One week after the Fed’s September rate cut: Bond market divergence and on-chain transmission in the crypto market

On September 18, 2025, as expected, the Federal Reserve lowered the target range for the federal funds rate by 25 basis points to 4.00%–4.25%, marking the first rate cut of the year. Powell characterized this move as "risk-management" easing, intended to alleviate the pressure of a slowing job market while maintaining caution as inflation remains above target. The dot plot suggests that two more rate cuts are still possible this year, with a more gradual path. In the week following the rate cut, overall market performance was quite mixed: the stock market saw volatility after a surge, with the S&P 500 retreating slightly. Short-term bond yields declined, while long-term yields rose, indicating that inflation and fiscal deficits remain significant constraints. The crypto market, however, preemptively reflected liquidity expectations through on-chain interest rates and fund flows. Overall, the market impact of this round of rate cuts requires a comprehensive examination of the three dimensions of macroeconomic policy, traditional markets, and on-chain transmission.

I. Policy Background: Historical Echoes of Risk Management

1. The Current Logic of Risk Management

• Risk Management: Federal Reserve Chairman Powell stated after the meeting that the interest rate cut was for "risk management"—the sharp slowdown in the job market has become a major concern. The non-farm payrolls added only 22,000 jobs in August, far below the 100,000 level required to maintain a stable unemployment rate. The unemployment rate rose to 4.3%, a four-year high. Inflation Constraints: The Federal Reserve still projects inflation to be around 3% for the full year 2025, significantly above its 2% policy target. This means the Fed still faces inflationary constraints during its easing efforts. Dot Plot Outlook: The September dot plot suggests two further 25 basis point rate cuts are possible this year, one each in 2026 and 2027, with the goal of gradually lowering interest rates to a neutral level of around 3% within two years. Internal Disagreement: New Governor Milan advocated for a one-time 50 basis point cut at the meeting, while Powell insisted on smaller easing steps, emphasizing that current interest rates remain "modestly restrictive" and that there is no risk-free path. 2. Historical Reference: Three Different Rate Cutting Patterns To understand this round of rate cuts, we need to place them in the context of history: 2001 (Dot-com Bubble): The tech bubble burst, triggering an economic recession. The Fed implemented a series of rapid rate cuts, but the stock market briefly rebounded before continuing its decline. 2008 (Financial Crisis): Systemic risks erupted, prompting the Fed to implement aggressive rate cuts and large-scale quantitative easing (QE), a policy considered a "crisis-style rate cut." 2019 (China-US Trade War): Economic fundamentals remained solid, but uncertainty increased. The Fed implemented an "insurance cut," a small reduction to prevent risk contagion, leading to a moderate stock market rally.

? The 2025 rate cut is most similar to 2019: not an imminent crisis, but rather the uncertainty of declining employment and viscous inflation. It's neither as radical as 2008 nor as passive as 2001, but rather a gradual easing aimed at "recession prevention and risk hedging."

II. Stock Market: Rebound Difficult to Sustain, Structural Divergence

1. Overall Trend

1. The S&P 500 ETF (SPY) fell from $663.21 on September 18 to $660.107 on September 25, a weekly decline of 0.47%. Initially driven by AI mergers and acquisitions, the stock market reached a new high on September 23rd; however, a subsequent pullback in tech stocks dampened the optimism generated by the rate cut. 2. Sector Performance: Technology stocks: Valuations are under pressure due to rising long-term interest rates. Small-cap stocks (Russell 2000): Financing conditions have improved, leading to relatively strong performance. Interest rate-sensitive sectors: Utilities, real estate, and energy have benefited from the low interest rate environment and performed reliably.

3. Market Logic

1. The interest rate cut failed to trigger a full-blown bull market because the "positive interest rate" was offset by "inflation concerns + fiscal deficits."

2. Investor strategies tend to reduce allocations to highly valued tech stocks and increase allocations to cyclical and defensive sectors.

III. Bond Market: A Mismatch of Short-Term Declines and Long-Term Rise

1. Declining Short-Term Interest Rates: The 2-Year Treasury yield fell slightly, and the market is betting that the Federal Reserve will cut interest rates again in October and December. 2. Rising long-term interest rates: The 10-year yield rose to 4.145%, and the 30-year yield rose to 4.76%. 3. Reasons: Sticky inflation: Tariffs and rising wage costs are pushing up prices. Fiscal deficit: The expansion of US Treasury supply is raising long-term interest rates. 4. Impact: Overall improvement in financial conditions has been limited. Higher long-term interest rates have weakened the stimulus effect of rate cuts on real estate and technology stocks.

IV. International Capital and the US Dollar Landscape

• The US dollar index (DXY) weakened briefly after the interest rate cut, but continued decline was prevented by the European Central Bank and the Bank of Japan maintaining loose monetary policy.

