How the Fed Affects Stocks, Bonds, Crypto and More

Higher interest rates have changed the trajectory of stocks, bonds, cryptocurrency and commodities in recent years. But now that the Federal Reserve has cut short-term rates until recently, what can investors expect going forward — and how long will the shifting rate environment affect markets?

On January 28, the central bank decided to pause its cutting cycle, leaving the benchmark interest rate unchanged at a range of 3.5% to 3.75%.

After three rate cuts in the latter half of 2025, the Fed appears poised to hold rates steady for the first quarter of 2026. Economic conditions remain in an uneasy balance as we head into the new year, and policymakers want to digest new economic data before taking further action.

The job market has slowed over the past year, but may be entering a turning point. Inflation has fallen from its 2025 peak but has a long way to go before hitting the Fed’s 2% target.

All told, the Fed has now cut interest rates six times since September 2024, when the cutting cycle began.

How interest rates affect investments

Interest rates are one of the biggest tools the Fed has to influence 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 for fighting inflation.

The Fed raised rates 11 times during the last tightening cycle starting in 2022, and it’s easy to see when markets really took note that the central bank isn’t kidding about recalibrating monetary policy. It was November 2021 when cryptocurrency and many of the riskiest stocks peaked.

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

Major stock indexes like the S&P 500 spent most of 2022 in a funk due to rising rates, but they performed well in 2023. The S&P 500 rose about 24% in 2023 and 23% in 2024, then ended 2025 with a 16% annual return in Trump’s April backlash.

In 2022, cryptocurrency prices struggled as interest rates looked higher. As rates began to top out, crypto prices bottomed out and then rallied in 2023 and throughout 2024. The introduction of bitcoin ETFs initially helped boost the price of bitcoin, ethereum and other cryptocurrencies, but prices weakened through the end of 2025 while other assets, including precious metals, rose to new highs.

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 or at least support markets from falling more. As lower short-term rates help boost the economy, stocks are starting to rise on the prospect of easier access to capital and higher corporate profits. Lower short-term interest rates make stocks more attractive as long-term investments compared to conservative alternatives such as bonds.

In contrast, when short-term rates rise or are expected to rise, stocks can endure significant volatility as investors factor in rising rates and reprice company growth projections. In other words, policy shift could change the outlook for stocks as investors start to price in a slowing economy and lower profit growth due to higher rates.

How Interest Rates Affected Crypto and Commodity Markets

Some other major asset classes had mixed reactions in the face of fluctuating rates.

Gold has long been a safe haven in times of volatility, and was on a tear in 2024 and 2025. Meanwhile, cryptocurrency has often been touted as a cure-all for what ails you, be it inflation, low interest rates, lack of purchasing power or devaluation of the dollar. The shifting narratives were easy to believe as long as crypto was on the rise, but didn’t prove helpful as many of the biggest coins failed to follow metals – such as gold, silver and copper – higher.

Crypto’s volatility and liquidity dependent performance make it an impossible asset class to predict in general. Individual coins, including mainstays like bitcoin or ethereum, have languished amid anemic inflows and competition for trading from newer investment opportunities like prediction markets.

Considered a crypto-friendly president, President Trump has not proven to provide sustainable benefits for investors. Although many of the largest coins have increased in value since the early 2020s, many remain off their most recent highs.

The recent performance of commodities has been mixed. Metals, specifically precious metals, posted record performances. Oil bounced around between $70 and $85 for much of 2024, although it fell below $60 in 2025 on fears of a slowing economy and oversupply.

How interest rates affect bonds

Unlike many other asset classes where interest rate changes have more fluid impacts on prices and future growth, interest rate changes have a direct and measurable relationship with bond investing: Bond prices and interest rates move in opposite directions. This applies to individual bonds as well as bond mutual funds and ETFs.

Calculating the impact of interest rate changes on an individual mortgage is relatively simple and your broker will do it for you automatically. Investors who plan to hold their individual bonds to maturity need not worry about short-term price fluctuations. Excluding callable bonds, interest rate changes will not affect expected coupon payments, bond term or face value repayment at maturity.

Bond funds, whether mutual funds or exchange-traded funds (ETFs), are susceptible to losses (or gains) when interest rates change. A bond fund is a pool of hundreds of individual bonds of different maturities, prices and payouts. To measure a given fund’s sensitivity to interest rate changes, the fund will calculate the duration for you. Duration is the weighted average time until a bond’s cash flows are received. The longer the duration, the more sensitive a bond or bond fund will be to interest rate changes.

For example, a bond fund with a duration of one has less interest rate risk than a bond fund with a duration of two. Generally, if interest rates were to drop by one percentage point, the bond fund would increase in value by its duration. Using our example, a bond fund with a duration of one will increase in value by one percentage point. A bond fund with a duration of two will increase by two percentage points. The reverse is true when interest rates rise.

As long-term investments, bonds and bond funds play a key role in diversification and risk management. Understanding interest rate trends and their relationship to your bond portfolio is important, but it shouldn’t be the only signal informing your allocation to bonds or other fixed income investments. A long-term outlook should trump short-term trading impulses.

Bottom line

Interest rates, inflation and uncertainty – all can create a hot spot of volatility for investors. With so much volatility, investors must proceed with intent and stay diversified.

The best way for most investors to approach the market is to stick to a long-term game plan. For many, this means investing regularly in a diversified portfolio of stocks or bonds and mostly ignoring the noise around the world. Whether you use index funds, individual stocks, or a mix of both, don’t let emotions get in the way of an effective long-term investment plan.

Interest rate policy is not the same tradable event it was a few decades ago. The Fed is open and transparent about policy expectations, making it easier to tell where rates will go before each meeting. Business, economic and geopolitical risks drive the policy responses that will affect your investments.

When this happens, buy-and-hold investors can use the market’s volatility to their advantage by dollar-cost averaging their portfolio over time, regardless of day-to-day price changes. Disciplined investing and periodic rebalancing can help you weather rocky periods and still come out ahead.

Consistency has created more above-average investors than luck or market timing. Staying informed about economic policy is one way to adjust your strategy and expectations so that you are not caught off guard by rapid market movements.

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