4E Labs | One Week After the Federal Reserve's Rate Cut in September: Stock Market Pressure, Divergence in Bond Market, and On-Chain Transmission in the Crypto Market

On September 18, 2025, the Federal Reserve lowered the target range for the federal funds rate by 25 basis points to 4.00%--4.25%, marking the first rate cut of the year. This move was defined by Powell as a "risk management" style of easing, aimed at alleviating pressures from a slowing job market while remaining cautious with inflation still above target. The dot plot indicates that there may still be two more rate cuts this year, with a gradual path favored.

In the week following the rate cut, market performance was mixed: the stock market experienced volatility after a brief surge, with the S&P 500 slightly retreating; short-term bond yields fell, but long-term yields rose, indicating that inflation and fiscal deficits remain significant constraints; the crypto market reflected liquidity expectations through on-chain rates and capital flows. Overall, the market impact of this round of rate cuts needs to be 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 Chair Powell stated after the meeting that this rate cut was 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 needed to maintain a stable unemployment rate, which rose to 4.3%, the highest in four years.
• Inflation Constraints: The Fed still expects inflation to be around 3% for the entire year of 2025, significantly above the 2% policy target. This means the Fed still faces inflation constraints during the easing process.
• Dot Plot Outlook: The September dot plot shows that there may be two more 25bp rate cuts this year, with one each in 2026 and 2027, aiming to gradually bring rates down to approximately 3% neutral level within two years.
• Internal Disagreement: Newly appointed Governor Milan advocated for a one-time 50bp cut during the meeting, while Powell insisted on a gradual easing approach, emphasizing that current rates are still "modestly restrictive" with no risk-free path.

2. Historical Reference: Three Different Rate Cut Models

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

• 2001 (Dot-com Bubble): The tech bubble burst, leading to a recession, and the Fed cut rates rapidly, but the stock market continued to decline after a brief rebound.
• 2008 (Financial Crisis): Systemic risks erupted, prompting the Fed to aggressively cut rates and implement large-scale QE, categorizing the policy as "crisis-style rate cuts."
• 2019 (US-China Trade War): The economic fundamentals remained robust, but uncertainty increased, leading the Fed to adopt "insurance-style rate cuts," making small adjustments to prevent risk spread, while the stock market maintained moderate gains.

👉 The 2025 rate cut resembles 2019 the most: it is not an imminent crisis but rather uncertainty stemming from a declining job market and sticky inflation. It is neither as aggressive as 2008 nor as passive as 2001, but rather a "preventing recession, hedging risks" gradual easing.

II. Stock Market: Difficult to Sustain Rebound, Structural Divergence

1. Overall Trend

1. The S&P 500 ETF (SPY) fell from $663.21 on September 18 to $660.107 on September 25, a weekly decline of 0.47%.
2. Initially driven by themes like AI mergers, it reached a new high on September 23; however, tech stocks soon corrected, dissipating the optimism brought by the rate cut.

2. Sector Performance

1. Tech Stocks: Pressured by rising long-term rates, valuations are under strain.
2. Small-cap Stocks (Russell 2000): Improved financing conditions led to relatively strong performance.
3. Rate-sensitive Sectors: Utilities, real estate, and energy benefited in a low-rate environment, showing stable performance.

3. Market Logic

1. The rate cut did not lead to a broad bull market because "rate benefits" were offset by "inflation worries + fiscal deficits."
2. Investor strategies shifted towards: reducing allocation to overvalued tech stocks while increasing allocation to cyclical and defensive sectors.

III. Bond Market: Short Rates Down, Long Rates Up Mismatch

1. Short-term Rates Down: The 2-year Treasury yield slightly declined as the market bets on further rate cuts by the Fed in October and December.

2. Long-term Rates Up: The 10-year yield rose to 4.145%, and the 30-year yield increased to 4.76%.

3. Reasons:

• Sticky Inflation: Tariffs and rising wage costs push prices higher.
• Fiscal Deficits: Expansion of Treasury supply raises long-term rates.

4. Impact:

• Overall financial conditions improved only slightly.
• Rising long-term rates weakened the stimulative effect of rate cuts on real estate and tech stocks.