• Limited capital inflows into emerging markets benefited some Latin American currencies, but Asian markets remained under pressure.

• High long-term US Treasury yields continued to attract safe-haven funds back to the United States, weakening the spread of global liquidity. V. Crypto Market: On-Chain Interest Rates and Liquidity Repricing 1. Short-Term: Higher Yields After the interest rate cut, funds flowed out of low-yielding money market funds and into DeFi lending markets (such as Aave), pushing up USDC supply rates. 2. Medium- to Long-Term: Downward Shift in the Yield Curve Forward markets like Pendle indicate that future ETH staking and stablecoin yields are expected to decline. Funds may flow from ETH staking to Layer 2, Restaking, and RWAs. Stablecoin arbitrage opportunities have narrowed, prompting institutions to shift toward yield-optimizing strategies. 3. Asset Prices: BTC: Fluctuated between $114,000 and $117,000, down approximately 0.6% this week and failing to break through its August high of $124,000. ETH: Fluctuated between $4,400 and $4,600, closing at $4,491, showing a slight increase but lacking momentum. Altcoins: Trading activity was active, but sustained upward momentum was lacking, with high open interest failing to break through. Overall market capitalization: Remained at $4.14 trillion, with no significant expansion due to rate cuts. 4. Driving Factors: Policy Expectations: The 25bp policy rate was in line with market expectations, but fell short of the 50bp some investors had hoped for. The market interpretation leans towards "cautious easing." Inflation and the Bond Market: August CPI was 2.9%, core CPI 3.1%, coupled with tariff expectations → stagflation concerns; rising long-term US Treasury yields have limited liquidity outflows. Institutional and Liquidity: Money market funds are substantial ($7.4 trillion), but have yet to see significant inflows into cryptocurrencies. While there has been progress in ETF applications and stablecoin innovation, capital flows are limited. Politics and Regulation: The Trump administration is sending pro-crypto signals, but the Federal Reserve's independence is undermined, increasing uncertainty. 5. Market Sentiment: Short-term Caution: The market is showing a "sell the facts" effect, with meme coins and highly leveraged altcoins particularly vulnerable. Long-term Optimism: Historical interest rate cut cycles have been positive for BTC and risky assets; some investors expect BTC to reach new highs in the long term. Community Discussion: Divergent views on emerging concepts (such as DATs) reflect investors' selective caution regarding innovative narratives. A week after the rate cut, the crypto market saw no unilateral positive news, with prices trading sideways, sentiment cautious, and institutional investors slow to enter the market. While the medium- to long-term bullish outlook remains, investors are more focused on fundamentals and risk hedging rather than simply the positive impact of the rate cut. Sixth, Political Risk: Challenges to Central Bank Independence The Trump administration openly pressured the Federal Reserve, attempting to remove Governor Cook, setting a precedent in central bank history. Divisions exist within the Federal Reserve (Milan supports a 50 basis point increase, while Powell advocates for a gradual approach). Market concerns that monetary policy may be influenced by political cycles are driving risk premiums. For the crypto market, this actually reinforces the long-term value of the "decentralization" narrative. VII. Investor Strategy: Cross-Market Allocation Traditional Markets Equities: Reduce allocation to high-valuation technology and increase allocation to defensive and cyclical stocks. Bonds: Adopt a "barbell strategy" (short-term bonds + long-term bonds) to hedge against interest rate fluctuations. Crypto Markets Allocation: Maintain focus on the liquidity of DeFi blue chips, but be prepared for declining yields.

• Topic: RWAs (on-chain US Treasury bonds), Restaking, and L2 infrastructure will be structural opportunities.

• Risk: If stagflation becomes a reality, crypto may face pressure in the short to medium term, but the narrative still provides value support.

Conclusion

One ​​week after the September 2025 interest rate cut, the US market presents a "triadic pattern":

1. Stock market under pressure: S&P 500 fell 0.47%, tech stocks retreated, and small-cap stocks and defensive sectors diverged.

2. Bond market divergence: Short-term interest rates fell, long-term interest rates rose, and financial conditions improved only slightly. Crypto Revaluation: On-chain yields will rise in the short term, but decline in the medium to long term, leading to a restructuring of the funding structure. Meanwhile, political interference and inflationary stickiness make this round of easing far more complicated than in the past. Key variables for the future are: Employment: Watch the October employment report. If the unemployment rate continues to climb, the stock market may enter a defensive market. Inflation: If tariffs push CPI stickiness above 3%, long-term interest rates may rise further. Fiscal and Political Affairs: Watch the FOMC meeting. Fiscal expansion in an election year and risks to central bank independence could trigger unexpected volatility.

This determines whether the market can move from "cautious volatility" to "systemic repair."