Hey everyone! Before I begin I want to mention I am an advisor but I'm not your advisor. None of what I say is individual financial advice specific to you and your financial situation.
TLDR: The Fed controls one overnight rate. It influences everything else but controls none of it. Match your bond duration to your time horizon, lock in cash you'll need soon, ignore the FOMC livestream, and stop letting one variable out of dozens drive your decisions.
Tomorrow afternoon the Fed will likely announce their decision to hold steady what is called the federal funds rate. The amount of questions I get from people about what they should change based on what the Fed does is staggering so I figured I'd get in front of some of that in a post like this. I'm hoping this is helpful to you and I'm happy to answer questions in the comments.
Let's start with what the Fed actually controls. It is one specific rate. The federal funds rate (currently 3.50–3.75%). They don't set your mortgage, your HYSA, your bond fund, or the 10-year treasury. They influence all of those but they control none of them.
One thing I hear constantly is "Fed cuts = stocks rip." Across ~13 rate-cut cycles since 1973, the S&P averaged 4.9% one year after the first cut. But 1973, 1981, 2001, and 2007 were all double-digit declines. 1982 was up 36%. It was the same Fed action with wildly different outcomes. Generally the reason for the cut matters more than the cut itself. And it's all priced in by the time Powell stands up in front of the cameras anyway.
Where rates actually matter:
- Bonds. 2022 was a little crazy. The US aggregate index was down ~13%, which was the worst year in 40+. But if you held, coupons kept paying and maturities reinvested higher. Try to match bond duration to your time horizon.
- Cash, T-bills, CDs. The boring stuff is paying real money for the first time since the GFC. That probably doesn't last past this year. If you have known spending in the next 1-5 years, locking in today's rates is duration matching, not market timing.
- Sequence of returns risk if you're withdrawing. Your fixed income is the bridge that funds spending in bad equity years. Don't reach for yield in junk or long duration to juice it. That's not where you swing for the fences for extra return.
Generally what I would tell a rando on the street is to stop watching FOMC live. I would check your bond duration and credit quality. Try to lock in cash you'll need soon and DO NOT abandon equities just because rates moved. Be suspicious of any product pitched specifically because of "the rate environment" like annuities, structured notes, or private credit. If it only makes sense in one rate regime, it likely doesn't make sense in your financial plan.
The Fed is one variable out of dozens, and it's one you can't predict or outmaneuver. The only thing you control is whether your plan can absorb whatever they decide to do.
Build your financial plan, stress test your financial plan, and then go live your life.