Want to know where interest rates are headed? During tumultuous economic times, it's normal to search for answers about what's to come for your finances.

While there's no way to predict exactly what will happen, the Federal Reserve has tools that some people look to for insights. Among them is the Fed's dot plot, which shows where the Fed's policymakers see interest rates headed in the next few years.

This chart, which is published quarterly, certainly can't guarantee what's to come. In fact, some say it's not worth paying attention to at all. But others look to the dot plot for insights into what the Fed will do in the short term.

The dot plot is a chart that shows how the Fed's top policymakers — members of the Federal Open Market Committee (FOMC) — think the Fed will change short-term interest rates over the next few years.

There are up to 19 dots on the Fed's dot plot, each one representing the prediction of one anonymous member of the Federal Reserve Board. Those predictions are updated at each FOMC meeting based on a review of what's happening with the economy and the outcomes each member believes are most likely in the future.

The Federal Reserve began publishing the chart in 2012 as part of an effort to increase transparency around its policies. The dot plot can now be found in the Summary of Economic Projections published each March, June, September, and December.

The Fed's dot plot might look like a mess at first glance, but it's easy to read with a little guidance.

The Y axis (vertical) shows the target percent for the federal funds rate. On the X axis (horizontal), you'll see the rate predictions for the end of the current year, along with the end of the two upcoming years, and for the "longer run." The longer-run projections show what each member believes will happen if there are no further shocks to the economy.

The dot plot only tells us what the FOMC members estimate will happen to interest rates in the future. But remember, they are educated guesses and they're not necessarily accurate, since a variety of factors could change the ultimate outcome.

With that in mind, here's how you might benefit from reading the Fed's dot plots:

Identify trends that indicate where interest rates are headed.

Get a sense of whether the Fed's members anticipate rate cuts or increases.

Determine how much agreement there is between committee members over future policies.

See if rates are expected to rise or fall, and prepare to shift your investment strategy as needed.

Before using the Fed's dot plot to help with your financial strategies, it's important to acknowledge its limitations.

Historically, the chart is only minimally accurate at estimating rates with a one-year horizon and not at all accurate at predicting rates two or more years in advance. According to Fed Chair Jerome Powell, "The dots are not a great forecaster of future rate moves," and there is actually "no great forecaster."

Why are tools like the dot plot so inaccurate? Mainly because the Fed only influences the economy, but doesn't control it. The Federal Reserve adjusts interest rates based on economic conditions that are beyond its control and are sometimes completely unpredictable, such as inflation and unemployment.

In other words, any number of unforeseen events or policy changes could change the Fed's short-term monetary policy. For example, tariffs or conflicts abroad could have a swift and significant impact on inflation.

On top of that, the dot plot showcases the disagreements between FOMC members about where the economy is headed and what corrective measures are necessary. And as you look further out on the chart, you'll notice their forecasts differ even more.

So you're interested in getting a sense of what will happen with interest rates, don't put too much stock in the Fed's dot plot, especially when it comes to predictions over a year out. Instead, you could be better off taking multiple data points and reports into consideration, including FOMC Meeting Statement, the yield curve, and the full quarterly Summary of Economic Projections.

On December 18, the Federal Open Market Committee (FOMC) lowered its benchmark interest rate by 25 basis points or 0.25%, to a range of 4.25% to 4.50%. The move follows a 50-basis-point reduction in September and a 25-basis-point reduction in October.

The cut was expected by investors based on Fed cues earlier in the year. The committee adjusts interest rates in part to encourage a long-term inflation rate near 2%. After three years of inflation above 3%, the rate of price increases fell to 2.4% in September 2024 before rising to 2.7% in November.

The Fed also indicated there would likely be only two rate reductions next year rather than four as previously predicted. The more conservative approach is prompted by the recent uptick in inflation and uncertainty over the outcomes of President-elect Trump’s policies.

The big question investors are asking is how these lower rates could affect their portfolios and investment strategies. Let's provide answers with a closer look at how the stock market typically responds to falling interest rates.

Latest news: Cautious Fed holds rates steady with Trump unknowns looming over outlook

When the Fed cuts interest rates, banks lower the rates they charge on loans made to their customers. On existing variable-rate debt, the reductions are immediate. In this case, business and consumer borrowers quickly benefit from lower ongoing interest expenses. New fixed-rate loans also get cheaper, but existing fixed-rate borrowings are not affected. Fed rate cuts can, however, create opportunities to refinance fixed-rate loans at lower interest rates.

