In the present study, aluminum matrix composites (AMCs) were fabricated by friction stir processing (FSP) using Ni-Cu particles. Ni-Cu particles were added to the Al matrix in two ways. First, without any treatment and in the form of a mixture of as-received powders. Second, treated through mechanical alloying to form Monel solid-solution particles. The particles were added to a groove to be processed by the FSP tool to produce a local AMC. To investigate the kinetics of intermetallic compounds (IMCs) growth in reinforcement particles, the produced AMCs were annealed at 500 °C for 2 h. To characterize the reinforcing particles, several analyses were performed on the samples. Field-emission scanning electron microscopy (FE-SEM) was used to study the size, morphology, and IMC thickness. TEM was performed to characterize the IMCs through high-resolution chemical analyses. Tensile testing was used to understand the mechanical properties and fracture behavior of AMCs. Tensile testing revealed a noticeable improvement in strength for the as-mixed sample, with a UTS of 90.3 MPa, approximately 22% higher than that of the base aluminum. In contrast, the mechanical alloying sample with annealing heat treatment exhibited a severe drop in ductility, with elongation decreasing from 17.98% in the as-mixed sample to 1.52%. The results showed that heat treatment thickened the IMC layer around the reinforcing particles formed during the FSP process with as-mixed particles. In the AMC reinforced with mechanically alloyed Ni-Cu powders, IMC formation during FSP was significantly suppressed compared to that of as-mixed particles, despite the finer size resulting from milling. Additionally, the heat treatment resulted in only a slight increase in IMC thickness. The IMC layer thickness after heat treatment in both the mechanically alloyed sample and the as-mixed sample was approximately 2 µm and 20–40 µm, respectively. The reason behind this difference and its effect on the fracture behavior of the composite were elaborated in this study, giving insights into metal-matrix production with controlled reaction.