
Insights|21 Aug, 2025
IN THE ARTICLE:
The Federal Reserve approved a rate cut and signaled more on September 17, 2025, while the market is pricing more aggressively versus the Fed.
Wondering if the market is getting ahead of itself? Laddered fixed rate advances provide predictable funding costs and diversify risk.
Don’t need liquidity today, but anticipate balance sheet growth or deposit outflows? Forward starting advances capture the benefit of today’s inverted yield curve.
Thinking the Fed will cut more aggressively? Adjustable rate advances keep durations short and your options open.
On September 17, 2025, the Federal Reserve approved a cut to the target range for the federal funds rate by 25 basis points to 4.00%- 4.25%. The move is part of what the Federal Open Market Committee (FOMC) describes as a “steady pace” of reductions that is now projected to include two additional quarter-point cuts by year-end.
Looking at the Fed’s “dot plot,” markets are currently pricing rates lower by 51 and 23 basis points versus the Fed’s projections in 2026 and 2027, respectively.
(Source: Bloomberg): Latest Federal Funds Target Rate dot plot chart versus market expectations as of 10/2/2025
In a declining rate environment, FHLBank San Francisco advance funding strategies center on reducing funding costs, increasing flexibility, and shielding net interest margin (NIM) from volatility.
It may be intuitive to assume that if rates are headed lower, shortening your funding makes sense, allowing you to refinance later at cheaper levels. And while that scenario can sometimes play out, it’s worth remembering that the market prices those expectations into the shape of the yield curve. As of the time of this writing, the market expects 75 basis points of rate cuts between now and the end of March 2026.
Some members may note lingering tariff uncertainty and associated inflationary pressure and wonder if markets may be getting ahead of themselves. In that scenario, locking in today’s fixed rates with an FHLBank San Francisco Fixed Rate Advance might be particularly attractive. Consider laddering Fixed Rate Advances to balance cost and flexibility by blending short-, medium-, and long-term funding. This approach reduces exposure to the most expensive short-term rates while creating periodic refinancing opportunities as maturities roll off. The result is more predictable funding, diversified risk, and greater adaptability as market conditions evolve.
Liquidity might not be required today, but you may be anticipating balance sheet growth or deposit outflows in the foreseeable future. In this case, consider forward starting advances. Forward starting Fixed Rate Advances allow you to lock in lower long-term funding costs today while deferring the actual funding until it’s needed. In an inverted yield curve, this strategy captures the benefit of cheaper forward rates, avoids paying the premium for short-term borrowing, and provides certainty around future funding costs.
Floating-rate advances, such as the SOFR Adjustable Rate Advance and Choice SOFR Adjustable Rate Advance, offer funding that automatically resets as market rates move lower. This allows you to immediately benefit from falling short-term interest rates as rate cuts occur. This funding strategy particularly appeals to those who believe that the Fed may be more aggressive in this cutting cycle than what the market currently implies.
Compared with overnight funding, SOFR Adjustable Rate Advances can reduce operational burden, provide greater certainty around ongoing funding access, and often improve liquidity risk metrics due to their longer contractual maturities. Additionally, SOFR-indexed advances often result in lower overall cost of funds as a fixed spread is locked into SOFR for the term of the advance, avoiding potential volatility associated with the overnight advance pricing (see Chart 1 below).
Chart 1. Historical spread to SOFR on an overnight advance
If you’re looking for additional flexibility, you can opt for the Choice SOFR Adjustable Rate Advance. Choice SOFR is an adjustable rate advance where you own an option to terminate the funding early on a designated date in the future without incurring prepayment fees. In the scenario analysis below, we compare a 6-month Fixed Rate Advance (@ 4.04%) to a 12-month Choice SOFR Adjustable Rate Advance (@SOFR+32.5 bps) where you have the option to terminate the funding after 6 months. Even though Choice SOFR would start out at a higher all-in rate initially, in an aggressive rate cut scenario (150 bps of cuts over the next 6 months), Choice SOFR would produce a lower cost-of-funds than the 6-month Fixed Rate Advance while still delivering improvements to your liquidity metrics due to the longer final maturity (see Chart 2 below).
Chart 2. Scenario analysis: 6M Fixed Rate Advance vs 12M NC 6M Choice SOFR under aggressive rate cuts scenario. Market data as of 10/2/2025.
Utilizing FHLBank San Francisco advances in a declining rate environment can provide reduced funding costs, increased flexibility, and shield your NIM from volatility. To learn more about liquidity products and solutions from FHLBank San Francisco, please contact your Relationship Manager or the Member Services Desk at (415) 616-2500.
FHLBank San Francisco makes a portion of its net income available through grants to finance the purchase, construction, or rehabilitation of housing for low- or moderate-income households in member communities. Utilizing FHLBank San Francisco products to help manage your balance sheet during change could result in more financing available for housing needs in your communities.
Federal Home Loan Bank of San Francisco (FHLBank San Francisco) makes no representations or warranties about the accuracy or suitability of any information or scenarios in this article. This article or the information or scenarios presented is not intended to constitute legal, accounting, investment, tax, or financial advice or the rendering of legal, accounting, tax, consulting, or other professional services of any kind. Your institution should consult with its accountants, counsel, tax, financial representatives and advisors, consultants, and/or other advisors regarding the extent to which these scenarios may be useful to it and with respect to any legal, tax, business, and/or financial matters or questions. This article does not constitute an offer to extend credit or an investment solicitation to buy or sell any security.
Your institution should exercise its independent capability, and that of its advisors, to evaluate the merits and the financial risks associated with the use of any FHLBank San Francisco advances or other products and should not rely on analysis or communication from the FHLBank San Francisco, including anything in this article. The decision to use the FHLBank San Francisco's advances and other products remains solely your institution's responsibility.
The data, scenarios, valuations, risk measures, and projected net interest margins provided in this article are for informational and illustrative purposes only and are provided as an accommodation and without charge. The data, scenarios, valuations, risk measures, and projected net interest margins are estimates only and may not represent the actual or indicative terms at which new (or economically equivalent) transactions could be entered into or the actual or indicative terms at which existing (or economically equivalent) transactions could be prepaid, terminated, liquidated, assigned, or unwound. The scenarios and valuations were derived using proprietary pricing models and estimates and assumptions at a point in time or about relevant future market conditions and other matters, as applicable, and all of which are subject to change without notice. The scenarios and valuations were prepared without any consideration of your institution’s balance sheet composition, hedging strategies, or financial assumptions and plans, any of which may affect the relevance of these valuations to your institution's own analysis.
FHLBank San Francisco assumes no liability in connection with any use of this information or scenarios and makes no warranty or guarantee that the information or scenarios presented herein is current or accurate. FHLBank San Francisco expressly disclaims responsibility for any errors or omissions in disseminating the information or scenarios, any party’s reliance on the information or scenarios, and any use to which the information or scenarios is put. FHLBank San Francisco further expressly disclaims any obligation to update any of the information presented in this article.