How The Fed Impacts Stocks, Crypto And Other Investments

Higher interest rates played out on stocks, cryptocurrency and commodities such as oil over the past few years. But now that short-term rates have started declining, what can investors expect from here, and how long will the shifting rate environment impact markets?

After lowering interest rates by 25 basis points at its December meeting, the Federal Reserve opted to hold rates steady at its last five meetings, including the latest on July 29-30, leaving them in a range of 4.25 to 4.50 percent. With the potential disruptions and inflation caused by President Donald Trump’s tariffs, the nation’s central bank decided to keep rates where they are.

But more rate cuts may be on the way in 2025, helping buoy the U.S. economy.

How interest rates impact investments

Interest rates are one of the biggest tools the Fed has for influencing the economy. By lowering rates, the Fed can stimulate economic activity, making it cheaper to borrow. On the other hand, by raising interest rates, the Fed can slow economic activity, making credit more expensive — which is a useful strategy to fight inflation.

While the Fed raised rates 11 times during the last tightening cycle, it’s easy to spot when markets really sat up and took notice that the central bank wasn’t kidding that it was about to recalibrate monetary policy. It was November 2021 when cryptocurrency and many of the riskiest stocks peaked.

“When the Fed introduced restrictive monetary policies by increasing rates in 2022, this caused equity markets and cryptocurrencies to appropriately decline in valuation,” says Octavio Sandoval, principal at Illumen Capital.

“The stock market will never not worry about future interest rates,” says Steve Azoury, head of Azoury Financial in Troy, Michigan. “The cost of borrowing impacts all areas of investing, purchasing and savings. Just the anticipation of what may happen is enough to cause a stock market reaction.”

While rates were moving higher, many stocks were moving lower, anticipating slower economic conditions. But when investors got a clearer picture of the end of rising rates in 2023, the outlook became more optimistic.

Major stock indexes such as the S&P 500 spent most of 2022 in a funk due to rising rates, but they fared well in 2023. The S&P 500 rose about 24 percent in 2023, while the Nasdaq Composite climbed around 43 percent. They followed that up strongly in 2024, and have risen to new all-time highs in 2025 after rebounding from a meltdown over Trump’s tariffs in April.

But after an impressive run-up, there may be plenty of room for markets to fall if the economy worsens. In fact, following Trump’s announcement of tariffs, 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.

Amid rising interest rates, many high-growth stocks had a rough 2022, and while prices firmed up in the past couple of years, that doesn’t mean these stocks are still anywhere close to their prior highs.

For example, software stocks such as Zoom Communications and Confluent are well below the all-time highs they hit in 2020 or 2021. Nonetheless, profitable big-name stocks such as Microsoft, Apple and others in the Magnificent 7 set a series of new all-time highs year after year despite higher rates, even after a lackluster 2022.

In 2022, cryptocurrency prices struggled as interest rates looked to move higher, but when rates began to top, crypto prices bottomed and then rose in 2023 and throughout 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.

How do lower interest rates affect stocks?

A lower fed funds rate makes it easier for money to flow through the economy, helping to boost markets or at least support them from declining more. As lower short-term rates help boost the economy, stocks begin rising due to the prospects for higher corporate profits. Lower short-term interest rates make stocks and other risky investments look like more attractive investments compared to alternatives such as bonds.

In contrast, when short-term rates are high or expected to move higher, stocks endure notable volatility as investors factor in rising rates. In other words, stocks begin pricing in a slowing economy and lower profit growth due to higher rates.

While the Fed lowered short-term interest rates in late 2024, longer-term interest rates have been rising generally over this period. The bellwether 10-year Treasury, now offering a 4.38 percent yield, is above its 52-week low of 3.60 percent, which was set in September 2024.  

With the federal government expecting to run even larger budget deficits under Trump’s proposed tax plans, investors are demanding higher long-term rates to protect them against the potential for inflation. Eventually, if long-term interest rates continue to rise, it may hurt stock prices.  

How interest rates have affected crypto and commodities markets

Some other major asset classes have had varied responses in the face of fluctuating rates.

While cryptocurrency prices plummeted along with other risky assets, many commodities spiked higher in early 2022, including oil, but many of those moves proved short-lived. With the rising fed funds rate slowing and then pausing in 2023, both oil and crypto found some support, while gold powered higher.

Gold has long been a safe haven in times of volatility. The yellow metal went on a tear in 2024, as the pending arrival of lower rates and potential market volatility helped boost its price. It’s had a strong start in 2025 as well, rising to record levels as economic uncertainty rears its head.

Cryptocurrency has often been touted as a cure-all for what ails you, whether that’s inflation, low interest rates, lack of purchasing power, devaluation of the dollar and so on. Those positives were easy to believe in as long as crypto was rising, seemingly regardless of other assets.

“The truth is that crypto prices have proven to be impacted by the same directional sentiment that impacts retail stock investors,” says Dan Raju, CEO of Tradier, a brokerage platform. “In general, high interest rates scare investors away from riskier investments like crypto, and the lowering of rates will be seen as a positive by the crypto investor community.”

Indeed, cryptocurrencies responded to reduced liquidity, as did other risky assets, by falling when the Fed announced in November 2021 its intention to raise rates and then throughout 2022 as the Fed aggressively followed through. On top of that, the blowups of cryptocurrencies and exchanges such as FTX hammered traders’ confidence in these virtual assets.

But 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. 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 appeared clear and then actually did appear in September 2024.

However, other factors are also at play in the rise of cryptocurrency. One of the most notable is the approval of spot Bitcoin ETFs, which has driven a lot of money to this cryptocurrency. The election of Trump, perceived as the crypto-friendly presidential candidate, also had traders betting strongly on an expected rise in cryptocurrency.

As for commodities, many have been well off their recent highs, as fewer supply constraints and higher interest rates work to take them down a few notches. But the expectation of lower rates helped keep oil from falling substantially below $70 a barrel in 2023 and 2024. Oil bounced around between $70 and $85 for much of 2024, though in early 2025 it fell under $60 on fears about a slowing economy.

How should interest rates impact your investing strategy?

Interest rates, inflation and uncertainty — all create a stew of volatility for investors. With so much volatility, investors may want to tread cautiously.

However, the best way for most investors to approach this type of market is to stick to the long-term game plan. For many, the long-term plan means continuing to invest regularly in a diversified portfolio of stocks or bonds and mostly disregarding the noise around the world. For others, the game plan may involve buying and holding well-diversified index funds. Either way, don’t let emotions get in the way of an effective long-term investing plan.

While short-term traders may be sweating rate movements, it’s vital to keep things in perspective. Instead of trying to find the right time to sell, buy-and-hold investors can use the market’s volatility to their advantage and then try to find the right time to add more.

“For long-term investors, the pullbacks represent attractive buying opportunities,” says Greg McBride, CFA, Bankrate chief financial analyst.

Downturns can be an appealing time to add to your portfolio at discounted prices. As investing legend Warren Buffett once said, “You pay a very high price in the stock market for a cheery consensus.” That is, stocks are cheaper when few agree that they’re an attractive investment.

Bottom line

Interest rates rose quickly in 2022 and 2023, and since September, the Fed has begun lowering rates and may eventually do so in 2025, despite a pause in the first half of the year. Those investors with a long-term investing horizon may view any downturn as an ideal time to pick up some quality investments at bargain prices.

And if stock valuations plummet? Buffett has some wisdom for that situation, too: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.