4E Labs | The Federal Reserve cut interest rates by 25 basis points as expected: a shift from "high-level stability" to "gradual easing" in the economic game

The Federal Reserve (Fed) announced a 25 basis point reduction in the target range for the federal funds rate, adjusting it from 4.25%-4.50% to 4.00%-4.25%. This is the first rate cut since the resumption of the easing cycle in September 2024, marking a shift in monetary policy from "high and steady" to "gradual easing."

The market had fully anticipated this --- --- prior to the meeting, the CME FedWatch tool indicated a probability of a 25bp rate cut as high as 92%-96.4%. However, behind this "small step easing" lies a complex economic game: weak employment, sticky inflation, and geopolitical pressures intertwine, making the Fed's "cautious dovish" stance central.

This article will analyze from six aspects: decision background, meeting details, economic market impact, cryptocurrency market perspective, global impact, and investment strategies.

### I. Decision Background: Employment Downturn Overwhelms Inflation Upsurge

"Dual Mandate Challenge": The Fed's dual mandate --- --- to promote maximum employment and price stability (2% inflation target) --- --- faces severe challenges by mid-2025. In the first half of this year, the U.S. economy exhibited a "cold and hot" dichotomy: on one hand, the labor market significantly cooled, while on the other, inflation rebounded under trade policy stimuli. This combination of "employment downturn + inflation upturn" has put decision-makers in a dilemma.

• Labor Market Alarm: The August non-farm payroll report showed that the U.S. added only 120,000 jobs, far below the expected 180,000, with the unemployment rate rising to 4.3%, the highest since 2023. The number of initial jobless claims surged to 263,000, a near four-year high, and the labor force participation rate stagnated at 62.5%. Fed Chairman Powell stated at the Jackson Hole annual meeting that "the employment risk is skewed to the downside," which became the "overwhelming" reason for the rate cut. Compared to the 50 basis point "big move" in September 2024, this 25 basis point cut seems more like a "preventive" intervention to avoid a hard landing of the economy.
• Inflation's "Sticky" Challenge: The August CPI rose 2.9% year-on-year, with core CPI up 0.3% month-on-month, although in line with expectations, it slightly rebounded from July's 2.7%, still above the 2% target. The tariffs imposed on China and Europe during Trump's administration (with an average tax rate rising to 15%) are seen as "drivers" of inflation. PIMCO economist Tiffany Wilding warned that this could amplify supply chain costs, pushing core PCE inflation above 2.5%. However, the Fed's statement emphasized that "inflation risks are roughly balanced," indicating a preference to view tariff impacts as "temporary" rather than structural issues.
• Political and Internal Tensions: Trump openly urged for "significant rate cuts," even pushing for the dismissal of Fed Governor Cook to replace him with a more dovish board. This has heightened concerns about the Fed's independence. During the meeting, a regional Fed president cast a dissenting vote (supporting a pause in rate cuts), marking another rift following Bowman’s opposition to the 50 basis point cut in September 2024. Hu Jie, a professor at Shanghai Jiao Tong University’s School of Finance, analyzed that the Fed's "data dependence" principle is evident here: employment data "overwhelms" inflation and political noise.

Image: JULIA DEMAREE NIKHINSON/AP

Overall, the 25 basis point rate cut in September is a vote of confidence from the Fed regarding the "soft landing" prospects for the U.S. economy. It acknowledges the current economic downside risks but does not panic into excessive easing. By implementing a small rate cut, the Fed provides an insurance buffer for the economy and gains more time for observation and maneuvering.

### II. Meeting Details: Statement, Dot Plot, and "Cautious Dovish" Communication

(1) Statement: The addition of "magnitude and timing" language releases a signal of "slowing pace," avoiding self-reinforcing market expectations.

