Introduction
The Fed’s interest rate policies, which have a decisive role in the global economy, can also lead to significant fluctuations in digital asset markets. Since 2012, the Fed has adopted a 2% annual inflation target based on the Personal Consumption Expenditures (PCE) Price Index as its main policy. Current data suggest that PCE remains at 2.1%, while core PCE is contracting for the first time since the pandemic. Macroeconomic factors such as global trade tensions and additional tariffs are behind this uncertainty.
FED Rate Cut Expectations
When the Fed cuts interest rates: In 2023, the Fed raised the federal funds rate to a range of 5.25%-5.50%, which led to significant pressure on crypto markets and increased volatility in asset prices. In the last quarter of 2024, interest rates were lowered to the 4.25%-4.50% range, and these levels were maintained in the first half of 2025 (March and May meetings). These changes in interest rate policies are directly affected by factors such as inflation dynamics, economic growth data and geopolitical risks. During periods of interest rate cuts, investors tend to move away from low-yielding conventional instruments and towards alternative assets. This trend may increase interest in digital assets with high risk and return potential. Moreover, while the depreciation effect of interest rate cuts on the US dollar causes short-term fluctuations in cryptocurrency markets, this effect gradually diminishes in the long run.
When interest rates are increased: Interest rate hikes are a monetary policy tool to offset inflationary pressures and maintain price stability. Rising borrowing costs restrain demand inflation by restricting both consumer spending and corporate investment. As money supply tightens, saving tendencies strengthen and credit demand weakens, which may signal a slowdown in economic activity. In addition, interest rate hikes may increase the value of the dollar, triggering selling pressure in crypto assets and leading to a downward trend in prices.
When interest rates remain stable: If the outlook is in line with market expectations, digital asset markets generally show limited and cautious reactions. However, the inflationary effects of trade wars may lead to a postponement of rate cuts. On the other hand, signs of recession, such as a sharp rise in unemployment rates, may cause the Fed to bring forward a policy change.
Rate of Change in Inflation due to Interest Rate Hikes
| Rate Hike | Inflation Impact |
|---|---|
| 25 Basis Points Increase | Inflation could fall from 6% to 5.8% |
| 50 Basis Points Increase | Inflation could fall from 6% to 5.5% |
| 100 Basis Points Increase | Inflation could fall from 6% to 5% |
| 200 Basis Points Increase | Inflation could fall from 6% to 4.5% |
Current forecasts of market participants suggest that the federal funds rate will fall to 3.6% in the last quarter of 2025. However, the possibility of the Federal Reserve (Fed) postponing this reduction process until September 2025 is a scenario that is gaining weight in the markets.
The Fed’s decision to hold interest rates steady in May 2025 is associated with uncertainties about the sustainability of economic growth and concerns that inflation could re-accelerate. According to the general market view, three to four rate cuts are expected by the end of the year. On the other hand, economists at leading financial institutions such as Charles Schwab are more cautious, forecasting a maximum of two rate cuts after September 2025.
How have expectations changed in the last 1 month?
| History | 425–450 (Expectation Rate to Remain Constant) | 400–425 (Discount Probability Rate) |
|---|---|---|
| April 30, 2025 | %32.9 | %63.2 |
| May 30, 2025 | %94.6 | %5.4 |
If the projected rate hike in June materializes, it is highly likely that the Fed will keep its policy rate unchanged at 5.50%-5.75% in July. Currently, the Fed maintains its stance of keeping the policy rate at 4.25%-4.50%. Despite a total of 100 basis points of cuts in the second half of 2024, a more cautious policy approach has been adopted as we enter 2025.
Behind this cautious stance are factors such as the expectation that core PCE inflation will hover above the target of 2.8%, trade tensions caused by new tariffs and economic growth concerns. Although traditionally low-interest rate expectations support risky assets, the prospect of escalating trade wars may increase the risk of an economic slowdown, strengthening the trend towards safe-haven assets such as gold. On the other hand, commodity markets, particularly oil, may come under pressure.