In short, rate cuts lower the cost of borrowing. Cheaper debt is usually good for business, but the reason for the rate reduction influences how corporate leaders and investors respond.

If the Fed lowers rates because inflation is slowing, the response should be positive. Businesses are likely to pursue growth more aggressively. Investors, expecting higher earnings ahead, may funnel more capital into the stock market. This can push stock prices higher.

Lower rates can negatively affect the stock market when they are prompted by an economic slowdown. When the economic outlook is uncertain, corporate leaders and investors can be more cautious about investing in growth.

According to Robert R. Johnson, CEO and chair of active index strategy developer Economic Index Associates, "historically speaking, equities perform substantially better when the Fed is lowering rates rather than when the Fed is raising rates."

Learn more: What is the Federal Reserve?

Investor expectations heavily influence stock prices. For this reason, the effects of a rate change usually begin well before the Fed acts.

When investors expect a rate reduction and the economic outlook is good, stock prices rise. Once the Fed implements the cut, the after-effects can be minimal. The exception is if the rate reduction is more or less aggressive than investors had expected. In that case, the market may shift again as investors adjust to new circumstances.

Learn more: Your step-by-step guide to investing

Johnson, who has extensively studied how the Fed's policies affect stock market returns, identifies the best-performing sectors when interest rates are falling as autos, apparel, and retail.

Johnson also sees opportunity in real estate investment trusts or REITs, particularly mortgage REITs. "With rates expected to continue to fall in 2024 and beyond, both equity REITs and mortgage REITs could be attractive investments," Johnson said.

Learn more: How to invest in real estate: 7 ways to get started

David Russell, global head of market strategy at trading platform Tradestation, expects lower rates to benefit cruise ship operators and airlines. "They're economically sensitive and have significant debt loads," Russell said. "Lower inflation will help their profitability, while lower rates could reduce their borrowing costs."

To summarize, lower interest rates are particularly good for real estate values and companies that rely heavily on debt or discretionary consumer spending.

Investors routinely adjust their holdings and trading behaviors according to their economic outlook. This is evident in the market movements that follow reports on inflation, jobs, and gross domestic product.

Learn more: Jobs, inflation, and the Fed: How they're all related

As an example, the S&P 500 experienced a single-day decline of 3% in early August 2024 after a disappointing July jobs report sparked recession worries.

Market shifts prompted by investor-sentiment trends can encourage many to wonder what moves they should be making ahead of Fed-rate actions. The right answer depends on the investor's timeline and strategy.

Learn more: When is the Fed’s next meeting?

Investors who need to maximize income or growth within a relatively short timeline may see the opportunity to adjust holdings according to the interest rate climate.

Commonly, this involves shifting exposure between stocks and bonds. Bonds are favored when interest rates are rising, while stocks become popular as interest rates fall.

On the other hand, long-term investors with high-quality, diversified portfolios may want to avoid big changes in response to rate adjustments. Overhauling a portfolio based on temporary conditions can easily undermine results over time.

Lane Martinsen, founder and CEO of Martinsen Wealth Management LLC, describes the dangers of making short-term decisions for long-term portfolios.

"Reacting to rate changes can lead to emotional decision-making, which can harm long-term performance," Martinsen said. "Frequent buying and selling to 'time' the market often results in higher costs, taxes, and missed growth opportunities."

Long-term investors might instead rely on changing economic conditions to prompt periodic reviews of their portfolio composition or asset allocation. If the allocation is performing and the risk profile is acceptable, few to no adjustments are needed.

Still, a proven allocation strategy may allow for small changes to improve performance as interest rates evolve. In this scenario, Johnson recommends adjusting sector exposure.

Specifically, when interest rates are expected to drop over time, investors could reduce financial and utilities holdings while increasing exposure to autos, apparel, and retail — sectors that have historically shown strength in falling rate environments.

Investors can implement sector-based adjustments without changing their relative exposures to broader asset classes, such as stocks, bonds, and alternative assets. Doing so should keep the portfolio's risk and appreciation potential fairly stable, which is critical for long-term growth.

With fewer rate reductions now expected in 2025, any boost to earnings or bond prices next year will be more muted. There are also other, potentially offsetting, factors in play. Two to note are high valuations in the S&P 500 and unknown outcomes from any policy changes made by the new president. Major portfolio or strategy changes at this point could be premature. This may be the time for investors to focus on the long-term rather than chase uncertain gains.