The Fed's FOMC meeting on September 17-18 (with the decision announced at 2 PM Eastern Time on the 17th) showcased its communication art as always precise. The statement included the new phrase "magnitude and timing," suggesting that future rate cuts will "slow the pace," which the Wall Street Journal described as a subtle shift in the "new Fed voice." Participants assessed that a wide range of information would be considered, including labor market data, inflation readings, and global developments. Following this adjustment, the target range for the federal funds rate is set at 4.00%-4.25%, which Powell referred to as a "risk management" measure, aimed at balancing employment and inflation. Notably, this rate cut sparked a single dissent: newly appointed Governor Stephen Miran (Trump's economic advisor) opposed it, arguing for a pause to observe tariff impacts. This reflects an increasing divide within the FOMC, with one regional Fed president also casting a dissenting vote in favor of maintaining the status quo.

(2) Dot Plot: The median indicates roughly two more 25bp cuts by the end of 2025, which is more conservative than the "three to four cuts" anticipated by the market mid-year. Fed's Economic Projections Report for September 2025: Summary of Economic Projections, September 17, 2025

Among the 19 FOMC members, 10 expect the rate to drop to 3.75%-4.00% by the end of 2025 (i.e., two 25 basis point cuts), a significant narrowing from the four cuts predicted in June. Economic forecasts show GDP growth of 2.1%, an unemployment rate of 4.3%, and core PCE inflation at 2.5% by 2025, but there are significant divergences in the dot plot: the median forecast indicates two cuts by year-end, while some hawkish members raised the long-term median rate to 3.0%, reflecting concerns about tariff-induced inflation. Powell explained the divergence at the 2:30 PM press conference: "The slowdown in immigration is dragging down labor supply, and we need to be more cautious." He reiterated that there is "no preset path," but emphasized that policy restrictiveness has weakened, allowing for "more flexible adjustments." This is consistent with the "slowing" tone from the December 2024 meeting but places greater emphasis on employment recovery.

(3) Press Conference emphasized three points:

1) Restrictiveness has weakened, but remains binding; 2) No preset path, tied to each core data release; 3) Maintaining vigilance against secondary inflation upturns and sensitivity to employment risks.

After the meeting, the U.S. Treasury yield curve steepened: the 10-year Treasury yield fell to 3.85%, while the 2-year yield rose to 3.95%, indicating that the market is pricing in an 85% probability of two rate cuts by year-end. Overall, this was a "dovish yet hawkish" communication --- --- acknowledging the cycle's shift while rejecting "unconditional easing." Its effect is to suppress excessive optimism, stabilize long-term rate expectations, and maintain the flexibility of financial conditions. This meeting reinforced the "data dependence" framework, but political noise (such as Trump's push for larger rate cuts) prompted Powell to repeatedly reaffirm the Fed's independence.

### III. Economic and Market Impact: From "Selling the Fact" to "Buying the Dip"

1) "Technical Volatility" on Release Day

• U.S. Stocks: Spiked and then retreated, with growth and high-beta sectors leading the decline, a typical "buy the expectation, sell the fact" scenario.
• Rates and Dollar: Long-end rates rose and then fell back, the dollar index fluctuated downward, with real rates still relatively high but marginally loosening.
• Credit: Spreads tightened and then stabilized, with a growing preference for high-yield and EM local currency debt.

Interpretation: More like a "re-pricing of expectations" rather than a trend reversal. If data does not deteriorate sharply, the pullback serves as a reallocation/investment window.

2) Macro Outlook and Asset Lines

• Growth: The probability of falling within a low growth range of 1.6%-2.1% is increasing, with a soft landing still being the baseline.
• Inflation: The downward direction remains unchanged, but the path is volatile, with tariffs/oil prices being the main disturbance.
• Policy: The 25bp cut is the starting point rather than the endpoint, with the next steps depending on the "scissors gap" between employment and core inflation.

Asset Implications:

• Bonds: Long-duration credit bonds, selective HY/EM local currency bonds are relatively better (benefiting from a steepening curve and a weaker dollar).
• Stocks: Earnings visibility supports AI/semiconductors/software with high ROIC; in Asia-Pacific, Hong Kong internet leaders and Korean semiconductor chains are seeing valuation recovery; in Europe, a focus on "value/dividend" factors for defensive participation.
• Commodities and Gold: The weight of gold and physical assets as a hedge against inflation and geopolitical risks can be increased, but attention should be paid to the rising short-term correlation with risk assets.

