1. Introduction

On August 22, Federal Reserve Chairman Powell stated that the downside risks to the labor market are rising and that it may "require adjustments to our policy stance." The market widely expects the Federal Reserve to initiate a rate cut at the September FOMC meeting. This statement immediately triggered a strong response from risk assets, with U.S. stocks rallying across the board and the crypto market reversing from several days of downward trends, with ETH surging and breaking previous highs, reaching around $4,956.

Ultimately, the Federal Reserve's interest rate decisions are driven by hard data on employment and inflation. On the timeline, key nodes have become clear: the FOMC is scheduled to meet on September 16-17, and the September decision will not only provide the interest rate decision but also update the "dot plot" and macroeconomic forecasts. The two critical "life-and-death data" before the meeting, namely the August non-farm payrolls and unemployment rate (released on September 5) and the August CPI (released on September 11), will essentially determine whether a rate cut will occur. This means that in the next three weeks, any "face-slapping" data surprises (such as accelerating wages, a rebound in service inflation, or an unexpected decline in the unemployment rate) could alter the smooth path of "September + another cut within the year."

This article will interpret the basis of the Federal Reserve's interest rate decisions, the impact pathways of interest rate cuts on crypto assets, and historical experiences, as well as conduct scenario analysis on the probability of a rate cut in September and the pace of rate cuts in the fourth quarter, and analyze the potential performance of the cryptocurrency market, ultimately providing investors with a multi-dimensional outlook and probability-weighted market predictions.

2. Determinants of Federal Reserve's Interest Rate Policy

The Federal Reserve's dual mandate is "maximum employment" and "stable prices." The core tool of the Federal Reserve's interest rate policy is the Federal Funds Rate. It is the target interest rate range applicable to overnight lending of excess reserves between U.S. commercial banks, set by the Federal Open Market Committee (FOMC). In other words, this is the "wholesale borrowing rate" within the banking system. By adjusting it, the Federal Reserve 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 in employment and inflation.

The Federal Reserve's interest rate policy is constrained by three core factors: employment, inflation, and financial conditions. The interest rate policy is not driven by a single indicator but is a dynamic balancing process influenced by 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-bond market reactions, financial stability risks). In the current macro context of 2025, these factors are collectively pushing the Federal Reserve from "maintaining high rates for a long time" to gradually "preparing for small steps of easing."

1) Rising Employment Risks

In July, U.S. non-farm employment increased by only 73,000, significantly below market expectations, and previous data was also revised down; the unemployment rate rose to 4.2%. This indicates that the expansion of the U.S. labor market is approaching "stall speed," showing that employment is no longer a "safety cushion" for the Federal Reserve's policy. If employment continues to weaken, it will directly touch upon the Federal Reserve's core goal of "maximum employment," forcing it to lean more towards easing in its policy orientation.

2) Inflation Decline Stalled but Overall Moderate

Regarding inflation, the July CPI year-on-year was 2.7%, and the core CPI year-on-year was 3.1%, with month-on-month increases of 0.2% and 0.3%, respectively, with the core CPI recording the largest monthly increase this year. Although the inflation level remains above the Federal Reserve's 2% target, it has not deteriorated into "full re-inflation." Notably, the Producer Price Index (PPI) is rising, reflecting that upstream cost pressures are increasing, while the speed of transmission to the end consumer remains slow. This "upstream rising, downstream moderate" pattern indicates that inflation still has stickiness in the short term but has not reached an uncontrollable level.

3) Financial Conditions and Policy Communication

In addition to hard data, the Federal Reserve also pays attention to feedback and stability in financial markets. Powell's speech at Jackson Hole clearly released the signal of "not rushing into significant easing but leaving room for small adjustments," with the core idea being to use limited rate cuts to buffer the tail risks in the labor market. The market interprets this as: if employment data continues to weaken, the Federal Reserve will first cut rates by 25 basis points in September and may make another slight adjustment by the end of the year.

3. Impact of Interest Rate Policy on the Crypto Market and Historical Experience Analysis

The Federal Reserve's interest rate decisions not only directly affect the dollar and the U.S. economy but also influence global risk assets, including cryptocurrencies, through multi-layered transmission effects in financial markets. Overall, this transmission can be roughly divided into three main lines: the interest rate and discount rate channel, the dollar and capital flow channel, and the risk appetite and funding behavior channel. These three pathways intertwine to shape the cyclical volatility characteristics of the crypto market.

1) Discount Rate Channel: Lower Interest Rates Raise Risk Asset Valuations

Interest rates are the cornerstone of asset pricing. A rate cut by the Federal Reserve will lead to a decline in U.S. Treasury yields, thereby lowering the market's discount rate. In this environment, the valuations of growth assets with more distant future cash flows are more easily elevated, which is the logic behind why tech stocks and high-duration assets like Bitcoin and Ethereum often outperform during easing cycles. Historically, during the pandemic in 2020, the Federal Reserve quickly cut rates and implemented QE, directly driving a dual bull market in U.S. stocks and the crypto market, with BTC rising from under $10,000 to $60,000 within a year. Conversely, in 2022, under the backdrop of aggressive rate hikes by the Federal Reserve, Bitcoin and Ethereum were both halved or more, with rising discount rates putting pressure on prices.

