Fed Rates to Cut: How Will Multi-Asset Prices Move?

Executive Summary

Currently, against the backdrop of a weakening labour market and inflation meeting expectations while remaining manageable, the Federal Reserve is anticipated to restart its rate-cutting cycle on 17 September 2025. This article analyses the impact of this round of rate cuts on U.S. equities, cryptocurrencies, U.S. Treasuries, and the U.S. Dollar Index, while providing an outlook on the future price trends of these asset classes. Notably, as U.S. equities remain the largest allocation for global investors, this article will place a particular focus on the effects of rate cuts on the stock market.

In theory, interest rate cuts influence U.S. equities through five key channels: reducing corporate borrowing costs, increasing market liquidity, stimulating economic activity, boosting asset valuations, and enhancing market confidence. However, in practice, rate-cutting cycles are rarely straightforward and often proceed in a start-pause-restart pattern. For analysis, we define the period before a pause in a rate cut cycle as the "early phase" and the period after as the "later phase".

Historical data reveal a strong correlation in U.S. equity performance between the early and later phases of rate-cutting cycles. During the rate-cut cycles of January 2001–December 2001 and September 2007–December 2008, declines in the early phases of U.S. stock markets were followed by further declines in the later phases. This was primarily due to the profound and prolonged impact of the dot-com bubble burst and the global financial crisis on the U.S. and global economies. The economic weakness exerted greater downward pressure on equities than the upward lift provided by monetary easing, ultimately resulting in sustained market declines.

In contrast, during the rate-cutting cycles of November 2002–June 2003 and July 2019–March 2020, the upward momentum in U.S. equities during the early phases persisted into the later phases. This was primarily because the economic slowdown in 2002 and the pandemic shock in 2019 did not inflict long-term damage on the U.S. economy. In the early phases of these cycles, the liquidity unleashed by rate cuts outweighed the downward pressure from economic slowdowns, providing a significant boost to equities. As the later phases of rate cuts began and low interest rates were sustained, supportive forces dominated, driving the S&P 500 Index to surge by 16.3% and 29% in the later phases, respectively, far surpassing the gains in the early phases.

Looking back at the current context, the Federal Reserve has already undergone the early phase of its rate-cutting cycle from September to December 2024. During this period, despite tariff-related shocks, the U.S. economy demonstrated resilience. This allowed the supportive effects of rate cuts on equities to outweigh the downward pressure from economic slowdowns, resulting in a 4.1% gain in the S&P 500. Although current equity valuations are elevated, historical positive correlations in stock performance between the early and later phases of rate-cutting cycles, combined with the implementation of U.S. tax cut policies, suggest that U.S. equities are likely to sustain their upward trajectory over the next 12 months.

Similar to the stock market, cryptocurrencies—also classified as risky assets—are equally positively impacted by interest rate cuts, particularly in terms of liquidity and market sentiment. Furthermore, rate cuts tend to weigh on the U.S. Dollar Index, prompting investors to shift toward cryptocurrencies (dubbed "digital gold") as an alternative. Combined with the U.S. government’s crypto-friendly policies, we anticipate that Bitcoin and Ethereum will likely end their current downward trend and stage a recovery.

As the Federal Reserve enters the latter phase of its rate-cutting cycle, the U.S. Treasury yield curve is expected to continue steepening. In light of this, we recommend that investors focus on shorter-duration Treasuries. On one hand, short-term Treasuries are more significantly impacted by Fed rate cuts; on the other hand, the prices and yield movements of long-term Treasuries are subject to higher uncertainty due to other economic and financial market factors. Regarding the U.S. dollar, while rate cuts may exert downward pressure, the weakness of the euro and pound is likely to provide upward support, potentially leading the U.S. Dollar Index to fluctuate within a range.

In summary, if the Federal Reserve resumes its rate-cutting cycle as expected in September 2025 and implements three rate cuts within the year, U.S. equities, cryptocurrencies, and short-term U.S. Treasuries are likely to experience price increases. In contrast, long-term U.S. Treasuries and the U.S. Dollar Index may enter a period of fluctuation.