### IV. Cryptocurrency Market Perspective: "Risk Asset" Rebound Under Liquidity Injection

1) Short-Term: High Volatility Zone After Expectation Fulfillment

• Price Behavior: After the decision, BTC/ETH rose and then fell, with increased daily volatility; mainstream altcoins fluctuated more violently with the market.
• Transaction Structure: Derivatives open interest rose faster than spot transactions, with an increased share of leveraged trading, but insufficient spot buying.
• Sentiment: The Fed's "cautious dovish" stance dampened fantasies of "rapid cuts," with the market quickly switching between "easing imagination --- inflation concerns."

Short-term focus is on range and event-driven strategies; a significant upward attack requires "incremental capital in the spot market" and "downward movement of the dollar/real rates" to resonate.

2) Mechanism: Four Main Transmission Lines (Top-Down)

Crypto is highly sensitive to "real rates --- dollar," more sensitive to "net liquidity," and most sensitive to "regulatory expectations." The interplay of these three determines trend vs rebound.

3) Mid to Long-Term: Three Establishing Main Lines

• BTC's "Digital Gold" Status: In a framework of fiscal deficits, long-term dollar decline, and geopolitical uncertainty, BTC gains stronger reasons for strategic allocation.
• ETH and On-Chain Cash Flow: Rate cuts and declining capital costs favor the valuation of L2 expansion --- on-chain settlement --- real cash flow; in the medium term, the logic of "pricing based on cash flow" will be more adopted by institutions.
• Stablecoins and Compliant Financial Bridges: During the easing cycle, if stablecoin regulations with "high entry, strong disclosure, clear capital" gradually take shape, it will strengthen the bridge for fiat --- on-chain deposits, improving the funding elasticity and credit hierarchy of the entire ecosystem.

4) Four Core Risks

1. Secondary inflation upturn → Real rates "stick" → Dollar rebounds, amplifying Crypto pullbacks;
2. Regulatory tightening beyond expectations → Stablecoins/exchanges/tax events trigger structural risk premium increases;
3. Leverage --- liquidation chain → High open interest in derivatives and crowded long positions can easily lead to cascade deleveraging;
4. Systemic liquidity events → Traditional financial stress spills over, with Crypto funds being the first to be withdrawn.

### V. Global Perspective: Emerging Markets "Breathing" and Geopolitical Ripple Effects

The impact of the Fed's rate cut transmits globally through capital flows and exchange rate channels, seemingly becoming a "butterfly effect" that affects all parties. Firstly, a weaker dollar has provided emerging markets with a long-awaited breathing space. As the Fed begins its rate-cutting cycle, the dollar index has weakened again after being relatively stable over the summer, currently falling below the 97 mark and likely to challenge recent lows. This presents a "double-edged sword" for emerging economies --- --- on one hand, the depreciation of the dollar alleviates these countries' external debt burdens and import costs, motivating capital to "exit the U.S. and enter emerging markets" in search of higher returns; but on the other hand, currency appreciation may weaken export competitiveness and could trigger exchange rate volatility. Overall, the positive effects outweigh the negatives.

(1) China

The pressure of the U.S.-China interest rate differential has eased, expanding the maneuvering space for monetary policy; a combination of RRR cuts/rate cuts/structural tools is more likely to be implemented, benefiting the valuation recovery of credit and equities.

Taking China as an example, the renminbi has significantly appreciated recently under the expectation of the Fed's shift to easing, briefly surpassing the 7.17 mark. The People's Bank of China is seizing the opportunity: analysts say that if the Fed's rate cut materializes, it will significantly narrow the U.S.-China interest rate differential and alleviate depreciation pressure on the renminbi, opening up space for the PBOC to implement RRR cuts or rate cuts. The market widely expects the PBOC to lower the reserve requirement ratio (RRR) to increase market liquidity and guide the loan market quotation rate (LPR) downward, reducing corporate financing costs and using the external easing "wind" to boost the domestic economy.

(2) India

Nominal interest rate reduction space is expected, and the real yield adjusted for inflation remains attractive, with local currency bonds and foreign net inflows into the stock market being favored.

