I’ve noticed that many financial market participants tend to think of the Federal Reserve, the USA’s central bank, as an all-powerful entity that controls all aspects of the US financial markets. For example:
- A Reuters journalist wrote in November 2023: “If investors failed to heed the ‘don’t fight the Fed’ mantra this year, they should be doubly cautious about ignoring it again next year….betting against the Fed is risky, no matter where the economic or policy cycles are”
- Two journalists from Reuters commented in September 2024: “The Federal Reserve cut U.S. short-term borrowing costs on Wednesday… a lower policy rate should translate to cheaper borrowing costs for most kinds of loans”
- Howard Marks, who is the co-founder of the distressed debt investment firm Oaktree Capital and an investor I respect deeply, shared the following in a June 2025 podcast with The Motley Fool: “You go through these periods of time, like 2017, 18. I would go travel the country… and speak to audiences or clients even. I would get one question. What month will the Fed raise interest rates? That’s all they ask”
The quote from Marks is one of the best at showing just how important the Federal Reserve looks in the eyes of most financial market participants.
But when it comes to interest rates, the truth of the matter is that the Federal Reserve controls only one interest rate, which is the federal funds rate. The federal funds rate is the interest rate that banks charge each other for overnight loans.
Most types of loans that consumers and businesses interact with are not pegged to the federal funds rate. In addition, many types of corporate bonds and government bonds have interest rates that are set by market forces, not the Federal Reserve.
Figure 1 above shows the monthly percentage change for a few different interest rates over the past two years. There’s the federal funds rate, which is the blue line; there’s the interest rate for 1-year US Treasuries, which is the orange line; there is the interest rate for 10-year US Treasuries, which is the brown line; and lastly, there is the interest rate for 20-year US Treasuries, which is the red line. The monthly percentage change for these four different interest rates do not move in lock-step. In fact, in the green circle, all three Treasuries saw a monthly increase in their interest rates around October 2024 when the federal funds rate declined. This would not have happened if the Federal Reserve was all-powerful.
As for the stock market, the Federal Reserve’s impact on stocks is unclear, outside of severe crises where the central bank can play a role in stabilising asset prices – as it did during the 2008 financial crisis.
Table 1 shows a few time periods in the past where the interest rate on the 3-month Treasury bill had increased significantly. It’s important to note that the 3-month Treasury bill is a close proxy for the federal funds rate, so the time periods when the interest rate on the 3-month Treasury bill increased would also be times when the Federal Reserve had raised interest rates.
| Time period | Change in yield of 3-month Treasury bill | S&P 500 annualised return |
| 1954 – 1964 | 1.2% → 4.4% | 21% |
| 1960s | 4% → 8% | 7.7% |
| 1970s | 8% → 12% | 6% |
It turns out that the three time periods of rising interest rates actually saw the S&P 500 produce annualised returns ranging from a decent 6% to an outstanding 21%. So, there have been past episodes where US stocks have done well over the long run even when the Federal Reserve was raising the federal funds rate.
Table 2 shows a few dates in the past where the Federal Reserve had cut the federal funds rate and how US stocks performed over the next 12 months. It turns out that US stocks have done very well, as well as done very poorly, in the 12 months after the Federal Reserve had lowered interest rates.
| Date of Federal Reserve rate cut | Return of US stocks in the next 12-months after rate cut |
| October 1957 | 17% |
| October 1973 | -36% |
| February 1982 | 32% |
| September 2007 | -24% |
So the reality of the situation, when it comes to the Federal Reserve, is that it is far from being all-powerful. There are many aspects of the US financial markets where the central bank has little to no control.
This is also why I spend very little time thinking about or keeping track of what the Federal Reserve is doing when making investment decisions.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I don’t have a vested interest in any company mentioned. Holdings are subject to change at any time.