At the crossroads: how the Fed balances inflation and employment after the third rate cut

Three months in a row — and again 25 basis points lower. The Federal Reserve has announced a second easing cycle, setting a federal funds rate target range of 3.50%–3.75%. But whereas earlier each cut was seen as positive news for risk assets, this time the picture turned out to be much more complex. “We can wait and see,” — said the Fed Chair, and these words instantly transformed market expectations into the most pessimistic scenario for future policy.

Signals that changed the game: from expectation to caution

The decision to cut was predictable, but the process behind it revealed much more than the figure itself. In the official statement after the meeting, the phrase reappeared that “the pace and timing” of further adjustments will depend on new economic data. Goldman Sachs analysts clearly identified this as what it truly is: the end of the preemptive easing phase. From this point on, any new rate cut will require a labor market crisis or another economic shock.

This signal became a turning point for all assets without exception. On the surface, it seems paradoxical: standard economic theory suggests that rate cuts should promote rising risk asset prices. But reality is more complicated.

Market diffusion: when one signal triggers different reactions

Global financial markets demonstrated what can be called a “disaggregation” by asset classes:

Traditional stocks initially looked like winners — the Dow Jones index rose about 1%, and regional banks, most sensitive to rate changes, jumped 3.3%. Bonds also became cheaper for borrowers, as the yield on 10-year Treasury notes decreased.

In the currency and commodity markets, opposite dynamics emerged. The US dollar weakened by 0.6%, reaching a one-month low; precious metals gained new momentum for growth, and crude oil markets showed a classic V-shaped recovery.

But the most telling reaction was in the crypto market. Investors, trying to buy into the positive report’s momentum, did so instantly — Bitcoin surged in the first minutes, but then quickly retraced and ended up 2.2% below the announcement level. Ethereum and other top altcoins followed the same cycle: rise, weak confidence, pullback.

Beyond the numbers: why one news caused different reactions

The key to understanding this fragmentation lies not in the rate cut itself, but in what it signifies:

First factor — “buy on expectations, sell on the news”. This scenario had been forecast for months. By the announcement day, it was fully priced in. When expectations materialized, some investors simply took profits, causing a slight correction.

Second factor — a paradigm shift in policy. The Fed has clearly moved from a recession-prevention mode to a “wait-and-see” stance. Powell repeatedly emphasized that rates are already close to neutral. Goldman Sachs confirmed that the preemptive easing is over.

Third — the complexity of the Fed’s situation. On one side — signs of cooling in the labor market. Internal estimates suggest that recent non-farm payroll data might be overstated; the real figure could be only 80–90 thousand per month. On the other side — inflation still exceeds the 2% target. The favored Fed indicator, (PCE), remains sensitive. Powell tried to attribute this to tariffs, calling them a “one-time price shock,” but the reality remains complex: simultaneous labor cooling and inflation persistence make each decision a minefield.

What will happen next: focus on two variables

Financial markets are now divided into two camps monitoring key signals:

First signal — labor market dynamics until spring 2026. If job growth remains below 100 thousand per month and unemployment exceeds 4.5%, a new rate cut cycle becomes more likely. Otherwise, the Fed will limit itself to one or two adjustments during the year. Most institutional investors are already incorporating this into their forecasts.

Second signal — political stability of monetary policy. Trump has already criticized the Fed, calling the rate cuts insufficient, and announced a candidate for Powell’s replacement. This adds another layer of uncertainty: the future composition of the central bank leadership and their preferences will significantly influence the rate trajectory.

Crypto market in the macroeconomic context: signals beyond rates

For cryptocurrencies, the impact of monetary policy is much deeper than just rate algebra:

Liquidity outweighs the rate in importance. Traders increasingly focus on whether the Fed actively replenishes liquidity through open market operations, rather than just lowering the official corridor. Liquidity determines market makers’ willingness to quote risky assets. If there’s only nominal rate cuts without real money inflows, crypto reactions could be sluggish or subdued.

Expectations management — the architect of prices. In practice, crypto repeatedly demonstrated that after rate cuts, prices tend to fall because the news was priced in advance. Bitcoin today follows this historical pattern precisely: rise on the news, then profit-taking.

Altcoins pay a higher price for volatility. Due to shallower markets and typically higher leverage, alternative coins are extremely sensitive to changes in the cost of capital. When liquidity shrinks, they often fall an order of magnitude more than Bitcoin.

Adding to this is another factor: a potential rate hike by the Bank of Japan could have a global effect through a drain of yuan-based liquidity. Some experts suggest that the crypto market may enter a sideways consolidation phase until mid-2026, when the global monetary architecture becomes clearer.

Summary: a new reality for risk assets

The turbulence in financial markets is decreasing. The Fed no longer acts as a safety net for all risk investments. The shift from “recession prevention” to “balancing inflation and employment” means each decision now depends on specific economic data, not preemptive impulses.

The phrase “pace and timing” sets a higher threshold. Powell blames tariffs; Trump is dissatisfied with the scale. This geopolitical friction between the central bank and the White House will add turbulence to every macroeconomic report.

For cryptocurrencies, this means the end of the era of endless liquidity. The market now lives in a world where every cent of money counts, where employment data can be manipulated, and where managing expectations is not just a buzzword but the very game. Investors aiming to buy into the momentum need to understand: ahead lies a period of data and forecast battles, not simply following a single central bank strategy.