Other emerging economies have also gained policy maneuvering room and capital favor. For example, India, where government bonds provide over 5% real yield after hedging exchange rate risks, have seen a surge in attractiveness. The Fed's rate cut will encourage the Reserve Bank of India to continue lowering rates to support growth, and in the context of falling inflation, India may see a new round of monetary easing this year. These factors combined make Indian bonds a "hot commodity" in the eyes of global investors. Standard Chartered reports that the current inflation-adjusted yield on Indian government bonds ranks among the top in major economies, while the pressure on global growth from U.S. tariffs has increased the likelihood of further rate cuts in India.

(3) Europe

Euro appreciation + tariff and growth pressures → passive hawkish risks rise; the ECB may delay synchronized easing, with European equity valuation recovery slower than U.S. stocks.

However, the global "ripple effect" brought about by the Fed's easing is not all positive. A significant source of uncertainty comes from the aggressive trade policies of the Trump administration. The U.S. imposing tariffs not only raises its own inflation but also exports inflationary pressures globally through commodities and supply chains. For Europe, which is already close to its inflation target, this is a severe blow. This year, core inflation in the Eurozone is expected to reach only 1.8% by 2027, below the 2% target. In this context, the Fed's rate cut has caused the euro to soar against the dollar (up 15% year-to-date, the largest increase since 2003). The sudden strength of the euro, combined with trade frictions dragging down European growth, could further depress European inflation. This puts the European Central Bank in a dilemma: logically, it should consider re-cutting rates to stimulate given inflation is below target, but its policy rate has already been lowered to 2% (in the middle of the neutral range), and further cuts could return to a "stimulus mode" of zero or even negative rates. ECB Executive Board member Schnabel warned against hasty excessive easing, as it may necessitate a reversal of policy direction in the future. Based on this, the market judges that the ECB may delay following the Fed's rate cuts after observing for a period rather than immediately aligning with the Fed's steps. This misalignment of monetary policies between the U.S. and Europe also means that the euro may strengthen further, putting pressure on European exports and growth.

(4) Japan

The convergence of U.S.-Japan interest rate differentials and rising expectations for policy normalization lead to a rebound in yen carry trades, increasing exchange rate elasticity; caution is needed regarding the dual impact of rapid exchange rate fluctuations on exports and corporate profits.

In Asia, Japan is also facing a delicate situation. The Fed's rate cut weakens the dollar, providing an opportunity to correct the long-standing undervaluation of the yen. This year, the yen has significantly appreciated against the dollar, reaching near recent highs. Part of the reason is that the Bank of Japan has begun discussing the end of its ultra-loose policy, while the Fed enters a rate-cutting cycle. This convergence of interest rates and policy differences is gradually prompting yen carry trades to unwind: investors are covering their short positions in yen, driving the yen's exchange rate higher. The chief strategist at Amundi pointed out that as a large number of yen carry trades are unwound, the yen is expected to gain further momentum. However, the rapid appreciation of the yen also poses challenges for the Japanese economy and corporate profits; the Japanese government has recently issued multiple verbal warnings about exchange rate volatility, suggesting intervention to stabilize the yen. This indicates that under the backdrop of Fed easing, the policy orientations of various central banks may diverge anew: some may have to remain inactive or even tighten again to defend their currencies and price stability.

Overall, the Fed's rate cut has injected a strong dose of confidence into emerging markets and global liquidity, but geopolitical factors and the differences in national fundamentals will determine the magnitude of the ripple effects from this "confidence boost." Monica Defend, head of investment research at Amundi, commented that the Fed's focus is shifting from inflation to employment and economic weakness, while political pressures are rising --- --- this will become the new norm after the "Super Central Bank Week." In the near future, the misalignment of policy steps among major economies may lead to phase adjustments in global capital flows. For instance, Fed easing will boost risk assets, but if Europe and others do not synchronize their easing, there may be a scenario where funds flow back from developed markets to emerging markets. However, central banks will ultimately act based on their own macro conditions, and investors need to closely monitor market fluctuations triggered by global "policy temperature differences."

