Fed rate cuts 2025: Understanding the impact and predictions

By Sean O'Meara

What are Fed rate cuts and why do they matter?

The Federal funds rate is the interest rate banks charge for lending to other banks. A fed rate cut is when the Federal Reserve lowers the target range for that interest rate. When interest rates are lower, borrowing is cheaper but people and businesses earn less on their savings.

In theory, lower interest rates stimulate borrowing, investment and ultimately job creation. Historically, the Fed cuts rates to stimulate economic activity and growth during an economic downturn. After the 2008 recession, the Fed cut rates to nearly zero to encourage economic growth and job creation.

The Federal Reserve’s 2025 policy outlook

The Federal Reserve has a chairperson, board of governors and regional presidents. Analysts believe currently that members are split on policy, with some governors pushing for big cuts and some regional presidents opposed.

Bloomberg reports that the Fed is concerned about heightened inflation and a slowing labor market. President Trump is influencing the Fed’s policy outlook too, simultaneously pushing for a lower cost of borrowing while tariffs threaten to push up costs for consumers and businesses.

Analysts are predicting the Fed will introduce a quarter point rate cut to the Federal funds rate target range. This means the rate will drop from a range of 4.25% – 4.50% to 4% – 4.25%. It last dropped in December 2024 by the same amount.

While a quarter point rate cut matters to the economy, it’s not the largest cut or the lowest rate in recent history. After the 2008 recession, the Fed cut rates to nearly zero to encourage economic growth and job creation. 

In March 2020 during the Covid-19 pandemic, the Fed cut rates twice, going from a range of 1.00% – 1.255% to 0% – 0.25%.

Impact of Fed rate cuts on stocks 

As a general rule, higher interest rates tend to constrain lending and also affect corporate profitability. When rates are lower, companies can borrow more cheaply and have increased access to liquidity, meaning stocks may perform better. 

Because rate cuts impact savings as well as borrowing. Stocks can become more attractive by comparison to cash and fixed income assets. This may push up demand for stocks, which can lead to increases in their price.

The effect of rate cuts on stocks can vary by sector. Tech and consumer stocks tend to experience a boost due to higher consumer confidence and disposable income. Financial stocks tend to have a mixed response. Lower rates make borrowing between banks cheaper but it also eats into lender profitability.

Companies projected to grow at a faster rate than the wider market, also known as ‘growth stocks’, benefit too. This is because their valuation is based on discounted future earnings. The discount decreases as rates drop, potentially making the stock more valuable today.

When borrowing is cheaper and saving is less rewarding, it tends to boost consumer spending, which increases investor confidence. This can have a positive impact on earnings expectations for the wider stock market.

Impact of Fed rate cuts on crypto 

Fed rate cuts can weaken the U.S. dollar and assets denominated in U.S. dollars. This can make crypto a more appealing asset as it is not tied to any national currency. Investors may be attracted to crypto as a ‘hedge’ against volatility in the U.S. economy.

In 2020 during the Covid-19 pandemic, crypto values rallied as the Fed cut rates repeatedly. These rallies tend not to happen immediately after a cut, but there has been a pattern of crypto values increasing in line with Fed rate cuts.

This is because the perceived risk of crypto investing compares more favorably with the lower perceived reward of cash or fixed-income investing. When interest rates are high, cash savers are less inclined to invest in crypto because it’s more of a trade-off against the certainty of cash returns.

Some analysts believe any post-cut crypto rally has already been priced in.

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Predictions for 2025 Fed rate cuts 

Analysts aren’t unified on the details, but there’s broad consensus that the Fed will cut its target range rates after its September meeting by 0.25%, or ‘25 basis points’. This will follow nine months’ of stable rates. This could lead to some market volatility as traders adjust their outlooks and strategies accordingly.

There’s general consensus across major brokerages is that the Fed will make a total of three cuts in 2025. The predicted depth of the cuts expected in 2025 ranges from 50 basis points to 100 basis points. The markets are seeing cooling job growth and stubborn inflation as a primary driver.⁶ 

On the back of any cuts, bullish investors will be expecting to see increased consumer confidence and improved corporate profitability. Bearish investors will be cautiously watching the impact of the cuts on economic fundamentals like inflation and employment figures.

Regardless of asset class, rate cuts bring opportunities and risks to investors. Diversification of holdings across sectors and asset classes may protect investors from some of the expected volatility.

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¹ https://www.ft.com/content/af41b26c-f3fc-4a20-a744-23fccadd0c2

²  https://www.bloomberg.com/news/articles/2025-09-14/trump-expects-a-big-cut-from-federal-reserve-this-week?embedded-checkout=true 

³  https://www.investopedia.com/what-to-expect-from-wednesday-s-fed-meeting-11809077

⁴  https://www.forbes.com/advisor/investing/fed-funds-rate-history/

⁵  https://happycoin.club/en/snizhenie-stavki-frs-mozhet-i-ne-sprovoczirovat-ralli-bitkoina/