Learn how to make rational financial decisions in volatile interest rate environments and align your strategy with your specific goals for optimal outcomes.
Interest rates tend to be framed as either good or bad. Too high is bad. Too low is good. Borrow if rates fall. Save if they rise. Real life, unfortunately, is not that simple.
Interest rates are neither villains nor heroes. They’re simply tools and market indicators. Depending on your goals, timeline, and current position, the same rate environment can be a burden for one person and an opportunity for another. The mistake I see most often is reacting emotionally to rate changes instead of evaluating how they actually affect your specific situation.
Rational decision-making requires looking beyond headlines and asking a more useful question: How do current interest rates interact with what you’re trying to accomplish, both now and in the future?
The Federal Reserve has a difficult mandate. It is tasked with maintaining maximum employment, stable prices, and moderate long-term interest rates. Those goals often pull in different directions.
In December 2025, the Fed implemented its third and final quarter-point rate cut of the year. The decision was not unanimous. Chair Jerome Powell pointed to a slowing job market as a major factor, while other committee members expressed concern that cutting rates could reignite inflation.
This tension is always present. Lower rates can support employment, but risk higher prices. Higher rates can cool inflation but slow economic growth. Holding rates too high for too long carries its own risk, particularly once unemployment begins to rise, which can be hard to reverse.
While the full effects of elevated rates may not be fully realized yet, I do not believe we are headed for a significant economic downturn. Many analysts and strategists share that view. What matters most is understanding that rate policy is reactive, not predictive. The Fed responds to economic conditions. It does not control them perfectly.
It’s tempting to assume lower interest rates are always better, but history tells a different story. Very low rates often coincide with economic stress. The 2008 financial crisis and the height of COVID lockdowns both featured extremely low rates. Borrowing was cheap, but those periods were defined by job losses, uncertainty, and contraction.
On the other hand, high interest rates usually signal strong demand and inflation. That environment can reward savers through higher yields on money market accounts and certificates of deposit. At the same time, however, it increases the cost of borrowing and places pressure on businesses and households that rely on credit.
We are in unprecedented territory right now. The rapid drop in rates during COVID was followed by a surge in inflation that has been stubbornly persistent. This has made the current environment harder to interpret using historical patterns alone.
Caption: Cuts to federal interest rates can stimulate the economy, which in turn can accelerate inflation. | Photo by Markus Winkler
Not necessarily. The federal funds rate influences borrowing costs indirectly. Mortgage rates, for example, are shaped by investor demand, housing market conditions, inflation expectations, and overall sentiment. While interest rates on loans often move in the same direction as the Fed rate, they do not do so in lockstep.
Throughout 2025, mortgage rates fluctuated up and down despite rate cuts. They didn’t always fall proportionately with cuts; for example, 30-year mortgage rates actually increased slightly after the Fed’s second rate cut in mid-September, and continued to move up and down throughout the following months. These shifts reflected broader market forces and uncertainty.
In theory, higher short-term rates should eventually slow lending and bring mortgage rates down over time, because banks won’t lend as much. In practice, sentiment and risk perception play a significant role.
Rising national debt also matters. If investors begin to question the government’s ability to meet its obligations, lenders may demand higher rates to compensate for perceived risk. This can push borrowing costs higher even when the Fed is easing policy.
Interest rates create opportunities, but only if they align with your timeline. Over the past year, money market accounts offered yields of around 4- 4.5%. Those rates have now drifted closer to the 3.5-3.75% range. That yield is still attractive, but likely to continue adjusting downward if rates fall further.
If you have money you won’t need for a few years, it can make sense to lock in intermediate-term CDs or bonds rather than riding declining short-term rates. On the other hand, if you expect to use those funds soon, tying them up for the sake of a slightly higher yield can create unnecessary penalties and friction. Ensure that your investment decisions align with what you're trying to accomplish.
The same principle applies across your financial life. Match the tool to the goal. High rates reward patience and planning. Low rates reward flexibility and access to capital. Neither is inherently better.
One note of caution, however. Inflation-protected securities like inflation-protected treasury bonds (TIPS) tend to be most effective when inflation is rising. With the Fed actively trying to suppress inflation, these instruments may not deliver the benefits people expect right now.
Context matters more than timing. If you plan to buy a home in the near future and rates are elevated, waiting can make sense if you have flexibility. As borrowing slows, conditions often cool. That can improve affordability. At the same time, life doesn’t pause for perfect conditions. If you’re ready to buy a home, return to school, or make a necessary purchase now, delaying solely because of interest rates may not be the best option.
For business owners and real estate investors, higher rates raise the stakes. Returns must justify the added cost of capital, and contingency planning becomes essential. If you are thinking of taking out a loan to start or grow a business or invest in real estate, make sure to do due diligence and ensure there is a high potential to make your money back. High interest rates often signal strong spending, but it can be a double-edged sword, as the risk to borrowers is also higher if something goes wrong.
Interest rates will continue to fluctuate. That is a feature of the system, not a flaw. Making rational decisions in an uncertain rate environment can feel difficult, but it’s possible to align your strategy. The goal is to understand how different rate environments affect your specific objectives and to build a strategy that remains sound across multiple scenarios. Resilience and flexibility are paramount in times of volatility.
At PFW Advisors, we help clients step back from the noise and evaluate decisions through a rational framework. If you want help navigating high inflation, volatile rates, and the tradeoffs they create, the most important step is clarity. When your goals are clear, interest rates become information rather than anxiety.
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