1. Introduction

In the fourth quarter of last year, as the U.S. economy slowed, the Federal Reserve initiated a rate-cutting cycle starting in September. From 19 September to 19 December 2024, the Fed’s policy rate was reduced from 5.5% to 4.5%. Since the beginning of this year, rising inflation expectations driven by tariff policies have prompted the Fed to pause its rate cuts. Currently, with a weakening labour market and inflation remaining manageable and aligned with expectations, the Federal Reserve is expected to resume its rate-cutting cycle on 17 September 2025. This article analyses the impact of this renewed cycle on U.S. equities, cryptocurrencies, U.S. Treasuries, and the U.S. Dollar Index, while providing an outlook on the future trajectory of these asset classes. Notably, given that U.S. equities remain the largest allocation for global investors, this article will focus particularly on the effects of rate cuts on the stock market.

* For related information, refer to the article published on 1 September 2025, titled “The Fed’s Fight for Survival — Markets Stay Calm While Economists Sound the Alarm”

2. U.S. Equities

2.1 Theoretical Impact of Rate Cuts on the Stock Market

In theory, Federal Reserve rate cuts are beneficial to U.S. equities for five primary reasons. First, reduced corporate borrowing costs: Lower interest rates decrease the cost of financing for businesses, whether for operations, expansion, or debt refinancing. This enhances corporate profitability and cash flow, thereby driving stock price increases. Second, increased market liquidity: Rate cuts inject liquidity into the financial system by lowering borrowing costs, encouraging investors to allocate capital to higher-risk assets, such as equities, in pursuit of greater returns.

Third, stimulating economic activity: Rate cuts reduce borrowing costs for consumers (e.g., mortgages, auto loans, or credit cards), encouraging spending. This boosts demand for goods and services, improving corporate revenues and supporting stock prices. Fourth, enhancing asset valuations: Lower interest rates reduce the discount rate applied to future cash flows, increasing the valuation of assets like stocks, as future earnings appear more valuable. Finally, boosting market confidence: Rate cuts are typically perceived as a signal of the Federal Reserve’s commitment to supporting the economy, bolstering investor optimism and driving capital inflows into the stock market.

2.2 The Real World Is More Complex Than Theory

In practice, the real economy is far more complex than theoretical models suggest. This complexity is primarily reflected in the timing of rate cuts and the sustained impact of a low-interest-rate environment on equities after the rate-cutting cycle concludes. Regarding the timing of rate cuts, the process is rarely continuous and often follows a start-pause-restart pattern. For example:

· January 2001–December 2001 rate-cutting cycle, with a pause in July 2001;

· November 2002–June 2003 rate-cutting cycle, with a pause from December 2002 to May 2003;

· September 2007–December 2008 rate-cutting cycle, with a pause from May 2008 to September 2008;

· July 2019–March 2020 rate-cutting cycle, with a pause from November 2019 to February 2020.

2.3 The Early Phase of the Rate-Cutting Cycle

Influenced by slowing economic growth, the Federal Reserve initiates a rate-cutting cycle. For analytical purposes, we define the period before a pause as the "early phase" and the period after as the "later phase". During the early phase of rate cuts, the U.S. stock market experiences two opposing forces: downward pressure from decelerating economic growth and upward support from the liquidity unleashed by lower interest rates.

Historical data suggests that the relative strength of these two forces determines the trajectory of U.S. stock markets. For instance, during the first half of the interest rate cut cycles in 2001 and 2007, the S&P 500 index experienced declines. In contrast, during the first half of the rate cut cycles in 2002 and 2019, the index saw gains.