IV. International Capital and Dollar Dynamics

• The Dollar Index (DXY) weakened briefly after the rate cut, but due to the European Central Bank and the Bank of Japan maintaining easing, the dollar index did not continue to decline.
• Limited capital inflows into emerging markets, with some Latin American currencies benefiting, but Asian markets remain under pressure.
• High long-term Treasury yields continue to attract safe-haven funds back to the US, weakening the global liquidity spread.

V. Crypto Market: On-chain Rates and Liquidity Repricing

1. Short-term: Rising Yields

After the rate cut, funds flowed out of low-yield money market funds into DeFi lending markets (like Aave), pushing up USDC supply rates.

2. Medium to Long-term: Yield Curve Shifts Down

1. Forward markets like Pendle indicate expectations for lower ETH staking and stablecoin yields in the future.
2. Funds may shift from ETH staking to L2, Restaking, and RWAs.
3. The arbitrage space for stablecoins narrows, leading institutions to shift towards yield optimization strategies.

3. Asset Prices

1. BTC: Fluctuated in the $114,000--$117,000 range, down about 0.6% for the week, failing to break the August high of $124,000.
2. ETH: Traded between $4,400--$4,600, closing at $4,491, slightly up but lacking momentum.
3. Altcoins: Active trading but lacking sustained upward momentum, with high open interest but no breakthroughs.
4. Total Market Cap: Maintained at $4.14 trillion, showing no significant expansion due to the rate cut.

4. Driving Factors

1. Policy Expectations: The 25bp cut met market expectations but fell short of some investors' anticipated 50bp, leading to a cautious interpretation of the market.
2. Inflation and Bond Market: August CPI at 2.9%, core CPI at 3.1%, combined with tariff expectations → stagflation concerns; rising long-term Treasury yields limited liquidity overflow.
3. Institutions and Liquidity: Large money market fund sizes ($7.4 trillion) have not significantly flowed into crypto; while ETF applications and stablecoin innovations have made progress, capital flows remain limited.
4. Politics and Regulation: The Trump administration signaled support for crypto, but increased interference with the Fed's independence added uncertainty.

5. Market Sentiment

1. Short-term Caution: The market exhibited a "sell the fact" effect, with meme coins and highly leveraged altcoins particularly vulnerable.
2. Long-term Optimism: Historical rate cut cycles have been favorable for BTC and risk assets; some investors expect BTC to reach new highs in the long term.
3. Community Discussion: There are divergences regarding emerging concepts (like DAT), reflecting selective caution in funding towards innovative narratives.

A week after the rate cut, the crypto market did not show a unilateral positive response, characterized by price stagnation --- cautious sentiment --- 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 "rate cut benefits."

VI. Political Risks: Challenges to Central Bank Independence

• The Trump administration publicly pressured the Fed, attempting to dismiss Governor Cook, setting a historical precedent for central banks.
• There are internal disagreements within the Fed (Milan supports 50bp, Powell advocates gradualism).
• The market is concerned about monetary policy being influenced by political cycles, raising risk premiums.
• For the crypto market, this has reinforced the long-term value of the "decentralization" narrative.

VII. Investor Strategies: Cross-Market Allocation

Traditional Markets

1. Stocks: Reduce allocation to overvalued tech, increase allocation to defensive and cyclical sectors.
2. Bonds: Adopt a "barbell strategy" (short-term + long-term bonds) to hedge against interest rate fluctuations.

Crypto Market

1. Allocation: Maintain liquidity focus on DeFi blue chips but adapt to declining yields.
2. Themes: RWAs (on-chain US Treasuries), Restaking, and L2 infrastructure will present structural opportunities.
3. Risks: If stagflation materializes, crypto may face pressure in the medium to short term, but narratives still provide value support.

Conclusion

A week after the rate cut in September 2025, the US market presents a "triple structure":

1. Stock Market Under Pressure: The S&P 500 fell 0.47%, tech stocks corrected, and small-cap and defensive sectors diverged.
2. Bond Market Divergence: Short-term rates fell, long-term rates rose, with limited improvement in financial conditions.
3. Crypto Revaluation: On-chain yields rose in the short term but shifted down in the medium to long term, with a restructuring of capital.

At the same time, political interference and sticky inflation make this round of easing far more complex than in history. Key variables for the future include:

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

This will determine whether the market can transition from "cautious oscillation" to "systematic repair."