I. Introduction
On August 22, Federal Reserve Chairman Jerome Powell stated that downside risks in the labor market are rising and that it may "require us to adjust our policy stance." The market widely expects the Fed to start cutting rates at the September FOMC meeting. This statement immediately triggered a strong response in risk assets: U.S. stocks rallied across the board, the crypto market reversed from a multi-day downtrend, and ETH surged past previous highs, reaching nearly $4,956.
The ultimate drivers of the Fed's interest rate decisions are hard data on employment and inflation. On the timeline, key nodes are clear: the FOMC is scheduled for September 16–17. The September decision will not only provide a rate decision but also update the "dot plot" and macro forecasts. Two critical "life-or-death" data points before the meeting—August nonfarm payrolls and unemployment rate (released September 5), and August CPI (released September 11)—will basically determine whether a rate cut will happen. This means that in the next three weeks, any "face-slapping" data surprises (such as re-accelerating wages, a rebound in services inflation, or an unexpected drop in unemployment) could alter the smooth path of "September + one more cut within the year."
This article will interpret the basis for the Fed's interest rate decisions, the impact path and historical experience of rate cuts on crypto assets, conduct scenario simulations on the probability of a rate cut in September and the pace of rate cuts in the fourth quarter, and analyze the possible performance of the crypto market, ultimately providing investors with a multi-dimensional outlook and probability-weighted market forecasts.
II. Determinants of the Federal Reserve's Interest Rate Policy
The Fed's dual mandate is "maximum employment" and "stable prices." The core tool of the Fed's interest rate policy is the Federal Funds Rate. This is the target range for overnight lending of excess reserves between U.S. commercial banks, set by the Federal Open Market Committee (FOMC). In other words, it is the "wholesale borrowing rate" within the banking system. By adjusting it, the Fed can influence the cost of funds and liquidity throughout the financial system, thereby indirectly affecting credit rates, the dollar exchange rate, asset prices, and the overall trends of employment and inflation.
The Fed's interest rate policy is jointly constrained by three core factors: employment, inflation, and financial conditions. Rate policy is not driven by a single indicator but is a dynamic balancing process under the interplay of multiple factors. Overall, the key factors influencing its decisions mainly include: the labor market (employment numbers, unemployment rate, wage growth), inflation performance (CPI, core CPI, PCE, inflation expectations), and financial conditions (credit spreads, stock and bond market reactions, financial stability risks). In the current macro context of 2025, these factors are jointly pushing the Fed to gradually shift from "maintaining high rates for a long time" to "brewing small steps of easing."
1) Rising Employment Risks
In July, U.S. nonfarm payrolls increased by only 73,000, significantly below market expectations, and previous data were also revised down; the unemployment rate rose to 4.2%. This means that the expansion of the U.S. labor market is approaching "stall speed," indicating that employment is no longer the "safety cushion" for Fed policy. Once employment continues to weaken, it will directly touch the Fed's core goal of "maximum employment," forcing it to lean more towards easing in its policy orientation.
2) Inflation Eases but Remains Mild Overall
On inflation, July CPI year-on-year was 2.7%, core CPI year-on-year was 3.1%, with month-on-month increases of 0.2% and 0.3% respectively. The month-on-month increase in core CPI was the largest monthly gain so far this year. Although inflation remains above the Fed's 2% target, it has not deteriorated into "full-scale re-inflation." Notably, the Producer Price Index (PPI) is rising, reflecting upstream cost pressures, while the transmission to end-consumer prices remains slow. This "upstream rising, downstream mild" pattern means that inflation remains sticky in the short term but is not yet out of control.
3) Financial Conditions and Policy Communication
In addition to hard data, the Fed also pays attention to financial market feedback and stability. Powell's speech at Jackson Hole clearly signaled "no rush for aggressive easing, but leaving room for small adjustments," with the core being to use limited rate cuts to buffer tail risks in the labor market. The market interprets this as: if employment data continues to weaken, the Fed will take the lead in cutting rates by 25 basis points in September and may make another small adjustment by year-end.
III. The Impact of Interest Rate Policy on the Crypto Market and Historical Experience Analysis
The Fed's interest rate decisions not only directly affect the dollar and the U.S. economy but also, through multi-layered transmission in financial markets, impact global risk assets including cryptocurrencies. Overall, this transmission can be divided into three main channels: the interest rate and discount rate channel, the dollar and capital flow channel, and the risk appetite and capital behavior channel. These three paths intertwine to shape the cyclical volatility characteristics of the crypto market.
