [and] when narratives change, positioning gets sloppy," Malek said.

Where will the Effective Federal Funds Rate end 2026 at?

Key takeaway: The majority of respondents predict the EFFR to land between 3.0% and 3.67% at the end of the year.

Experts aren't predicting a rate cut from the Fed before midyear, as the central bank held rates steady in January following three successive cuts late last year. But that doesn't mean board governors won't change course before the year is out.

Municipal finance respondents predict that the effective federal funds rate could finish 2026 anywhere from as low as 2.75% to as high as 4.25%. The first quartile of respondents hovered around 3%, while the third quartile was around 3.67%. The median for responses was 3.37%.

All eyes are on inflation levels and labor market volatility as key indicators as to whether the Fed will seek to cut its benchmark interest rate in the months to come.

James Ragan, co-chief investment officer and director of investment management and research for D.A. Davidson, told The Bond Buyer that his forecast calls for two quarter-point cuts this year.

Strong gross domestic product could skew outlooks slightly, but "over time we are comfortable with a fed funds target of 3% to 3.25%," Ragan said. "This is dependent upon core inflation moving below 2.50% for a few months, which might be difficult if GDP growth exceeds expectations." 

Will issuance volume shock muni pros?

Key takeaway: Municipal finance professionals see issuance volume increases as a trend that could surprise.

From volume increases to interest rate volatility, here are the trends muni pros think could take the industry by surprise.

The trend that the greatest share of respondents (19%) expect could surprise the markets is issuance volume will increase in 2026, followed by interest rate increases (12%), federal budget cuts impacting munis (8%) and threats to tax exemptions (8%).

Other top scenarios that could surprise municipal finance professionals include interest rate decreases (7%), credit rating downgrades (7%) and issues with debt in the U.S. economy (4%).

Last year was a record year for supply, as issuance exceeded $580 billion on the back of infrastructure upgrades, tax-exemption fears and a pipeline of megadeals.

Jeff Lipton, municipal market intelligence analyst for The Bond Buyer, predicts the volume total for 2026 could range from $570 billion to $590 billion. This forecast is driven in part by "infrastructure motivations" and market expectations for a "broader application of P3 involvement fueled by natural disasters, aging infrastructure, traffic growth and competition."

If greater economic weakness than expected is realized, with associated declines in revenue, it could impact volume, Lipton added. 

"I expect policy-driven volatility to be tempered in 2026 ahead of the November mid-terms, and so I would anticipate issuance to be more front-loaded in the first half of the year," he said.