Does The Federal Reserve Rate Affect Annuity Rates?

The so-called "Fed Rate" (The Federal Funds Rate) gets a lot of publicity. People regularly call us asking how changes in the Fed Rate will impact annuity rates, specifically immediate annuity rates and deferred income annuity rates.

While we don't suggest that you try to "time the market"—which is notoriously hard—we want to give you an idea of what exactly drives annuity rates, and how the Fed Rate plays into the overall mechanics. In this article we're going to discuss:

• What impacts annuity rates
• How broader interest rates influence annuity pricing
• How waiting for Fed Rate changes might play out for you

What Impacts Annuity Rates?

If you're trying to maximize your annuity income, you probably want to know what makes annuity rates rise and fall. While we have an article detailing annuity trends, we're going to quickly break it down for you here.

To understand why annuity rates change, you need to understand how insurance companies invest. A typical insurance company’s investment portfolio looks something like this:

• Bonds: ~60%
• Stocks: ~15% or less
• Mortgages: ~10%
• Cash: ~6%
• Other investments: ~ 9%

Insurers are experts at mitigating risk: that's their business. Since annuity contracts tend to be long-term contracts, especially income annuity contracts which can last your lifetime, income annuity rates are typically based on long-term, highly rated bond yields.

We find a strong correlation between Moody's Aaa Corporate Bonds with maturities of 20 years or more and income annuity rates.

The chart below shows payout rates for Life with 10 Years Certain annuities and these types of bonds.

The above chart shows the strong relationship between income annuity rates for a 65 year-old Single Life with 10 Years Certain Annuity and Moody's Aaa Corporate Bond Rates with Yields 20 Years or Longer.

How the Fed Rate Affects Annuity Rates (and How It Doesn’t)

You may hear about the Fed declaring rate changes, and wonder if it will impact annuity payouts. The short answer is: not necessarily.

There are several reasons the Fed Rate doesn't directly impact annuity rates:

• Fed Rate is short-term (overnight); annuity rates are long-term (years, decades)
• The Fed Rate's main focus is managing inflation and economic risk, not setting rates for insurance or other financial products
• Fed Rates influence overnight lending practices between banks; annuity rates are commercial market rates

That being said, the Fed Rate is very important (see this overview) and can have indirect, long-term effects on annuity rates such as influencing overall market interest rate trends.

If you look at the chart below you'll notice that annuity rates tend to follow the general trend of the Fed Rate, but there's a lot more variation in annuity rates. Annuity rates may lag behind changes in the Fed Rate or be muted by other factors in the economic environment.

The above chart shows the strong relationship between income annuity rates for a 65-year-old Single Life with 10 Years Certain Annuity and the target Federal Reserve Rate (ticker: DFEDTARU).

In short, don't be surprised if annuity rates don't directly follow Fed Rate changes, it's not a guarantee.

Why Doesn't The Fed Rate Directly Impact Annuity Rates?

Since annuity rates are closely related to long-term corporate bond rates, we should determine if there is a relationship between these bond rates and the Fed Rate.

The above chart shows the strong relationship between Moody's Aaa Corporate Bond Rates with Yields of 20 Years or Longer (ticker: DAAA) and the target Federal Reserve Rate (ticker: DFEDTARU).

If you look at the chart above, you see that long-term corporate bond rates also have a lot of variation compared to the Fed Rate. This is because these bond rates are based more on the long-term economic outlook, not intra-bank overnight lending.

That being said, it is again true that the Fed Rate appears to have an impact on the overall trend of these types of bonds. However, if you're trying to time an annuity purchase based on a change in the Fed Rate, you might be surprised to find that rates are not changing the way you wanted.

Should You Wait For Fed Rate Changes?

Let's get down to brass tacks: should you wait until the Fed changes rates to buy your annuity?

If you think the Fed is going to raise rates, you might expect to see some annuity rate increases. However, you also may be disappointed to find that annuity rates do not follow suit or even go down after a Fed Rate hike. Remember, insurers are investing heavily in long-term corporate bonds, which track the long-term economic outlook, not the Fed Rate.

If you think the Fed is going to lower rates, you might reasonably expect annuity rates to also decrease. Yet again, historical data shows that this is not always the case. Annuity Rates may in fact increase as Fed Rates decrease.

Many financial experts discourage investors from trying to time financial markets—it is notoriously hard and even financial professionals routinely get it wrong.

Instead, these financial pros suggest:

• Buying an annuity when you need the income
• Comparative shopping for the best available rates
• Customizing your annuity to meet your needs and maximize your income
• Using an annuity ladder to reduce interest rate risk

Questions? We're here to help.

If you have any questions about this, feel free to call our annuity experts at (866) 866-1999. Our friendly, U.S.-based professionals can talk through your options with you, helping you feel confident in your decision.

And don't forget to run annuity quotes with our blue annuity calculator on this page. You'll get fast, free annuity quotes from top-rated companies instantly online. You can run multiple scenarios to find the best annuity for you.

References

• Chen, James. "Federal Funds Rate: What It Is, How It's Determined, and Why It's Important", Investopedia.
• Schwab Center for Financial Research. “Does Market Timing Work?” Schwab Center for Financial Research. July 18, 2025.
• "Federal Funds Target Range - Upper Limit" Federal Reserve Bank of St. Louis.
• "Moody's Seasoned Aaa Corporate Bond Yield" Federal Reserve Bank of St. Louis.