### VI. Strategic Insights (Cross-Asset + Crypto)

1) Asset Allocation Framework (12-Month Rolling Perspective)

• Bonds:
• Increase allocation to IG/BBB+ long-duration credit (benefiting from a steepening curve), select HY/EM local currency bonds;
• Use a spread + duration "dual factor" combination to control default sensitivity.
• Stocks:
• U.S.: High visibility earnings in AI/semiconductors/software with high ROIC;
• Asia-Pacific: Hong Kong internet leaders and Korean semiconductor chains seeing valuation recovery;
• European stocks: Focus on "value/dividend" factors for defensive participation.
• Commodities/Gold:
• Gold and physical assets as a hedge against inflation and geopolitics.
• Crypto:
• Core Position: BTC as "digital gold," Satellite Position: ETH + infrastructure sectors;
• Strict leverage limits (e.g., total position VAR ≦ 95% percentile threshold) to control tail risks with option collars/straddles;
• Increase positions when event-driven (upgrades/ETFs/policies) and incremental spot capital resonate, otherwise exit with time-based profit-taking/moving stop-loss discipline.

2) Key Monitoring Indicators

• Macro: Core PCE, non-farm payrolls/unemployment rate, JOLTS, wage growth, ISM new orders.
• Financial Conditions: 10Y/2Y spread, financial conditions index, M2 and reverse repo balances.
• Dollar and Real Rates: DXY, 5y5y BEI, 10Y TIPS.
• Crypto-Specific: Spot/perpetual basis, total market OI, funding rates, total stablecoin supply and net growth rate, on-chain active addresses and fees.
• Regulatory Pulse: Progress on stablecoin legislation, CEX enforcement events, ETF fund flows.

### Conclusion: The "Soft Landing" Bet and Rebalancing Under Cautious Easing

This 25bp rate cut is not "flooding the market," but rather a risk rebalancing:

• Between weakening employment and persistent inflation, the Fed chooses small, reversible, data-driven steps;
• Between asset pullbacks and earnings resilience, the market will choose buying on dips + risk diversification;
• Between gradual dollar decline and capital reallocation, cross-market opportunities will increasingly appear in valuation gaps and cash flow-backed assets.

For professional investors, treating rhythm as a marginal advantage:

• Before policy provides a "clear acceleration," maintain structural long + disciplined hedging;
• In the Crypto space, wait for the triple resonance of "net liquidity + real rates + regulatory expectations," using pullbacks and events to build mid-term positions;
• Manage portfolios with a scenario tree, rather than betting on a single path. In an era that does not commit to the future but only to conditions, "staying true while being innovative" is the source of long-term winning probabilities.

References:

1. Summary of Economic Projections, September 17, 2025, September 18, 2025
2. Reuters World News, "Morgan Stanley, Deutsche Bank expect three US interest rate cuts this year," September 12, 2025
3. Matthew Weller, Investing.com, "FOMC Meeting Preview: Fed to Cut, but Will It Endorse 3 Cuts This Year?" September 17, 2025
4. Reuters, "US unemployment rate near 4-year high as labor market hits stall speed," Lucia Mutikani, September 5, 2025
5. Reuters, "US consumer inflation accelerates; weekly jobless claims approach four-year high," Lucia Mutikani, September 11, 2025
6. Reuters Finance, "Fed lowers interest rates, signals more cuts ahead; Miran dissents," Howard Schneider et al., September 17, 2025
7. Yicai, "Fed cuts rates by 25 basis points, Nasdaq first breaks 19,000 points, S&P 500 moves towards 6,000 points," November 8, 2024
8. Standard Chartered, "Financial Market Weekly: Is the Fed Coming to the Rescue?" August 8, 2025
9. FastBull Finance News, "Global 'Super Central Bank Week' Returns! Can the Fed 'Significantly Cut Rates' as Promised?" September 17, 2025
10. Reuters Commentary, "Fed easing a mixed blessing for rest of the world," Jamie McGeever, September 17, 2025
11. Sichuan Online, "Powell hints at possible Fed rate cuts; experts say it's both a long-awaited 'tailwind' and may hide 'underflows'," August 24, 2025

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