Fed's Challenge: Lowering Interest Rates While Controlling Ongoing Inflation

On September 17, 2025, the Federal Reserve lowered interest rates by 0.25 percentage points, marking its first rate reduction since December 2024. This move signaled a transition from a tight monetary policy to a more supportive approach as the job market softened and inflationary pressures persisted [1]. The federal funds rate was adjusted to a target range of 4.00%–4.25%. According to the central bank’s latest economic outlook, policymakers anticipate two more cuts in 2025 and another in 2026 [6]. The decision, expected by most investors, was prompted by weakening employment figures, such as an increase in the unemployment rate to 4.3% and subdued nonfarm payroll growth in August, highlighting mounting concerns about economic vulnerability [1].

The rate reduction quickly influenced international markets. The U.S. dollar slipped against key currencies like the euro and yen, and both gold and silver soared to new highs, indicating a movement of capital toward assets considered safer in times of inflation and lower returns [3]. Treasury yields also fell, causing the yield curve to steepen, which is often viewed as a positive indicator for riskier assets. In the commodities sector, copper and other industrial metals rose thanks to a weaker dollar and demand from China’s infrastructure and electric vehicle industries, while energy prices steadied amid fluctuating supply conditions [3].

For the stock market, the rate cut shifted attention back to growth opportunities, benefiting sectors such as small-cap equities, real estate, and consumer discretionary, all of which stand to gain from reduced borrowing costs [1]. Still, the Fed’s move toward a more accommodative policy did not erase all risks. Although inflation showed signs of cooling, it remained above the central bank’s 2% goal, with the core CPI at 3.1% in August. Weakness in the labor market was evident, with fewer job openings and slower wage growth [6]. Experts noted that while the cut made financial environments more favorable, it did not immediately lower rates for mortgages or car loans, which are typically linked to longer-term Treasury yields [1].

The cryptocurrency sector, known for its sensitivity to monetary policy changes, delivered mixed reactions.

and other risk-oriented investments usually see gains when the Fed loosens policy, and this 0.25% rate cut followed that trend, with BTC/USD prices climbing shortly after the announcement [1]. The crypto market’s responsiveness was heightened by strong institutional demand, as shown by $3.4 billion in net inflows to U.S. spot Bitcoin ETFs in July [1]. However, issuers of stablecoins faced challenges, as reduced rates squeezed returns on their U.S. Treasury holdings, potentially impacting profitability [1]. While altcoins and DeFi tokens benefited from the favorable risk environment, they remained exposed to market swings and regulatory challenges [1].

Geopolitical friction and political dynamics added complexity to the Fed’s policy choices. President Donald Trump’s persistent demands for larger rate cuts and his selection of Stephen Miran for the Federal Reserve Board highlighted the challenges the central bank faces in maintaining its independence amid political scrutiny [4]. Miran, aligned with Trump, pushed for a 50-basis-point reduction, underscoring divisions within the FOMC [6]. The Fed also had to contend with the repercussions of Trump’s tariff strategies, which initially stoked inflation but now appear to be having a more gradual and limited impact [6].

Looking forward, the course of Fed policy will be shaped by ongoing assessments of inflation, labor market data, and international economic trends. Investors currently expect an additional 68 basis points of rate reductions by the end of the year, with the possibility of a neutral policy stance emerging by mid-2026 [1]. While a slow and steady easing process could benefit risk assets and the housing sector, persistent inflation, financial instability, and geopolitical surprises remain as key threats. For cryptocurrencies, the balance between ample liquidity and regulatory shifts will be decisive, and a prolonged period of easier policy could enhance Bitcoin’s role as a hedge against broader economic risks [1].