December 12, 2025: Don’t Fight the Fed

The Federal Reserve voted on Wednesday, December 10th to lower its target for the federal funds rate to the range of 3.50% - 3.75% from the previous range of 3.75% - 4.00%. The rate cut was not unexpected, but many people want to know what is next for the Fed: will they continue to cut rates at a steady pace or will they slow down?

We actually have some insight into what 2026 will hold for interest rates. While 2025 had three rate cuts, the expectation is that 2026 will have only one rate cut under the current circumstances. If circumstances change, the Fed could opt for more or fewer rate cuts. I will spare you the charts and reports that support the belief that 2026 will likely have only one rate cut, but you should understand what the Fed tries to balance when determining interest rates.

The Federal Reserve has two mandates (the “dual mandate”) when it comes to it’s decision-making. The first mandate is to support maximum employment - if interest rates are too high, then the cost of doing business is too high and it becomes difficult to hire and pay employees. The second mandate is to maintain stable prices - the target inflation rate is 2%. Predictable prices make it easier for households and businesses to plan, save, and invest. The difficulty is balancing these two mandates since they can come into conflict.

People may become frustrated that interest rates are either too high or too low depending on their perspective. Ultimately, there is nothing you can do to influence interest rates, but you can still make informed decisions about your personal finances. Higher interest rates make large purchases (like a home or vehicle) more expensive so budgeting accordingly is key. Large purchases can be refinanced if interest rates fall, but don’t make this assumption critical to the outcome of your personal finances. Interest rates may not fall quickly (or at all).

From an investment perspective, people may be inclined to time the market when it comes to purchasing bonds. This is a tricky situation because we often have some (albeit transient) insight into what interest rates will do in the future. Even with expectations about future interest rates, investors can still be wrong about when and how much to invest to get the yield they want. Timing the bond market can be like trying to time the stock market - it is generally not recommended.

As always, the best strategy is to create your financial plan and to stay disciplined. Focus on what you can control and don’t let the headlines scare you into abandoning all the work you put into your plan.