Federal Influence on Stocks, Cryptocurrencies, and Various Investments
In a rapidly changing economic landscape, the role of interest rates in shaping the markets has never been more evident. From 2022 onwards, we have witnessed a series of events that have significantly influenced the stock market, cryptocurrencies, and commodities such as oil.
For long-term investors, downturns can be an appealing time to add to their portfolio at discounted prices. However, the current high-rate environment has constrained growth and risk assets, as the Federal Reserve has kept interest rates in a range of 4.25 to 4.50 percent since July 2022. This decision was partly due to potential disruptions and inflation caused by President Donald Trump's tariffs.
The S&P 500 suffered a "correction" and the Nasdaq entered a bear market after President Trump's announcement of tariffs. Many high-growth stocks are still below their prior highs from 2020 or 2021. However, the S&P 500 rose about 24 percent in 2023 and the Nasdaq Composite climbed around 43 percent, following a rough 2022 due to rising rates.
Cryptocurrencies like Bitcoin are particularly sensitive to changes in Fed policy and interest rate guidance. Instability in the banking sector in 2023 led many traders to bid up cryptocurrency, in the belief that the future path of rate increases would be less severe. The approval of spot Bitcoin ETFs has driven a lot of money to this cryptocurrency, and the prospect of lower rates and inflows to ETFs have pushed Ethereum higher.
However, the blowups of cryptocurrencies and exchanges such as FTX have impacted trader's confidence in these virtual assets. The election of Trump, perceived as the crypto-friendly presidential candidate, also had traders betting strongly on an expected rise in cryptocurrency. With the Fed maintaining rates but signaling possible cuts later in 2025, cryptocurrencies could see increased volatility but might benefit from eventual rate reductions.
Oil prices often respond to interest rates indirectly through global economic growth expectations and the strength of the U.S. dollar. Oil prices bounced around between $70 and $85 for much of 2024, but fell under $60 in early 2025 due to fears about a slowing economy. While rate cuts can weaken the dollar and support commodity prices, geopolitical and supply factors remain dominant influences on oil.
In summary, markets are in a transition phase. The high-rate environment has constrained growth and risk assets, but impending rate cuts could restore confidence and boost stocks and cryptocurrencies, while commodities like oil will continue to be shaped by geopolitical supply factors alongside monetary policy shifts. This dynamic will likely persist through the remainder of 2025.
[1] Fed Signals Rate Cuts in 2025, Boosting Stocks and Cryptocurrencies [2] Crypto Prices Soar as Fed Hints at Easing Monetary Policy [3] Oil Prices Dip as Fed Hikes Rates, but Geopolitical Factors Remain Key [4] The Impact of Monetary Policy on Commodities: A Focus on Oil [5] Market Reactions to the Shifting Monetary Policy Environment: A 2025 Outlook
- In light of the Fed's signals for potential rate cuts in 2025, long-term investors might find appealing opportunities to invest in stocks and cryptocurrencies, aiming to capitalize on the expected growth and reduced risk.
- The anticipated easing of monetary policy by the Fed could lead to a surge in cryptocurrency prices, as traders anticipate increased liquidity and inflows to exchange-traded funds (ETFs), particularly for Bitcoin and Ethereum.
