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The Federal Reserve made its first interest rate cut of 2025 yesterday, lowering the federal funds rate by 25 basis points. The move was striking because core PCE inflation remains above 2.9%, a level at which the Fed hasn’t cut in more than 30 years.
Fed Chair Jerome Powell explained the shift:
“The decision reflects mounting weakness in the labor market. Our priority is now on supporting jobs, while continuing to monitor inflation risks.”
Markets reacted instantly. The U.S. dollar tumbled to its weakest level since February 2022, while stocks and commodities surged on expectations of further monetary easing.
A Split Fed and Rising Policy Uncertainty
The Fed’s updated dot plot revealed deep divisions among policymakers. While the median forecast calls for another 50 basis points of cuts by year-end, officials are far from unified.
- Nine of 19 policymakers expect at least two more cuts in 2025.
- Six members see no further cuts at all.
- Stephen Miran, a recent Trump appointee, even advocated for a larger 50-basis-point cut during this meeting.
This split underscores the growing uncertainty over the Fed’s policy trajectory.
Stagflation Concerns Grow as Inflation Persists
The Kobeissi Letter highlighted troubling forecasts from the Fed: unemployment is expected to hold near 4.3%–4.5%, while inflation will moderate only slightly. The Fed even raised its 2026 inflation outlook to 2.6%.
This mix of weak labor data and sticky inflation is fueling fears of stagflation. Markets are already pricing in as many as four additional rate cuts by September 2026, an aggressive pace rarely seen while inflation remains above target.
“The Fed is cutting while inflation is still elevated—this is an unusual and risky setup,” Kobeissi warned.
Stock Market at Record Highs Despite Rate Cuts
Adding to the unusual backdrop, the S&P 500 is sitting at record highs while the Fed begins an easing cycle. Historically, this combination has delivered strong returns:
- On average, equities gained nearly 14% over the next 12 months, though volatility was high in the near term.
Beyond equities, the Fed’s move raises questions for the housing market. Mortgage rates have dropped in anticipation of further cuts, but homebuyer demand remains near record lows as many owners remain locked into sub-4% loans.
Powell dismissed concerns of asset bubbles:
“Our focus remains squarely on jobs and inflation—not market valuations.”
Is Altcoin Season on the Horizon?
The backdrop could be especially bullish for altcoins. The Altcoin Season Index recently climbed above 75, signaling that most major altcoins are outperforming Bitcoin.
Analyst Michaël van de Poppe noted that Ethereum, XRP, Chainlink, and AI-related tokens are showing strong breakout patterns:
“Liquidity is flowing into altcoins, and momentum is shifting in their favor.”
However, risks remain. If the Fed slows the pace of cuts compared to market expectations, both equities and cryptocurrencies could face short-term disappointment. Still, for long-term holders, the mix of record equity valuations, aggressive Fed policy, and rising capital flows may mark the start of a powerful new cycle for altcoins.
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FAQs
The Fed cut rates to support the labor market amid “mounting weakness,” prioritizing jobs while still monitoring inflation. It was an unusual move given persistent inflation.
Stagflation is when an economy has both high inflation and weak job growth. Concerns are growing because the Fed expects persistent inflation and rising unemployment.
Historically, when the S&P 500 is at record highs as the Fed begins an easing cycle, stocks have delivered strong returns, though volatility can be high in the short term.
