Fed's interest rate cut in September: Divergence in the bond market and on-chain transmission in the crypto market

On September 18, 2025, the Fed lowered the federal funds rate target range by 25 basis points to 4.00%–4.25% as expected, marking the first rate cut of the year. This move was defined by Powell as a "Risk Management" style easing, aimed at alleviating the pressures of a slowing job market while remaining cautious as inflation remains above target. The dot plot indicates that there may still be two rate cuts within the year, with a gradual path favored.

Within a week after the interest rate cut, the overall market performance was relatively polarized: the stock market surged and then oscillated, with the S&P 500 slightly retreating; the short-end yields in the bond market declined, while the long-end yields rose, indicating that inflation and fiscal deficits remain significant constraints; the crypto market, on the other hand, reflected liquidity expectations in advance through on-chain interest rates and capital flows. Overall, the market impact of this round of interest rate cuts needs to be comprehensively examined from three dimensions: macro policy, traditional markets, and on-chain transmission.

I. Policy Background: Historical Echoes under Risk Management

1. The current logic of Risk Management

• Risk Management: Fed Chairman Powell stated after the meeting that this rate cut is for "risk management" — — the sharp slowdown in the job market has become a major concern. In August, non-farm payrolls added only 22,000 jobs, far below the 100,000 level needed to maintain a stable unemployment rate, with the unemployment rate rising to 4.3%, the highest in four years.
• Inflation Constraint: The Fed still expects the annual inflation to be around 3% in 2025, significantly above the 2% policy target. This means that the Fed still faces inflation constraints during the easing process.
• Dot Plot Outlook: The September dot plot indicates that there may be two more 25bp rate cuts within this year, one each in 2026 and 2027, with the goal of gradually reducing the interest rate to around 3% neutral level within two years.
• Internal Disagreements: Newly appointed member Milan advocated for a one-time cut of 50bp during the meeting, while Powell insisted on a gradual easing, emphasizing that the current interest rate is still "modestly restrictive" and there is no risk-free path.

2. Historical Reference: Three Different Rate Cut Models

Understanding this round of interest rate cuts requires comparison within a historical context:

• 2001 (Internet Bubble): The tech bubble burst, leading to an economic recession. The Fed rapidly cut interest rates, but after a brief rebound, the stock market continued to decline.
• 2008 (Financial Crisis): Systemic risk erupted, the Fed aggressively cut interest rates and implemented large-scale QE, the policy was categorized as "crisis-style rate cuts."
• 2019 (China-US Trade War): The economic fundamentals remain sound, but uncertainty is rising. The Fed adopts an "insurance-style interest rate cut," slightly lowering rates to prevent risk from spreading, and the stock market maintains a moderate upward trend.

The rate cut in 2025 is most similar to that in 2019: it is not an imminent crisis, but rather the uncertainty arising from a downturn in employment and sticky inflation. It is neither as aggressive as in 2008 nor as passive as in 2001, but rather a form of "preventing recession and hedging risks" through gradual easing.

2. Stock Market: Difficult to Continue the Rebound, Structural Differentiation

1. Overall Trend

1. The S&P 500 ETF (SPY) fell from $663.21 on September 18 to $660.107 on September 25, with a cumulative drop of 0.47% over the week.
2. Initially driven by AI mergers and acquisitions, it reached a new high on September 23; however, tech stocks soon corrected, dissipating the optimism brought by interest rate cuts.

2. Sector Performance

1. Tech stocks: Valuations are under pressure due to the upward pressure on long-term interest rates.
2. Small-cap stocks (Russell 2000): Improved financing environment, relatively strong performance.
3. Interest Rate Sensitive Sectors: Utilities, Real Estate, and Energy benefit from a low interest rate environment and perform steadily.

3. Market Logic

1. The interest rate cut has not led to a comprehensive bull market because the "interest rate benefit" is offset by "inflation concerns + fiscal deficits."
2. Investors' strategies tend to: reduce allocation in high-valuation technology stocks and increase allocation in cyclical and defensive sectors.

3. Bond Market: Mismatched Interest Rates with Short-term Decline and Long-term Rise

1. Short-term interest rates decline: The yield on 2-year government bonds has slightly decreased, with the market betting that the Fed will cut interest rates again in October and December.

2. Long-term interest rates rise: The 10-year yield rises to 4.145%, and the 30-year rises to 4.76%.

3. Reason:

• Inflation Stickiness: Tariffs and rising wage costs drive up prices.
• Fiscal deficit: Expansion of US debt supply raises long-term interest rates.

4. Impact:

• Overall improvement in financial conditions is limited.
• Long-term interest rates rising have weakened the stimulative effect of interest rate cuts on real estate and tech stocks.