Following a series of cuts to the federal funds rate in late 2024, the Federal Reserve has since held its target rate steady despite pressure to make additional cuts in 2025.

Fed officials are adopting a cautious approach amid economic uncertainties, especially the impact of recent tariffs imposed by the Trump administration. They've emphasized the need for patience, suggesting that any rate changes should await clearer economic data.

However, President Trump has been vocal in his opposition to the Fed's decisions, to say the least. He described Fed Chair Jerome Powell as a "stubborn moron" after the Fed kept interest rates steady, urging for immediate cuts and suggesting the Fed board override Powell.

And on Monday, Trump took things even further, stating in a letter (which was subsequently shared on social media) that he removed Federal Reserve Governor Lisa Cook from her post — a move that critics say is illegal.

So, how much influence does the sitting president really have over Fed leadership and its monetary policy decisions? Here’s what you need to know.

Read more: 5 ways to tariff-proof your finances

The Federal Reserve doesn’t directly control interest rates set by individual financial institutions. The Federal Open Market Committee (FOMC) — the division of the Fed responsible for setting monetary policy — controls the federal funds rate. That’s the short-term interest rate that depository institutions charge each other to borrow money overnight.

Learn more: Federal funds rate: What it is and how it affects you

When the FOMC raises or lowers its target rate, banks typically follow suit. Rising rates generally make it more expensive for consumers to borrow money, but it also means they’ll earn higher rates on savings accounts, certificates of deposit (CDs), and money market accounts. Conversely, lowering rates decreases short-term interest rates on credit products and deposit accounts.

Here’s a look at how rates have changed since 2022:

U.S. presidents don’t have authority over the Fed, but they do have certain powers that can impact the future of the Fed and its decisions.

The chair of the Board of Governors of the Federal Reserve System leads the Fed in working toward its key goals, including maximum employment, stable prices, and moderate long-term interest rates. Some of the Fed chair’s responsibilities include reporting to Congress on the Fed's monetary policy objectives, testifying before Congress, and meeting periodically with the Treasury Secretary.

According to the Federal Reserve Act, the chair and vice chair of the board are appointed by the president but must be confirmed by the Senate. Fed chairs and vice chairs serve four-year terms and can be reappointed by the sitting president. They can also be ousted by a sitting president, although this has never happened.

The president also nominates the seven members of the Board of Governors who serve on the FOMC and oversee the 12 Reserve Banks. Each member is appointed for up to 14 years, which is considered a full term, after which they can’t be reappointed.

Again, the president also has the ability to remove a governor from their seat. According to the Federal Reserve Act, governors can be removed by the President “for cause,” which is generally understood to mean serious misconduct or inability to perform the job — not simply policy disagreements. Until now, no Fed governor has been removed by a president.

In his letter, Trump accused Cook of mortgage fraud, citing this as justification for firing her. The matter was referred to the Justice Department for investigation, though Cook has not been officially charged with any crime.

In a statement released by her attorney, Abbe Lowell, Cook said she would not step down, explaining that President Trump does not have cause and therefore, no authority to remove her. Lowell said Tuesday they would be filing a lawsuit to challenge what they called an "illegal action."

Though presidents can’t control interest rates directly, they can discuss their stance on current monetary policy and its impact on rates. But this can be a touchy topic.

“Institutionally, the Federal Reserve is very protective of its independence because that independence helps it achieve its mandate,” said Scott Fulford, a senior economist at the Consumer Financial Protection Bureau. “Most presidential administrations go out of their way to avoid even publicly commenting on Fed policy.”

Even so, that hasn’t stopped our current president from expressing his views on the Fed and its decisions.

For example, earlier this year, Trump posted on social media that Powell's termination as Fed chair "cannot come fast enough" and referred to him as "a major loser."

Experts maintain that the Fed will continue to make decisions independently. Still, this outside commentary can lead to campaign promises and political actions that impact inflation and consumer prices in other ways, according to Fulford.

“For example, this administration has focused on resolving supply chain problems and reducing monopoly rent-seeking, which reduces inflation,” Fulford said. “Congress could raise taxes or spend less, which would also affect inflation.” He added that there are many policies that affect the broader cost of borrowing as well, such as reducing late fees or closing costs.

