The views presented here do not necessarily represent those of Advisor Perspectives.
Advisors should be wary of centering their long-term investment strategies around the Fed’s latest moves, even if markets may swing in response to a hike or cut in interest rates.
“Investors have left a lot of money on the table by mistiming their purchases and sales based on their tactical views,” said Dan Lefkovitz, a strategist for Morningstar Indexes. “Investing for the long term and not making tactical bets tends to work better,” rather than trying to invest based on the Federal Reserve’s near-term interest rate calls, Lefkovitz shared in a Nov. 21 phone interview with Advisor Perspectives.
“It’s critical to remember that the Fed only controls short-term interest rates, and longer term rates for mortgages and general borrowing rates are set by the market,” Lefkovitz added.
“Interest rates are just one variable of many that are affecting asset prices. In recent years, we’ve seen many instances where asset prices moved in an unexpected direction based on interest rates,” Lefkovitz said, pointing to 2024 recession fears.
Fed Watch This December
On Nov. 21, New York Fed President John Williams suggested there could be a rate cut at the Federal Open Market Committee (FOMC) December 9-10 meeting.
At the Central Bank of Chile Centennial Conference, Williams said: “I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions. Therefore, I still see room for a further adjustment in the near term.”
Morningstar’s Lefkovitz shared that the “FOMC meeting in December is interesting,” as there has been “a lot of mixed signals” in prior months about where rates were headed. Days after Williams’ public remarks, analysts adjusted their outlooks, noting they expected a 25-basis-point rate cut by the Fed in December.
Lefkovitz wrote about the challenges of trying to predict interest rates in a Morningstar report published in September.
“Interest rates are hard to forecast. As Exhibit A, I present 2024. The market was, at one point, expecting seven rate cuts by the Federal Reserve for the year. Debate raged over whether the US economy was heading for a ‘hard’ or ‘soft’ landing. But consensus was wrong. The economy remained airborne, and the Fed cut three times,” he wrote.
“As if forecasting rates weren’t hard enough, betting on the implications of rate moves ratchets up the degree of difficulty. I’m not saying rates don’t matter. I just think investment performance is driven by a complex interplay of variables—macro and micro, technical and fundamental, foreign and domestic,” Lefkovitz wrote.
Other Pressures To Consider
Regarding investment decisions, Lefkovitz notes that there’s a big temptation for investors and advisors to make bets on interest rates.
“Maybe you want to play the yield curve and go long on bonds, if the rates are going to get cut. Or maybe you bet on small-cap stocks or emerging markets, because there are rules of thumb that falling interest rates are good for (those asset classes) and dividend paying stocks,” he said.
For individuals investing for their retirement income, he notes that there are many pressures beyond interest rates to consider, including deficits, debt, the weaker dollar and inflation.
“There’s also a chance that interest rates will stay higher for longer,” Lefkovitz said.
“Things have gotten better over the past couple of years for fixed income investors. The overall yield on the U.S. stock market has come down, and it’s hard out there for dividend investors. There’s above-inflation yields to be had out there for fixed income investors.”
Bond Bright Spot
The Morningstar US Core Bond Index has shown that investment grade bond funds had a very strong 2025, Lefkovitz noted.
“Returns have been 6.8% this year (through Nov. 20) for this bond index,” he shared. “These bonds had a strong year even when the Fed last raised rates. Bonds have been a perfectly good investment for the past couple of years now. (For the same period) the yield was 4.4% on the US core bond index. That’s a really decent yield for higher quality bonds,” Lefkovitz said.
In his September report, Lefkovitz also discussed the relationship between bond prices and interest rates — noting it’s “more nuanced” than rising rates being “bad for bonds and vice versa.”
“Remember that the Fed only sets overnight lending rates between banks, what’s known as the federal-funds rate. Longer-term interest rates are determined by the market. It’s true that when yields on bonds rise, older bonds tend to fall in price. That’s exactly what happened in 2022, when the Morningstar US Core Bond Index dropped 13% as the Fed hiked seven times by more than 4 percentage points to combat inflation. But rates rarely move that far that fast,” Lefkovitz wrote.
“Central banks only have so much influence over borrowing costs, and the Fed’s impact on bond prices isn’t straightforward,” he added.
Danielle Walker is a freelance journalist with 15 years of business reporting experience. She previously worked at Business Insider and Pensions & Investments, among other business publications. Her work has been published in the Financial Times, Barron’s and Chief Investment Officer. Danielle is currently based in Norfolk, Virginia.
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The views presented here do not necessarily represent those of Advisor Perspectives.
