Key Insights
- September Fed rate cut odds now sit at 99.8% which shows near-inevitability.
- Lower rates could boost stocks and crypto by increasing liquidity.
- Weaker jobs data and tame inflation are driving expectations for multiple cuts before the end of the year.
Investors are sure the Federal Reserve will cut interest rates in September. According to data from the CME FedWatch tool, there is a 99.8% probability of a quarter-point reduction. This would be the Fed’s first rate cut in years after a prolonged tightening cycle.
Why the Fed May Cut Rates
The July inflation report came in without surprises. Core inflation is still above the Fed’s 2% goal. However, it hasn’t heated up too quickly. Meanwhile, job growth has weakened for three straight months.
In addition, the high tariffs introduced by President Donald Trump have slowed hiring and increased business costs. This has pushed the Fed to reconsider its usual way of keeping inflation in check while supporting employment.
The Fed’s Recent Policy Path
March 2020 saw the Fed slash its interest rates to near-zero to stimulate the economy during the pandemic. However, when inflation surged in 2022, rates were raised to a two-decade high.
Rate cuts resumed in late 2024 as inflation began trending toward 2%. The most recent cut came in December, leaving the current range at 4.25% to 4.5%. Since then, the Fed has paused amid worries that the tariffs could reignite inflation.
Political Pressure Builds
President Trump has been pushing hard for lower rates for months. He has argued that high borrowing costs hurt the economy and increase the government’s interest payments on debt.
He has publicly criticized Fed Chair Jerome Powell. Trump even hinted at legal action over the alleged cost overruns in the Fed’s headquarters renovation.
Powell has repeatedly pointed out the Fed’s independence. However, the political pressure is adding to the urgency of the upcoming decision.
The Rate Cut Effects on Crypto
According to insights from analyst Master of Crypto on X, lower rates often mean more liquidity in financial markets. For crypto, this could be a major tailwind. The cheaper borrowing costs make it easier for investors to allocate capital to higher-risk assets like Bitcoin and Ethereum.
As it was in past easing cycles, crypto markets have seen substantial gains. This happened as investors seek returns outside of traditional assets. However, if a September rate cut occurs, it could amplify that effect and see prices rise across the board.
So far, the expectations of a FED rate cut have already affected the financial markets. The U.S. dollar is near multi-week lows, and equities have rallied, with MSCI’s world index recently hitting record highs.
Additionally, Asian stocks are at their highest since 2021. Treasury yields have also experienced some changes lately, with two-year yields. This tends to react to Fed policy expectations, dropping from 3.95% at the start of August to 3.67%.
Liquidity Surge Could Push Risk Assets Higher
If the Fed eventually starts to cut its interest rates, liquidity could explode upwards. This is generally bullish for stocks, crypto, and commodities. However, the balance between supporting the economy and containing inflation is bound to be tested harshly over the coming month,
While inflation hasn’t spiked, tariffs could keep price pressures high. The Fed may slow or pause its rate cuts if inflation rises uncontrollably again. When this happens, the market will likely become more volatile (especially crypto and other risk assets).
The Fed expected to receive more labor and inflation reports before its September meeting. If job data stays weak, the rate cut is almost guaranteed. If inflation picks up, however, policymakers could reconsider cutting these rates.
Investors should closely monitor the August jobs report and producer price data. FED statements will also be key for spotting any shifts in tone.