1) Discount Rate Channel: Lower Rates Lift Risk Asset Valuations
Interest rates are the cornerstone of all asset pricing. The Fed's lowering of policy rates drives down U.S. Treasury yields, thereby reducing the market discount rate. In this environment, growth assets with more distant future cash flows are more easily revalued higher. This is why U.S. tech stocks and assets like bitcoin and ethereum—"high duration assets"—often outperform during easing cycles. Historically, during the 2020 pandemic, the Fed quickly cut rates and implemented QE, directly fueling a dual bull market in U.S. stocks and crypto, with BTC rising from under $10,000 to $60,000 within a year. Conversely, during the Fed's aggressive rate hikes in 2022, bitcoin and ethereum both halved or worse, as rising discount rates suppressed prices.
2) Dollar and Capital Flow Channel: Weak DXY Benefits Crypto
The Fed's rate policy also affects capital flows through the strength of the U.S. Dollar Index (DXY). Rate cuts often weaken the dollar's appeal, prompting capital to seek new stores of value and high-yield targets. In this context, non-sovereign assets like gold and bitcoin benefit significantly. For example, when the Fed ended balance sheet reduction and restarted rate cuts in 2019, bitcoin rebounded over 100% from its lows during the period of dollar weakness. In contrast, during the Fed's rate hikes and dollar strength in 2022, bitcoin fell below the $20,000 mark. This "dollar–bitcoin" seesaw relationship is an important indicator for observing the impact of policy shifts on crypto assets.
3) Risk Appetite and Capital Behavior Channel: Stock Market and ETF Linkage
Rate policy further affects the crypto market through stock market risk appetite. Historical data show that bitcoin and the Nasdaq Index are significantly positively correlated in most periods. When the Fed signals easing and the stock market rises, crypto assets often see greater upward elasticity; when the stock market seeks safety, the crypto market often experiences amplified declines.
In addition, with the launch of bitcoin and ethereum spot ETFs, the relationship between policy expectations and ETF subscriptions/redemptions has become increasingly close. For example, in the first half of 2024, as the Fed turned dovish, BTC and ETH ETFs saw consecutive net inflows, providing solid support for the market; while in July and early August, as policy uncertainty increased, ETF funds briefly saw net outflows, and the crypto market immediately experienced volatile declines. This shows that ETF fund behavior has become a direct channel for rate policy to transmit to crypto assets.
Since 2019, almost every turning point in monetary policy has been accompanied by a trending market in crypto, with the negative correlation between bitcoin prices and interest rates becoming increasingly apparent. At this point in time, as the market widely bets on a rate cut in September, we need to combine these historical experiences and transmission paths to consider how they will shape the next phase of the crypto market.
IV. Analysis of the Probability and Uncertainty of a September Rate Cut
The Fed's interest rate policy is at a critical turning point. The September 17 FOMC meeting is not only a routine rate-setting meeting but may also become the weathervane for monetary policy for all of 2025. The market is almost already betting on a "25bp rate cut in September," but the deeper question is: is this move a one-off "insurance adjustment," or the beginning of a new rate-cutting cycle? The answer will depend on the next two most critical data points—August nonfarm payrolls (to be released September 5) and August CPI inflation (to be released September 11). They will directly determine the hawk-dove distribution of the Fed's dot plot and market expectations for the policy pace in the fourth quarter.
1) Probability of a September Rate Cut
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Employment: July nonfarm payrolls increased by only 73,000, far below market expectations, and previous values were revised down, with the unemployment rate rising to 4.2%. This means the U.S. labor market is cooling rapidly, with expansion speed approaching "stall speed." If August nonfarm payrolls remain weak (e.g., 100,000), or the unemployment rate rises to 4.3% or higher, the logic for the Fed to maintain high rates will be completely undermined. Slowing employment means insufficient economic momentum, which is the most direct driver of a policy shift.
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Inflation: July CPI year-on-year was 2.7%, core CPI year-on-year was 3.1%, with month-on-month increases of 0.2% and 0.3%. Although the core month-on-month increase was the largest monthly gain of the year, overall it did not turn into "full-scale re-inflation." If August CPI month-on-month remains at 0.2% or lower, it will give the Fed ample room to start cutting rates on the grounds of "labor market downside risks." Even if core CPI unexpectedly rises to 0.3% or higher, it will mainly affect the pace of another rate cut at year-end, but will not prevent a preemptive adjustment in September.
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Market Pricing: The CME FedWatch tool shows about an 87.3% probability of a 25bp rate cut in September; Polymarket prediction markets give about a 78% probability. This indicates that "rate cuts starting in September" are already a consensus in pricing.
Overall, the Fed has almost no reason to "stand pat" in September. Even if inflation remains sticky, the Fed is more concerned about systemic risks from labor market deterioration. Therefore, a small step of easing in September is almost a high-probability event.