Bottom line: The Fed is designed to operate independently of politics, but public statements by the president can shape market expectations and potentially influence the Fed's policy decisions indirectly.

Banks and credit unions can adjust their rates at any time at their discretion. You can’t control how rates change, but you can implement smart savings strategies to ride out interest rate fluctuations:

Consider a high-yield savings account. These savings accounts offer higher interest rates compared to traditional savings accounts. When interest rates fluctuate, you can be sure you’re still earning a competitive rate compared to the market average with a high-yield account.

Start now. Compound interest helps your savings grow exponentially over time. The earlier you begin saving, the more your balance will grow. Plus, you’ll have a head start if rates fall in the future.

Shop around. Whether you’re looking to open a new savings account or reevaluate the one you currently have, regularly reviewing the best savings rates available can ensure you’re not missing out on better opportunities.

Lock in your rate. If you think rates may fall soon, putting your money in a CD allows you to lock in competitive rates for the next several months or even years. Keep in mind that CDs require you to keep your money on deposit until the maturity date, otherwise you’ll be subject to an early withdrawal penalty.

The Federal Reserve lowered the federal funds rate for the third time this year — and there may be more cuts next year.

Rate cuts can be cause for celebration, particularly if you're planning to buy a home or pay off debt. But you can also expect to earn less interest on bank deposits and some investments. In other words, now is a good time to reevaluate where you keep your savings and look for ways to maximize your interest earnings.

Interest rate reductions have several implications when it comes to banking and borrowing money. Here's what you can expect after a rate cut from the Fed:

Loans: If you have a fixed-rate loan, nothing will change. However, if you want to take out a new mortgage or car loan, for example, or refinance an existing loan, the interest rates offered by lenders will be lower. As a result, it's more affordable to borrow money since you’ll accrue less interest — and monthly loan payments may be lower, too.

Bank accounts: The annual percentage yield (APY), or interest you earn on bank deposits, decreases. As a result, you'll earn less on the cash you keep in your checking and savings accounts.

Low-risk investing: If you already have an investment account that gives you guaranteed returns, such as a certificate of deposit (CD) or Treasury bill, your rate will stay the same. However, the rates offered on new accounts will begin dropping.

The upcoming Fed rate cut is expected to be conservative, so you may only see gradual changes to your interest rates in the short term. However, more cuts are likely to come, so now is a great time to lock in high rates and prepare your next steps.

For your day-to-day cash and emergency savings, it's best to keep the money in the bank, since you need to maintain easy, penalty-free access to your funds.

But as banks reduce the interest rates offered on deposit accounts (which they can do at any time), your balances will earn less. As a result, you'll want to check the APY on your bank accounts and shop around to see if you can earn a higher rate elsewhere. Here are some bank accounts that might earn more than your regular checking or savings:

High-yield checking

High-yield savings

Online bank accounts

Read more: How do banks set their savings account interest rates?

When it comes to money you don't plan to use within the next few months, consider moving it out of your savings account and into a CD right away. By doing so, you could lock in around 4% APY or higher before rates take another hit.

In addition to comparing rates, look for CD accounts with longer terms, since the goal is to retain your high rate long past any future rate cuts.

This strategy is particularly useful for anyone who's been saving for a down payment on a home. By moving your savings into a CD, you can lock in a high APY while waiting for mortgage rates to drop. If you're not exactly sure when you'll need your money, you might also consider CD laddering, or opening up multiple CDs with staggered maturity dates.

Like CDs, Treasury bills are a good choice if you're saving up for a future expense and you want to lock in high rates before they start falling. At present, you can still get above 4% on several T-bill terms. However, the Fed's rate cut means these rates won't stay for long.

Before you buy a T-bill, compare the rates and terms with available CDs to see where you can maximize your earnings. And keep in mind that you don't have to pay state or local taxes on T-bill earnings.

Read more: CDs vs. Treasury bills: Maximizing your savings

As rates fall, you'll have to increase your risk in order to maintain or beat what you've been earning on cash deposits and fixed-income assets. That means that when your current CDs, T-bills, and bonds mature, you may want to move the money to your stock portfolio.

While rate cuts tend to be good for the stock market, it's too soon to tell how it will respond over the coming months. In other words, some patience is required. But while you're waiting to see how the market stabilizes, some experts suggest investing in stocks that are more sensitive to rate cuts, such as real estate investment trusts (REITs) and small caps.

Read more: High-yield savings account vs. investing: Which is right for you?