The minutes of the Federal Reserve meeting of May 2025 provide important signals regarding the Bank’s strategy in the current economic environment. The minutes suggest that policymakers agreed to maintain a “wait-and-see” approach in this period of ongoing uncertainty.
The main issues highlighted at the meeting are as follows:
- The need to maintain a data-driven and progressive approach to policy decisions was emphasized.
- It was stated that unfavourable trends in unemployment and inflation indicators should be closely monitored.
- In particular, the potential upward pressure on inflation from the US-China trade tensions was noteworthy.
- Steps to maintain the stability of dollar liquidity and FX swap lines were unanimously approved.
Market Expectations and Possible Scenarios
According to current market pricing:
- 94.6% expect interest rates to remain at current levels.
- The probability of a rate cut is calculated as 5.4%.
- Interest rate hikes are not expected by the market.
The Fed’s stance can be interpreted as an effort to keep its policies flexible against the possibility of continued inflation and unemployment threats. However, developments in global trade policies and changes in macroeconomic data will continue to be decisive in shaping the Fed’s future strategies.
| Indicator | Data | Comment | Expected | Previous |
|---|---|---|---|---|
| US Annual CPI | 2.4% | Inflation is falling. | 2.5% | 2.8% |
| US Monthly CPI | -0.1% | There could be deflationary pressure. | 0.1% | 0.2% |
| Indicator | Data | Comment | Expected | Previous |
|---|---|---|---|---|
| US Unemployment Benefits | 223K | Neutral. Parallel to expectations. | 223K | 219K |
Recent inflation data reveal a significant slowdown in the rate of price increase. In particular, the recording of negative levels on a monthly basis can be considered as the most positive development since 2021. This creates a favorable environment for the Federal Reserve to be more flexible in its monetary policy.
The stability in labor market indicators seems to have allayed concerns of an economic contraction for now. However, this balanced outlook may increase the demand for interest rate cuts to stimulate growth.
Impact on Global and Cryptocurrency Markets
Historical evidence suggests that crypto assets have performed more strongly during periods of loose monetary policy by the Fed. Increased liquidity in low-interest rate environments often increases interest in high-volatility assets. However, uncertainties in customs policies in 2025 and the cautious approach of the central bank increase the risk of volatility in digital asset markets.
The May 2025 CPI data, which came in below expectations at 2.3%, raised expectations of an easing in monetary policy and had a short-lived positive impact on crypto markets. If the interest rate cut, which is priced with a 5% probability at the June 2025 meeting, comes as a surprise, there may be significant movement, especially in Bitcoin and other digital assets.
Alternative Scenarios and Potential Impacts
- Interest Rate Cut Scenario:
- Lower borrowing costs
- Increase in market liquidity
- Increased risk appetite
- Rate Hike Scenario (Low Probability):
- Inflation down to 5.8%
- Short-term selling pressure
- Strengthening in the dollar index
Conclusion
2025 Policy Prospects
Market participants project a total reduction of 50 basis points starting in September 2025. This projection implies that the policy rate could fall to 3.75%-4.00% by the end of the year. The probability of a rate cut for July is assessed in the 20-30% range.
Digital Asset Performance
Bitcoin has returned 17% since the beginning of 2025 but has been under pressure due to trade wars and tax policy uncertainties. If interest rate cuts materialize, this asset class could see a new wave of upside.
The drop in inflation to 2.3% y/y by April 2025 has created a comforting environment, easing the pressure on policymakers. However, Fed officials tend to watch the data rather than change policy in the summer months. Expectations focused on September will be shaped by the sustainability of the improvement in macroeconomic conditions.
Disclaimer
This content has been prepared by the Darkex Research Team for informational purposes only. It does not constitute investment advice. All risks and responsibilities arising from your investment decisions are solely your own.