2) Dollar and Capital Flow Channel: Weak DXY Benefits Crypto

The Federal Reserve's interest rate policy also influences capital flows through the strength or weakness of the dollar index (DXY). Rate cuts often weaken the dollar's attractiveness, prompting funds 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 Federal Reserve ended balance sheet reduction and restarted rate cuts in 2019, Bitcoin quickly rebounded over 100% from its low during the period of a weakening dollar index. In contrast, in 2022, as the Federal Reserve raised rates and the dollar strengthened, 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 Funding Behavior Channel: Stock Market and ETF Linkage

Interest rate policy further influences the crypto market through stock market risk appetite. Historical data shows that Bitcoin has a significantly positive correlation with the Nasdaq index during most periods. When the Federal Reserve releases easing signals and the stock market rises, crypto assets often experience greater elastic increases; conversely, during stock market risk aversion, the crypto market often faces amplified declines.
Additionally, with the launch of Bitcoin and Ethereum spot ETFs, the relationship between policy expectations and ETF subscriptions/redemptions has become increasingly tight. For instance, during the dovish shift of the Federal Reserve in the first half of 2024, BTC and ETH ETFs recorded continuous net inflows, providing solid support for the market; while in July and early August, when policy uncertainty intensified, ETF funds briefly experienced net outflows, leading to immediate fluctuations and declines in the crypto market. This indicates that ETF funding behavior has become a direct channel for the transmission of interest rate policy to crypto assets.

Since 2019, every turning point in monetary policy has almost been accompanied by trend movements in the crypto market, with the negative correlation between Bitcoin prices and interest rates becoming increasingly evident. At this current juncture, as the market widely bets on a rate cut in September, we need to consider how these historical experiences and transmission pathways will shape the next phase of the crypto market.

Source: https://newhedge.io/bitcoin/bitcoin-vs-federal-funds-rate

4. Probability and Uncertainty Analysis of September Rate Cut

The Federal Reserve's interest rate policy is at a critical turning point. The FOMC meeting on September 17 is not only a routine interest rate meeting but may also become a barometer for monetary policy for the entire year of 2025. The market is almost betting on a "25bp rate cut in September," but the deeper question is: is this action a one-time "insurance adjustment," or the beginning of a new round of rate cut cycles? The answer will depend on the next two most critical data points—August non-farm employment (to be released on September 5) and August CPI inflation (to be released on September 11). They will directly determine the hawkish-dovish distribution of the Federal Reserve's dot plot and the market's expectations for the policy pace in the fourth quarter.

1) Probability of a September Rate Cut

Employment Side: The July non-farm employment increase was only 73,000, far below market expectations, and the previous value was revised down, with the unemployment rate rising to 4.2%. This indicates that the U.S. labor market is rapidly cooling, and the expansion speed is approaching "stall speed." If August non-farm employment continues to be sluggish (for example, 100,000), or if the unemployment rate rises to 4.3% or higher, the logic for the Federal Reserve to maintain high rates will be completely undermined. A slowdown in employment means insufficient economic momentum, which is the most direct driving force for a policy shift.
Inflation Side: The July CPI year-on-year was 2.7%, and the 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 recorded the largest monthly increase this year, overall it has not moved towards "full re-inflation." If the August CPI month-on-month remains at 0.2% or lower, it will provide ample space for the Federal Reserve to initiate a rate cut on the grounds of "downside risks in the labor market." Even if the core CPI unexpectedly rises to 0.3% or higher, it will more affect the pace of subsequent rate cuts at the end of the year rather than prevent the initial adjustment in September.
Market Pricing: The CME FedWatch tool shows that the probability of a 25bp rate cut in September is about 87.3%; the Polymarket prediction market gives about a 78% probability. This indicates that "initiating a rate cut in September" has become a pricing consensus.

Source: https://polymarket.com/event/fed-decision-in-september

Source: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

Overall, the Federal Reserve has little reason to remain "on hold" in September. Even if inflation remains sticky, the Federal Reserve is more concerned about the systemic risks posed by a deteriorating labor market. Therefore, a small step towards easing in September is almost a high-probability event.

2) Key Uncertainties

Although a rate cut in September is highly likely, the pace will still depend on the combination of August data. This can be summarized into three possible scenarios:

Continued Weak Employment + Moderate Inflation
If August non-farm payrolls remain below 100,000, the unemployment rate rises to over 4.3%, and the core CPI month-on-month is ≤0.2%, then a 25bp cut in September is almost a certainty, and the probability of another 25bp cut in December will significantly increase. This combination means that the Federal Reserve will not only act in September but will also intensify measures by the end of the year to stabilize employment.
Employment Rebound + Sticky Inflation
If August non-farm payrolls unexpectedly rebound to over 150,000, and the core CPI month-on-month is ≥0.3%, then a rate cut in September may still occur (to "hedge against tail risks in employment"), but the tone of the dot plot will be more hawkish. The market will interpret this action as a "preventive rate cut," rather than the beginning of sustained easing, and the probability of a second rate cut by the end of the year will be revised down.
Discrepancy Between Employment and Inflation
If employment improves but inflation declines, or if employment weakens but inflation rises again, the policy path will become more complex. For example, if there is "accelerating wages + sticky service inflation," the Federal Reserve may release cautious signals in September, or even delay action until October with a low probability. Although this scenario is less likely, if it occurs, it will lead to significant short-term market volatility.