2) Key Uncertainties
Although a September rate cut is highly probable, the pace still depends on the combination of August data. It can be summarized as three possibilities:
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Employment continues to weaken + mild inflation
If August nonfarm payrolls remain below 100,000, the unemployment rate rises above 4.3%, and core CPI month-on-month is ≤0.2%, then a 25bp cut in September is almost certain, and the probability of another 25bp cut in December rises significantly. This combination means the Fed will not only act in September but will also step up at year-end to stabilize employment. -
Employment rebounds + sticky inflation
If August nonfarm payrolls unexpectedly rebound to >150,000, and core CPI month-on-month is ≥0.3%, then a September rate cut is still possible (to "hedge tail risks in employment"), but the dot plot will be more hawkish. The market will interpret this move as a "precautionary rate cut," not the start of sustained easing, and the probability of a second rate cut at year-end will be revised down. -
Employment and inflation diverge
If employment improves but inflation falls, or employment weakens but inflation rises again, the policy path will become more complicated. For example, if "wages re-accelerate + services inflation stickiness returns," the Fed may send a cautious signal in September, or even, with low probability, delay action until October. Although this scenario is less likely, if it occurs, it will cause significant short-term market volatility.
Overall, the certainty of a 25bp rate cut in September is very high, and market and policy communication have paved the way for this move. But the pace in the fourth quarter is much more uncertain, mainly depending on whether employment continues to deteriorate and whether inflation remains mild. If weak employment and slowing inflation occur together, the Fed will cut rates faster; if inflation is stubborn, the policy pace will slow, or even remain at "just one cut."
V. Fourth Quarter Pace: Three Scenario Simulations and Market Implications
If a preemptive rate cut in September is basically confirmed, the real suspense lies in the pace from October to December. The key depends on whether employment further deteriorates and whether inflation can remain mild. Based on these two variables, three policy paths can be projected:
(A) Baseline Scenario: 50bp cumulative in September + December (probability ~55%)
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Conditions: August nonfarm payrolls remain weak, core CPI is mild.
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Policy pace: 25bp cut in September → wait-and-see in October → another 25bp cut in December.
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Market implications: Consistent with most investment bank forecasts (50bp cumulative for the year). For the crypto market, this means steadily improving liquidity, with the market tending towards gradual upward movement rather than a one-sided explosion.
(B) Cautious Scenario: Only one rate cut in September (probability ~30%)
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Conditions: August CPI month-on-month ≥0.3%, sticky services inflation; employment does not further deteriorate.
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Policy pace: 25bp cut in September → wait-and-see in the fourth quarter.
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Market implications: Short-term positive is realized, but a hawkish dot plot suppresses market optimism. The crypto market may remain volatile, with funds chasing hot sectors but lacking sustained trends.
(C) Surprise Scenario: Accelerated rate cuts in the fourth quarter (probability ~15%)
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Conditions: August nonfarm payrolls are extremely weak (50,000), unemployment rate approaches 4.5%, and core CPI falls.
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Policy pace: 25bp cut in September → consecutive cuts in October and December, with a cumulative ≥75bp for the year.
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Market implications: Liquidity is looser than expected, and risk assets are in full excitement. The crypto market could see an explosive bull market similar to 2020, with bitcoin and ethereum quickly hitting new highs, and altcoins and DeFi entering a high-volatility phase. But if the economy declines too deeply, stocks and crypto may first experience sharp volatility before rising.
The core differences among these three scenarios lie in the combination of employment and inflation. The baseline scenario is most likely (mild easing), while the cautious and surprise scenarios represent "slower pace" and "faster pace," respectively. For investors, the data on September 5 and September 11 will not only determine the September FOMC action but also shape market expectations for the rest of the year.
Conclusion
In summary, the combination of "slowing employment + unsteady inflation" in the U.S. economy is pushing the Fed to a turning point, with a high probability of starting a rate-cutting cycle in September. This macro inflection point is undoubtedly a major positive for the crypto market, which has been under pressure for the past two years: lower rates will clear the clouds over risk assets like bitcoin and restore market confidence in liquidity and growth. The rapid market response after Powell hinted at possible rate cuts shows that capital is already preparing for a new round of rallies. The current crypto market is at a key juncture of macro and industry resonance, and the macro policy inflection point, combined with catalysts such as increased mainstream adoption, is likely to jointly shape the next phase of the market.
However, as detailed in this article, the Fed's policy impact on the crypto market is multi-layered: there are opportunities from abundant liquidity, but also volatility from expectation games. Investors should closely monitor upcoming employment and inflation data and watch for whether policy signals meet market expectations. At the same time, by observing on-chain data and market indicators for capital flows, we see that institutions and whales have already positioned themselves in advance, but short-term corrections and position rotations are still ongoing, meaning the market trend will not be smooth. Looking ahead to the coming months, the most probable scenario is that an accommodative rate environment will provide sustained upward momentum for the crypto market. But whether it's a surprising accelerated bull market or an unexpected delay in rate cuts, the key to steady returns lies in dynamically adjusting strategies and risk management, focusing on early September employment and inflation data and Fed decision progress, and promptly revising judgments based on new information. Maintain caution when market expectations are unanimous, and dare to take contrarian positions when the market panics, to remain undefeated amid uncertainty.