2.4 The Later Phase of the Rate-Cutting Cycle

The performance of U.S. stock markets during the second half of interest rate cut cycles largely depends on their performance in the first half. In 2001 and 2007, the stock market experienced declines in the first half, and this downward trend persisted into the second half. This was primarily due to the profound and prolonged impact of the dot-com bubble burst and the global financial crisis on the U.S. and global economies. Despite significant rate cuts by the Federal Reserve in the first half (275 basis points from January to June 2001; 325 basis points from September 2007 to April 2008) and continued substantial cuts in the second half (200 basis points from August to December 2001; 175 basis points from October to December 2008), the economic weakness exerted greater pressure on the stock market than the boosting effect of monetary easing, ultimately leading to further market declines.

The economic slowdown in 2002 and the pandemic shock in 2019 did not cause lasting damage to the U.S. economy. In the early phases of the Federal Reserve's rate-cutting cycles during these periods, the liquidity unleashed by rate cuts effectively mitigated the pressures from economic slowdowns. Before the pause in rate reductions, the S&P 500 index recorded gains of 5.7% and 3.3%, respectively. Moreover, the early rate cuts improved U.S. economic expectations, consistently reducing downward pressure on U.S. stocks. As the later stages of rate cuts began and low interest rates were sustained, supportive forces dominated, driving significant S&P 500 rallies of 16.3% and 29%—far surpassing the gains in the early phases. Notably, during the pandemic, the U.S. stock market staged a V-shaped recovery after bottoming out. Beyond the impact of rate cuts, shifts in lifestyle and work patterns—such as remote work and home entertainment—fuelled a surge in technology stocks, further propelling the broader market upward.

2.5 Returning to the Present and Looking Forward to the Future

The Federal Reserve underwent the first half of its rate-cutting cycle from September to December 2024, reducing the policy rate by a cumulative 100 basis points. Following an eight-month pause, with U.S. inflation remaining in line with expectations and under control, the Fed is anticipated to initiate the second half of the rate-cutting cycle in September 2025.

During the early phase of the rate-cutting cycle, despite tariff-related challenges, the U.S. economy demonstrated resilience. This resilience allowed the supportive impact of rate cuts on the stock market to outweigh the pressures from economic slowdown, resulting in a 4.1% gain in U.S. equities. Although current equity valuations are elevated, historical correlations in stock performance between the early and later phases of rate-cutting cycles, combined with the implementation of U.S. tax cut policies, suggest that U.S. equities are likely to sustain their upward trajectory over the next 12 months (Figures 2.1 and 2.2).

Figure 2.1: Early and Later Phases in the Fed's Rate-Cut Cycles vs. S&P 500 Returns 

* S&P 500 return in the 12 months after the start of the second half rate cuts Source: Refinitiv, TradingKey

Figure 2.2: Fed Policy Rate vs. S&P 500 Performance

Source: Refinitiv, TradingKey

3. Cryptocurrencies

Since mid-to-late August 2025, the cryptocurrency market has shown signs of weakness. As of 5 September, Bitcoin and Ethereum have declined approximately 11% and 13%, respectively, from their recent highs. The primary drivers of this short-term correction are twofold: a technical pullback and market concerns over the "September Curse", as historical data indicates that September is typically a bearish month for cryptocurrencies.

Looking ahead, the Federal Reserve’s rate cuts are expected to benefit cryptocurrencies. Similar to equities, cryptocurrencies, as risk assets, are likely to experience positive effects from the increased liquidity and improved market sentiment driven by rate reductions. Additionally, rate cuts are anticipated to exert downward pressure on the U.S. dollar index, prompting investors to invest in cryptocurrencies—often referred to as "digital gold"—as an alternative store of value. Following the Fed’s initiation of its rate-cutting cycle on 18 September 2024, Bitcoin surged approximately 80% and Ethereum gained around 77% within three months. We anticipate that, as the Fed resumes its rate-cutting cycle in September 2025, this historical pattern may repeat. Combined with supportive U.S. government policies toward cryptocurrencies, prices are likely to reverse their recent downtrend and stage a recovery.