Overall, the certainty of a 25bp rate cut in September is very high, and market and policy communication has paved the way for this action. However, the pace in the fourth quarter carries significant uncertainty, primarily depending on whether employment continues to deteriorate and whether inflation remains moderate. If weak employment and slowing inflation occur simultaneously, the Federal Reserve will lower rates more quickly; if inflation remains stubborn, the policy pace will slow down, potentially remaining at a "one-time cut" scenario.

## 5. Fourth Quarter Pace: Three Scenario Simulations and Market Implications

If a rate cut in September is essentially confirmed, the real suspense lies in the pace from October to December. This will depend on whether employment further deteriorates and whether inflation can remain moderate. Based on these two key variables, three policy paths can be projected:

(A) Baseline Scenario: Cumulative 50bp Cut in September and December (Probability ~55%)

Conditions: August non-farm payrolls continue to be weak, and core CPI is moderate.
Policy Pace: 25bp cut in September → Wait and see in October → Another 25bp cut in December.
Market Implications: Consistent with the general predictions of investment banks (cumulative 50bp for the year). For the crypto market, this means a steady improvement in liquidity, with a gradual upward trend rather than a one-sided explosion.

(B) Cautious Scenario: Only One Rate Cut in September (Probability ~30%)

Conditions: August CPI month-on-month ≥0.3%, sticky service inflation; employment does not further deteriorate.
Policy Pace: 25bp cut in September → Wait and see in the fourth quarter.
Market Implications: Short-term benefits are realized, but the hawkish tone of the dot plot suppresses market optimism. The crypto market may maintain volatility, with funds chasing hot sectors but lacking a sustained trend.

(C) Unexpected Scenario: Accelerated Rate Cuts in the Fourth Quarter (Probability ~15%)

Conditions: Extremely weak August non-farm payrolls (50,000), unemployment rate approaching 4.5%, and core CPI declining.
Policy Pace: 25bp cut in September → Consecutive cuts in October and December, with a cumulative total of ≥75bp for the year.
Market Implications: Liquidity is more accommodative than expected, leading to a surge in risk assets. The crypto market is likely to experience an explosive bull market similar to 2020, with Bitcoin and Ethereum quickly reaching new highs, and altcoins and DeFi entering a high-volatility phase. However, if the economy declines too deeply, both the stock market and crypto may first experience severe fluctuations before entering an upward trend.

The core differences among these three scenarios lie in the combination of employment and inflation. The baseline scenario is the most likely to occur (moderate easing), while the cautious and unexpected scenarios represent "slower pace" and "faster pace," respectively. For investors, the data released on September 5 and September 11 will not only determine the actions of the September FOMC but will also shape market expectations for the remainder of the year.

Conclusion

In summary, the combination of "slowing employment + unstable inflation" in the U.S. economy is pushing the Federal Reserve towards a turning point, with a high probability of initiating a rate cut cycle in September. This macro turning point is undoubtedly a significant positive for the crypto market, which has been under pressure for the past two years: a decline in interest rates will clear the clouds hanging over risk assets like Bitcoin, revitalizing market confidence in liquidity and growth. The rapid market reaction following Powell's hint at a possible rate cut indicates that capital is already preparing for a new round of market movements. The current crypto market is at a critical juncture of macro and industry resonance, with macro policy turning points combined with increased mainstream adoption likely to shape the next phase of market trends.

However, as analyzed in detail in this article, the impact of Federal Reserve policy on the crypto market is multi-layered: it brings opportunities from liquidity surges but also accompanies volatility from expectation games. Investors should closely monitor the upcoming employment and inflation data, paying attention to whether policy signals align with market expectations. At the same time, by observing on-chain data and market indicators, we see that institutions and whales have already positioned themselves in advance, but short-term pullbacks and exchanges of holdings are still frequent, indicating that market trends will not be smooth. Looking ahead to the coming months, the more likely scenario is that a loose interest rate policy environment will provide sustained upward momentum for the crypto market. However, whether it is a surprising accelerated bull market or an unexpected delayed rate cut, the key to achieving stable returns lies in dynamically adjusting strategies and risk management, focusing on employment and inflation data in early September, as well as the progress of the Federal Reserve's decisions, and timely correcting judgments based on new information. Maintaining caution when market expectations are aligned and daring to position contrarily when market panic arises will enable one to remain undefeated amid uncertainty.

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Hotcoin Research | Market bets that the probability of a rate cut in September exceeds 80%: Analysis of the Federal Reserve's rate cut pace in the fourth quarter and its impact outlook