Don’t Freak Out About Fed Rates
For the last couple of weeks I’ve told some stories about advisors that try to rush people through the process. We should call those types of professionals salesmen because advice puts the client first while sales looks for the quick score. Any number of strategies exist to get you to take the bait. I expose as many as possible so you all can see an easier path to a solid retirement. Interest rates have been a hot topic for the past few years. Increases have created better long term planning opportunities and to be honest, it has been a lot of fun getting good deals for people.
Rates really topped out late in 2022 and at the time most people were telling me that they expected rates to go even higher. It didn’t happen because the fundamentals didn’t suggest it was going to happen. Most people judge things emotionally but the market is a tricky thing to interpret. Fed actions have been the source of speculation about where interest rates go with some type of fear surrounding the decision making process for a lot of people. “If the Fed cuts rates then we won’t have good annuity deals… we had better act fast!”
Every time I say this it seems as though I shouldn’t have to say it again but you’re going to have to hear it one more time and this probably isn’t the last. The Federal Reserve only sets the overnight lending rate to banks and that has no effect on the market rates available for the safe assets that form the bedrock of a retirement plan. Sure, economic changes from Fed actions can affect rates eventually but it doesn’t happen as fast as people think. In short, don’t get in a hurry just because there’s a little media frenzy over Fed movements.
There is no simple explanation available for changes in rates you care about. Inflation, unemployment, business cycles, international conflict, trade wars or policy changes etc. can all influence the rates you receive when you lend money. Yes, that’s right, when buying products for retirement you are lending money to someone. One of the simplest ways to explain how rates change can come from the most basic lesson in economics: supply and demand. When there is less demand for safe assets, rates rise to make it more enticing. When everyone wants to flood toward safe money, then rates fall because there is so much money chasing it.
Think back to 2020 when Covid lockdowns started. Business came to a halt so expectations were for a pullback in the market. Nobody wanted risk for a while and a lot of people started dumping stocks. With money flowing heavily toward cash and treasuries, interest rates cratered to the lowest levels we’ve ever seen. Cheap money led to business expansion and another real estate bubble but it took a while because the economy didn’t fully open up for about a year. When things started, the economy ripped wide open and we got serious inflation out of it. The Fed didn’t even start raising rates until the middle of 2022 and it took more than a year for them to reach the highest point of this time period.
Before rates were increased in 2022 we already had solid annuity rates because there was less demand for safe assets. Risk was on and everybody was addicted to larger returns in speculative assets. This is obviously an amateur view of everything but it’s got more juice behind it than you’d get from just basing your expectations on the Fed. Annuity rates have not correlated with the Federal Funds rate at all and in many cases were well ahead of Fed changes. We actually had lower annuity rates in early 2024 while the Fed was still increasing the overnight lending rate. Try to explain that. There’s more to it than just a single variable.
Lower Fed rates are meant to spur economic growth. The Reserve chairman is supposed to make decisions free of political influence but unfortunately that’s not the case. Politics are such a big part of it that I don’t know what to believe. Now analysts are saying that inflation isn’t a problem and the economy has not been as good as we thought. Unemployment numbers for the past year were just adjusted down so they apparently haven’t been accurate. Were they telling us the truth then or are they being honest now? I vote neither because my cynical mind believes there are factors involved that will never be made public.
If lower rates will help improve an economy that wasn’t as good as reported then it should normalize the overall business climate. If they go overboard to lower rates then we’ll get more inflation and annuity rates will still be strong. If they do things right then we’ll have a healthy economy. Most people don’t accept the fact that we are at a historically stable level of interest rates. If things work out like they should then we’ll end up with what we have now. If they economy is really in trouble, expect annuity rates to fall. If the Fed goes too far annuity rates will rise.
Since the decision to cut rates last week, treasuries have actually risen a bit but they fell before that. Bonds initially dropped by a small fraction and there is otherwise no change. The market is trying to figure out what’s going to happen so really adjustments will take some time. You should never be in a hurry to make long term planning decisions. Forget about what the Fed does when deciding where to put retirement assets. Better indicators to watch are treasury yields and aggregate bond prices of various maturity terms. If anyone tells you otherwise then they haven’t put real thought into it and are just playing on your fears to sell you something quickly. That’s a salesman, not an advisor.
Get on my calendar if you want to have an adult conversation about it.
Have a great weekend!
Bryan
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Last Updated on September 26, 2025 by Bryan Anderson