4. U.S. Treasuries

One year ago, one of the most intensely debated topics in the market was whether the U.S. would face a hard economic landing or enter a period of stagflation. This reflected investors’ concerns about uncertainties surrounding the U.S. economy, Trump administration policies, and Federal Reserve actions. At that time, the U.S. Treasury yield curve exhibited a degree of inversion, with the 1-5 year segment inverted by 67.4 basis points and the 20-30 year segment inverted by 8.6 basis points.

As the resilience of the U.S. economy became increasingly evident and expectations for Federal Reserve rate cuts grew stronger, the inversion of the U.S. Treasury yield curve has significantly improved. As of 4 September 2025, the 3-30 year yield curve has normalised, with only a slight inversion remaining in the 1-3 year segment (Figure 4).

Looking ahead, as the Federal Reserve enters the second half of its rate-cutting cycle, the U.S. Treasury yield curve is expected to continue steepening. Based on this outlook, we recommend that investors focus on shorter-duration Treasuries. On one hand, short-term Treasuries are more significantly impacted by Fed rate cuts; on the other hand, the prices and yield movements of longer-term Treasuries are subject to greater uncertainty due to influences from other economic and financial market factors.

Figure 4: U.S. Treasury Yield Curve (%)

Source: Refinitiv, TradingKey

5. U.S. Dollar

In the first half of 2025, the U.S. Dollar Index declined steadily from a high of 109.8 on 13 January to a low of 96.4 on 2 July, reflecting a 12.2% drop. This downward trend was primarily driven by global market volatility triggered by the Trump administration’s tariff policies, downward revisions to economic growth expectations, an expanding fiscal deficit, and a downgrade of the U.S. credit rating by Moody’s, which reduced the dollar’s appeal. Additionally, the global trend toward de-dollarisation exerted further pressure on the dollar. However, starting in early July, the dollar index began to recover slightly as trade negotiations progressed smoothly.

Looking ahead, the combination of slowing U.S. economic growth and the onset of the second half of the Federal Reserve’s rate-cutting cycle is expected to exert downward pressure on the U.S. dollar. In the Eurozone, weak economic performance coupled with the European Central Bank’s ongoing rate cuts will likely lead to euro depreciation, which could, in turn, provide a relative boost to the U.S. dollar index. In Japan, as the policy rate differential between the Bank of Japan and other major central banks narrows, the yen is anticipated to continue its upward trajectory, potentially exerting downward pressure on the dollar index. In the UK, the Bank of England’s continued rate-cutting stance, combined with weak economic fundamentals, may put downward pressure on the pound, indirectly supporting the dollar index. Taking these factors into account, we expect the U.S. dollar index to enter a fluctuation range in the short to medium term (Figure 5).

Figure 5: Static Impact of Major Economies on the U.S. Dollar Index

Source: Refinitiv, TradingKey

6. Risks

The primary risk factor for markets is the U.S. inflation level. The core PCE, the Federal Reserve’s key inflation gauge, has been rising month-on-month since reaching a low of 2.5% in April 2025. If this indicator exceeds expectations in the coming months, it could force the Fed to delay rate cuts and reduce their magnitude. In such a scenario, U.S. equities, cryptocurrencies, and short-term Treasuries would face downward pressure, while the U.S. dollar index would likely receive upward support.

7. Conclusion

The Federal Reserve’s policy rate currently stands at a high range of 4.25%–4.5%, providing ample room for rate cuts to support economic growth and stabilise financial markets. We anticipate that by the end of 2025, the Fed may implement three rate cuts of 25 basis points each. If this forecast materialises, risk assets such as U.S. equities and cryptocurrencies are likely to experience price increases. Concurrently, rate cuts will reduce yields on short-term U.S. Treasuries, driving their prices higher. While rate cuts will exert downward pressure on the U.S. dollar, the relative weakness of the euro and pound may provide upward support, potentially leading the U.S. dollar index to trade within a fluctuation range.