Tossing a Curveball: How Lower Interest Rates in 2025 Might Shake Up the Market
Federal actions shaping stock, cryptocurrency, and overall investment markets
Interest rates have been a rollercoaster ride over the past few years, impacting stocks, crypto, and commodities such as oil. But with interest rates starting to drop, the question is: what does this mean for 2025 and beyond?
After holding rates steady for the past couple of meetings, the Fed slashed interest rates by 25 basis points at its December 2024 meeting. With inflation reigning high and Trump's tariffs causing disruptions, the central bank thought it wise to keep rates where they were during their last meeting on May 8-9, 2025. Yet, it's rumored that more cuts may be in the pipeline for 2025.
Cheers for Lower Rates: Investor Expectations in 2025
Interest rates are one of the Fed's most powerful tools for steering the economy. When lowered, it can breathe new life into the economy by making borrowing cheaper. Conversely, raising interest rates can slow down economic activity by making credit more expensive—an effective weapon against inflation.
Even though the Fed cranked up rates 11 times during the last tightening cycle, it's easy to pinpoint when the market sat up and took notice. It was in November 2022 when crypto and many of the riskiest stocks peaked.
"When the Fed tightened its monetary policy by increasing rates in 2022, this inevitably led to equity markets and cryptocurrencies appropriately declining in value," says Octavio Sandoval, principal at Illumen Capital.
"The stock market will never stop worrying about future interest rates,” says Steve Azoury, head of Azoury Financial in Troy, Michigan. "The cost of borrowing affects every corner of investing, including purchasing and savings. Merely the anticipation of what's to come can trigger a stock market reaction."
As interest rates climbed, many stocks took a short tumble, bracing for slower economic conditions. However, when investors could get a clearer picture of the end of rising rates in 2023, the outlook turned sunnier.
Big stock indexes like the S&P 500 spent most of 2022 in a funk due to rising rates but made significant gains in 2023. The S&P 500 surged around 24 percent in 2023, while the Nasdaq Composite climbed approximately 43 percent. In 2024, they maintained their rise.
However, after impressive surges in 2023 and 2024, there may be plenty of space for markets to drop if the economy takes a turn for the worse. In fact, over the past few months, the S&P 500 suffered a "correction"— a decline of more than 10 percent from a recent high, while the Nasdaq entered a bear market—a decline of 20 percent or more from a recent high.
High-growth stocks experienced a tough time in 2022, particularly in a rollercoaster ride of crypto prices and other risky assets. While some prices firmed up in the past couple of years, it's a stretch to say these stocks are anywhere close to their earlier highs.
Software stocks such as Cloudflare, Zoom Communications, and Confluent are well below the all-time highs they hit in 2020 or 2021. Despite the high rates, profitable big-name stocks like Microsoft, Apple, and those in the Magnificent 7 still managed to set a string of new all-time highs year after year despite a lackluster 2022.
In 2022, crypto prices struggled as interest rates looked to climb, but when rates started their descend, crypto prices found a bottom and then rose through 2023 and into 2024. The introduction of Bitcoin ETFs has helped boost the price of Bitcoin, and the prospect of lower rates and inflows to ETFs have pushed Ethereum higher too.
What's Next? How Lower Interest Rates Affect Stocks and Crypto
Stocks and crypto faced significant volatility as investors factored in rising rates. But with the Fed lowering rates, what does the next six months (and beyond) have in store?
In 2024, the expectation of lower interest rates buoyed rate-sensitive sectors such as banks and real estate investment trusts (REITs). Small-cap indexes like the Russell 2000 also shone as the market began to price in the possibility of rate cuts happening. Those sectors gave back some gains in late 2024 and early 2025, though, as rising long-term rates dampened investor enthusiasm.
The bellwether 10-year Treasury, now offering a 4.28 percent yield, is below its recent high of 4.99 percent set in October 2023. Even after recent upward movement following the Fed's September, November, and December rate cuts, lower Treasury rates and a lower fed funds rate make it easier for money to flow through the economy, providing support to markets.
It's Complicated: The Influence on Other Markets
Some other major asset classes have had mixed reactions in the face of fluctuating interest rates:
Crypto and Commodities Markets
While crypto prices plummeted alongside other risky assets, many commodities spiked higher in early 2022, including oil, but many of those moves were short-lived. With the slowing and then pausing of the fed funds rate in 2023, both oil and crypto found some backing, while gold soared.
Gold has long been a safe haven in turbulent times. The yellow metal went on a tear in 2024, as the anticipation of lower rates and potential market volatility boosted its price. It's had a strong start in 2025 as well, climbing to record levels as economic uncertainty rears its head.
Crypto has often been called the cure-all for future woes, regardless of inflation, low interest rates, a devaluing dollar, or other issues. As long as crypto was rising, its benefits seemed logical.
"The truth is that crypto prices have shown they are influenced by the same directional sentiment that impacts retail stock investors," says Dan Raju, CEO of Tradier, a brokerage platform. "Low-interest rates energize the investor community, boosting crypto prices."
Indeed, cryptocurrencies responded negatively to decreased liquidity, as did other risky assets, falling as the Fed announced its plans to raise rates in November 2021 and throughout 2022, as the Fed aggressively followed through. On top of that, the fallouts of cryptocurrencies and exchanges like FTX shook traders' confidence in these virtual assets.
But turbulence in the banking sector in 2023 led many traders to bid up cryptocurrency, with some believing the future path of rate increases would be less drastic. And as 10-year Treasury rates peaked in October 2023 and then fell, riskier assets rose, as the path to a lower fed funds rate became clear and then followed through in September 2024.
However, external factors also play a role in the surge of cryptocurrency. One of the most significant is the approval of spot Bitcoin ETFs.
In early January 2024, the SEC approved 11 asset managers to offer Bitcoin ETFs. The prospect of the approval propelled the cryptocurrency to end 2023 on a high note, and the inflows to the new ETFs helped power the cryptocurrency to new highs in 2024. The election of Trump, perceived as the crypto-friendly presidential candidate, in 2024 also had traders betting on an anticipated rise in cryptocurrency.
The trends of other commodities are more varied. Some are far from their recent highs, as supply constraints and higher interest rates work to keep them in check. However, the promise of lower rates has helped prevent oil from falling precipitously below $70 a barrel in 2023 and 2024. Oil hopscotched between $70 and $85 for most of 2024, though in early 2025 it dipped below $60 on fears about a slowing economy.
- The Fed's decision to lower interest rates in 2025 might have significant implications for the stock market, with the expectation of cheaper borrowing potentially leading to growth in sectors like banks and real estate investment trusts (REITs).
- In 2025, the S&P 500, having made significant gains in 2023 and 2024, may experience drops if the economy takes a turn for the worse, as was seen in 2022 when the Fed tightened its monetary policy.
- Cryptocurrencies, like Bitcoin, have shown a correlation with general investor sentiment, with rates of interest impacting the investor community and, consequently, boosting crypto prices.
- In times of economic uncertainty, gold has been historically sought after as a safe haven, with its price surging in 2024 due to the anticipation of lower rates and potential market volatility, and maintaining a strong start in 2025.
