You, Your Financial Plan and the Federal Reserve

The Federal Reserve is currently maintaining the federal funds rate target range at 4.25% to 4.50%, having made the decision to keep the rate steady for the fourth consecutive session at their June 2025 meeting. The Fed last lowered the rate in December 2024 although it was speculated at a few different points since then that the Fed would be lowering the rates by this point.

The Fed’s actions are not always predictable, however, and this is due to the unpredictability of various economic measures. The Fed must walk a tight line in balancing the desire for growth but not at the expense of increasing inflation due to too much growth. Ideally, the Fed strives for a smooth economy without creating shocks to the system.   The Fed’s goal is to achieve maximum employment and price stability.

What do future rate changes mean to your financial well-being? Is there anything you should do to your investment portfolio in response? We typically recommend you remain informed – but you act only on factors you can expect to manage within your personal investing and overall financial plan. This is nearly always the case for economic events and other breaking news over which we have no control.

In that context, let’s take a moment to share some insights about the Federal Reserve funds rate.

What Is the Federal Reserve? 

As described on its consumer education site, the Federal Reserve is the central bank of the U.S. It was created by Congress as an independent government agency in 1913 “to provide the nation with a safer, more flexible, and more stable monetary and financial system.”

Jerome Powell is its current board of governors’ chair. He and his board are based in Washington, DC. They also oversee 12 regional reserve branches across the country and are tasked with three main roles:

1. Monetary Policy – Promoting “maximum employment, stable prices and moderate long-term interest rates”
2. Supervision and Regulation – Overseeing U.S. banks and gathering information to understand financial industry trends
3. Financial Services – Serving as a bank for U.S. banks as well as for the country’s monetary operations – issuing currency, managing the government’s bank accounts, borrowing money in the form of U.S. Savings bonds and more

 What Is Going On? 

While you wouldn’t want to run a country without all three of these roles in place, monetary policy is where much of the headline-grabbing action is found. The Fed continuously grapples with when, by how much, and how often it should change the federal funds rate.

The Federal Reserve sets monetary policy through its Federal Open Market Committee (FOMC), which includes the Fed’s board members and a rotating representation of Reserve Bank presidents.

The FOMC holds eight regularly scheduled annual meetings to consider what actions to take – if any. In the days before those meetings, the financial press often reports on expected outcomes as if they were nearly a done deal. Markets often respond accordingly, pricing in whatever is most expected to happen before it actually does. In reality, nobody knows for sure what the outcomes will really be until those meetings have taken place. If the outcome is a surprise, market volatility may result, as prices adjust to the latest expectations.

While the FOMC has a number of ways to seek balance among the competing demands of the economy, raising or lowering the federal funds rate has long been one of its more powerful management tools. So, it’s no wonder the question can grab everyone’s attention whenever the FOMC is set to meet. It’s also no wonder that investors are bombarded with the usual volume of conflicting coverage on what is and is not at stake, and what may or may not come to pass. Depending on who you heed, lower or higher federal funds rates can be anything from a panacea, to a global scourge, to a non-event in the markets.

What Does All This Mean to You and Your Money?

First, it helps to understand that there is an intricate interplay between nations’ monetary policies, global interest rates and the markets in general. Anyone who claims to know exactly what will happen in one arena when we pull a lever in another had best be able to present a functioning crystal ball to be believed. Yet should you want to review a good site for Fed funds rate predictions, see Fed Funds Rate Predictions.

There is not an exact correlation in terms of amount and timing between the Fed funds rate and the money market rates and there is even less of a correlation between the Fud Funds rate and the longer-term rates like mortgage rates. For a review of this correlation and to see some pretty graphs, check out this Fed article on Fed Funds Rate and Other Interest Rates.

Why is there often a disconnect? It’s partly the result of those multiple global factors at play, with the Fed’s actions representing only one among many others. It is also important to remember that the markets – both interest rates and stock markets – often move in anticipation of what the Fed actions may do, and they may then adjust if the Fed actions were a surprise from the anticipated.

What Should You Do?  

Whenever you’re wondering how best to respond to a shifting landscape such as that wrought by falling (or rising) interest rates, begin by asking yourself: What can I do about it? 

Unless you are Fed chair Jerome Powell, there is probably nothing you can do to personally influence what the Fed’s decisions will be, or how the global markets are going to respond to them. But there is plenty you can do to help or harm your own wealth interests.

First, if you already have a solid financial plan in place, we do not recommend abandoning it in a rash reaction to unfolding news. If, on the other hand, you do not yet have a well-built plan and portfolio to guide the way, what are you waiting for? Personalized financial planning is a good idea in all environments.

Next, recognize that rising or falling interest rates can impact many facets of your wealth: saving, investing, spending, and debt. If money market rates continue to come down, reviewing the amount of your cash position will continue to be important. If you have too much in cash and don’t need the money for emergency needs or short-term operating expenses but will need this money in the mid- or long-term, purchasing longer term fixed instruments may be a practical solution.   As our clients know, we generally adhere to the concept of matching our clients’ portfolios with their withdrawal needs.

Related to that, reviewing the duration of your bonds may be appropriate. Do you have the right mix of short-term, mid-term, and long-term bonds for your situation?  Taking advantage of the current long-term interest rates may be advantageous at this time, but you need to review this with your advisor as it relates to your overall plan. Again, while some speculate that longer-term rates may eventually begin to trickle down a bit, there is no crystal ball out there that can predict long-term rates with precision.

Reviewing the mix of stocks and equities may also be wise considering potential changes in interest rates. The level of current and future interest rates may guide you in making that decision, but your overall target mix of stocks and bonds and how that target ties to your overall financial plan and withdrawals needs should be a primary factor in helping you and your advisor make decisions.

Deciding when to pay down debt or take on more debt could also be impacted by the interplay of the interest rates.  As noted above, the Fed funds rate may impact mortgage rates, but there is not a direct correlation and at times the rates may move in opposite directions. (See The Fed and Mortgage Rates for a brief overview.)  Since December 2024, while the Fed funds rate has decreased, the mortgage rates have generally trickled back up.  Nevertheless, having a sense of where interest rates are now compared to historical and future terms could be helpful in making financial decisions. Yet again, these decisions should be made in context of your overall plan and goals.

The interest rates in the marketplace may also impact one’s decision regarding their options of extracting value from their pension – should you annuitize the pension (i.e., take the fixed amount for your lifetime) or take a lump sum amount and roll that over to your IRA? Careful analysis is needed, and this can even impact one’s retirement decisions.

Together and through varied interest rate climates, we can help put these and many other worldwide events into the context they deserve, so you can make informed judgments about what they mean to your own interests. The goal is to establish practical ways to manage your debt; wise ways to save and invest; and sensible ways to spend, before and in retirement.

These are the factors that matter the most in your life, and over which you can exercise the most control – for better or for worse. For our clients, we will continue to review your overall plan to guide you. Should you need to engage a financial planner to help with your overall goals and financial plan, feel free to reach out to us at Oasis Wealth to schedule a call.