The Federal Reserve’s first rate increase in more than three years is not just a monetary-policy story. It is a model-risk story.
On September 16, the Federal Open Market Committee voted unanimously to raise the federal funds target range by 25 basis points, to 3.75%–4.00%. The Fed said inflation remains elevated and that the increase would support a “timelier return” to its 2% goal. Its new projections also moved the median appropriate year-end 2026 policy rate to 4.1%, up from 3.8% in June. In other words, the important development is not simply yesterday’s quarter-point move. The expected path changed too.
That matters for CFOs because a surprising amount of corporate finance math quietly assumes that today’s financing environment is temporary.
The hidden assumption inside the model
A capital model can look conservative and still contain an aggressive assumption. Sometimes it is not in the revenue forecast or the margin target. It is buried in the discount rate, refinancing assumption, terminal value, or the expectation that debt can be replaced later at a lower coupon.
The September Fed projections are a useful reminder. The median participant now projects a 4.1% federal funds rate at the end of 2026 and 4.1% at the end of 2027. In June, those medians were 3.8% and 3.6%, respectively. That is a meaningful reset in the policy-rate path even before considering what could happen to credit spreads.
Reuters reported that 16 of the 18 policymakers who submitted rate projections expected at least one additional quarter-point increase by year-end. Goldman Sachs subsequently shifted its forecast to another 25-basis-point increase in October. Forecasts can be wrong, of course. That is exactly the point: a capital decision should not require a favorable rate forecast to produce an acceptable return.
Reopen the decisions that depend on cheaper money
This does not mean every CFO should immediately increase every hurdle rate by 25 basis points. The federal funds rate is not a company’s weighted average cost of capital, and mechanically treating it that way would be poor finance.
It does mean finance teams should identify decisions whose economics depend heavily on declining rates. Five areas deserve another look: refinancing plans, acquisition models, lease-versus-buy decisions, long-duration capital projects, and valuations that rely heavily on terminal value.
The question is not, “What will the Fed do next?” The more useful question is, “What happens to this decision if our financing assumption is wrong?”
A simple three-case capital test
For material decisions, I would want to see at least three financing cases side by side:
- Current-rate case: financing conditions remain roughly where they are.
- +50 basis-point case: borrowing costs and the relevant discount rate remain higher for longer.
- +100 basis-point stress case: the company faces a materially less favorable refinancing environment, whether because of policy rates, credit spreads, or both.
Then look at what breaks. Does an acquisition still clear the hurdle rate? Does debt-service coverage remain comfortable? Does a project still create value? Does a refinancing merely reduce returns, or does it create a liquidity problem?
That distinction matters. A project that produces a slightly lower IRR under the stress case may still be attractive. A project that only works if rates fall is a different proposition entirely.
Do not confuse precision with judgment
Finance teams are good at building precise models. But a model that says the cost of debt will be 5.85% three years from now is not necessarily more useful than one that admits the future is uncertain and shows the decision at 5%, 6% and 7%.
The Fed itself illustrates the problem. Its September projections are materially different from its June projections. That is not a criticism of the Fed; projections change as conditions change. Corporate forecasts should be built with the same humility.
Good capital allocation should not require a favorable interest-rate forecast to work.
The strongest CFO response to yesterday’s decision is therefore not to make a new prediction about rates. It is to find the places where the company has already made one implicitly—and test what happens if it is wrong.
Numbers & Judgment 