IV. International Capital and the Dollar Pattern

• The US Dollar Index (DXY) weakened briefly after the rate cut, but did not continue to decline due to the European Central Bank and the Bank of Japan maintaining an accommodative stance.
• Capital inflows into emerging markets are limited, with some Latin American currencies benefiting, but Asian markets remain under pressure.
• Long-term U.S. Treasury yields are high, still attracting safe-haven funds back to the U.S., weakening the global liquidity expansion.

5. Cryptocurrency Market: On-Chain Interest Rate and Liquidity Repricing

1. Short-term: Interest rates rise

After the interest rate cut, funds flowed out of low-yield money market funds into the DeFi lending market (such as Aave), driving up the supply interest rate of USDC.

2. Medium to long term: yield curve shifts downwards

1. Pendle and other forward markets show that future ETH staking and stablecoin yield expectations are declining.
2. Funds may flow from ETH staking to L2, Restaking, and RWAs.
3. The arbitrage space for stablecoins has narrowed, and institutions are shifting towards yield optimization strategies.

3. Asset Prices

1. BTC: Fluctuating in the range of $114,000–$117,000, down about 0.6% for the week, failing to break the August high of $124,000.
2. ETH: Fluctuating between $4,400 and $4,600, closing at $4,491, with a slight increase but lacking momentum.
3. Altcoins: Active trading, but lacking sustained upward momentum; high open interest without forming a breakthrough.
4. Total market capitalization: Remains at $4.14 trillion, not significantly expanded due to interest rate cuts.

4. Driving Factors

1. Policy Expectations: 25bp meets market expectations, falling short of some investors' anticipated 50bp, and the market interprets this as "cautiously accommodative."
2. Inflation and Bond Market: August CPI 2.9%, Core CPI 3.1%, combined with tariff expectations → concerns about stagflation; long-term U.S. Treasury yields rising limit liquidity spillover.
3. Institutions and Liquidity: The size of money market funds is enormous (7.4 trillion USD), and they have not significantly flowed into crypto yet; although there has been progress in ETF applications and stablecoin innovations, the flow of funds remains limited.
4. Politics and Regulation: The Trump administration has sent signals favorable to cryptocurrencies, but the increased interference in the independence of the Fed has added uncertainty.

5. Market Sentiment

1. Short-term caution: The market is showing a "sell the news" effect, with meme coins and highly leveraged altcoins being particularly vulnerable.
2. Long-term optimism: Historical rate-cutting cycles are beneficial for BTC and risk assets; some investors expect BTC to reach new highs in the long term.
3. Community Discussion: There are differences regarding emerging concepts (such as DAT), reflecting a selective caution in funding towards innovative narratives.

One week after the interest rate cut, the crypto market has not shown a clear positive trend, characterized by price consolidation — cautious sentiment — and slow institutional entry. The medium to long-term bullish logic remains, but funds are more focused on fundamental narratives and risk hedging rather than simply the "interest rate cut benefits."

6. Political Risk: Challenges to Central Bank Independence

• The Trump administration publicly pressured the Fed in an attempt to dismiss Governor Cook, setting a historical precedent for central banks.
• There are differences within the Fed (Milan supports 50bp, Powell advocates a gradual approach).
• The market is concerned that monetary policy will be influenced by the political cycle, leading to an increase in risk premium.
• For the cryptocurrency market, this instead reinforces the long-term value of the "decentralization" narrative.

7. Investor Strategy: Cross-Market Allocation

Traditional Market

1. Stocks: Reduce allocation to high-valued technology, increase allocation to defensive and cyclical.
2. Bonds: Use the "barbell strategy" (short-term bonds + long-term bonds) to hedge against interest rate fluctuations.

cryptocurrency market

1. Configuration: Maintain liquidity focus on DeFi blue chips, but adapt to declining yields.
2. Topic: RWAs (on-chain US Treasuries), Restaking, and L2 infrastructure will be structural opportunities.
3. Risk: If stagflation becomes a reality, crypto may face pressure in the medium to short term, but the narrative still provides value support.

Conclusion

A week after the interest rate cut in September 2025, the U.S. market showed a "triangular pattern":

1. Stock market under pressure: S&P 500 down 0.47%, tech stocks pull back, small-cap stocks and defensive sectors diverge.
2. Bond market differentiation: short-term interest rates decline, long-term interest rates rise, limited improvement in financial conditions.
3. Crypto Revaluation: On-chain yield rises in the short term and declines in the medium to long term, with a restructuring of the capital structure.

At the same time, political interference and inflation stickiness make this round of easing much more complex than in history. The key variable for the future is:

• Employment: Pay attention to the October employment report. If the unemployment rate continues to rise, the stock market may enter a defensive phase;
• Inflation: If tariffs keep the CPI sticky above 3%, long-term interest rates may rise further;
• Fiscal and Political: Attention to the FOMC meeting, fiscal expansion in an election year, and risks to central bank independence may trigger unexpected volatility.

This determines whether the market can transition from "cautious fluctuations" to "systemic repair."