On August 22, Federal Reserve Chairman Jerome Powell stated that the constantly "changing" economic risks provide the Federal Reserve with a stronger rationale for interest rate cuts. Although Powell acknowledged that the impact of the government trade war on consumer prices is now "clearly visible," he suggested that this impact is unlikely to be sustained and may instead be a one-time shock that the central bank can ignore.
These remarks indicate that Powell has aligned himself with the "dove" faction responsible for setting interest rates,Federal Open Market Committeeand also signal that he may support a 25 basis point rate cut by the Federal Reserve at its next meeting in September.
So, does a rate cut necessarily lead to an increase?
Based on historical experience, the answer is likely yes, but it is not guaranteed that a rate cut will lead to an increase.
In the market's intuition, "rate cuts" are almost synonymous with signals of liquidity release and rising asset prices. However, if we extend the timeframe to over the past thirty years, we find that the Fed's rate cuts are far from straightforward. Sometimes they are precautionary measures to avert potential issues, and at other times they are emergency relief actions to support the economy during a crisis.
Since 1990, the Federal Reserve has undergone five major rate-cutting cycles, each with different economic contexts and policy motivations, resulting in markedly different responses from the stock market. To understand the relationship between rate cuts and the market, one cannot simply view it as a "bull market button"; instead, it must be analyzed in conjunction with the macroeconomic environment and investor sentiment at the time.
A full year has passed since the last rate cut, and the market is once again focusing on the monetary policy meeting in September. According to FedWatch data, the probability of a 25 basis points rate cut by the Federal Reserve in September has reached 83.6%. Looking back over the past year, not only have the S&P 500 and Nasdaq set historical highs after the rate cuts, but Bitcoin has also surged, leading the market to once again yearn for the logic of "rate cuts = bull market." Coinbase also believes that the easing monetary cycle will bring about a season for altcoins.
However, is there really a necessary connection between rate cuts and market performance? This article will review the economic and stock market performance during the Fed's rate-cutting cycles since 1990 to provide a more rational basis for judging whether a bull market is on the horizon.
Rate Cuts and Bull Markets: Stock Market Performance During Rate-Cutting Cycles
1990-1992: Soft Landing After the Gulf War and the Savings and Loan Crisis
From 1990 to 1992, the U.S. economy faced consecutive shocks from the Savings and Loan Crisis and the Gulf War, resulting in tightened credit, and a sudden slowdown in consumption and investment, leading the economy into a rapid recession. The Federal Reserve began reducing interest rates in July 1990, continuing until September 1992, with the federal funds rate dropping from 8% to 3%, initiating a phase of aggressive easing.
Initially, the Federal Reserve observed a weakening economic momentum and instability in financial markets, gradually shifting to an accommodative stance. However, following Iraq's invasion of Kuwait in August, soaring oil prices and economic downturn led to widespread market panic, forcing the Federal Reserve to accelerate the pace of rate cuts. By October, as the economy continued to weaken and the government reached a budget agreement to reduce the deficit, the Fed took further action. By the end of 1990, pressures on the financial system intensified, yet inflation eased, creating space for more substantial easing.
This series of rate cuts effectively alleviated the negative impacts of credit tightening and geopolitical crises. The U.S. Consumer Price Index (CPI) rose from 121.1 points in 1989 to 141.9 points in 1993, but the year-on-year growth rate fell from 4.48% to 2.75%, indicating controlled inflation; GDP growth rebounded from -0.11% in 1991 to 3.52% in 1993, with the economy returning to a growth trajectory.
The response from capital markets was more direct. From 1990 to 1992, the easing effect of the Federal Reserve's interest rate cuts significantly boosted investor confidence, with the Dow Jones Industrial Average increasing by 17.5%, the S&P 500 rising by 21.1%, and the tech-heavy Nasdaq soaring by 47.4%, becoming the strongest recovery sector post-crisis.
1995-1998: Preventing Economic Recession and the Asian Financial Crisis
After experiencing a tightening cycle from 1994 to 1995 and successfully achieving a 'soft landing', the U.S. economy still faced concerns over slowing growth. To prevent excessive tightening from leading to recession, the Federal Reserve decisively shifted to an accommodative stance from 1995 to 1996, employing interest rate cuts to support the economy. This approach proved quite successful—U.S. GDP growth accelerated from 2.68% in 1995 to 3.77% in 1996, and further jumped to 4.45% in 1997, with the economy back on an upward path.
However, the Asian financial crisis erupted in July 1997, causing severe turbulence in capital markets. Although the domestic fundamentals remained strong, global uncertainty surged, with the Long-Term Capital Management (LTCM) crisis igniting market panic. To prevent external shocks from dragging down the domestic economy, the Federal Reserve executed three rate cuts between September and November 1998, lowering the federal funds rate from 5.5% to 4.75%.
The effects of this round of moderate interest rate cuts are quite significant, with the economy maintaining an expansionary trend, and the capital markets have indeed welcomed a carnival. Since the commencement of the easing, the Dow Jones Industrial Average has surged by more than double, recording a gain of 100.2%; the S&P 500 soared by 124.7%; while driven by the technology boom, the Nasdaq increased by 134.6%, accumulating energy in advance for the subsequent internet bubble.
2001–2003: Recovery after the Internet Bubble
Between 2001 and 2003, the U.S. economy faced the dual blows of the bursting of the internet bubble, the September 11 terrorist attacks, and the ensuing recession, plunging the market into a deep slump. The collapse of the internet bubble led to a stock market crash that swiftly affected the real economy, resulting in a sharp decline in corporate investment and a rise in unemployment, ultimately triggering an eight-month recession. The already fragile recovery momentum was further severely impacted after the terrorist attacks in September 2001, leading to a rapid decline in financial markets and consumer confidence.
In response to these pressures, the Federal Reserve undertook one of the most aggressive easing operations in history within just two years. The federal funds rate was reduced from 6.5% at the beginning of 2001 to 1.75% by December of that year, and further lowered to 1% in June 2003, totaling a reduction of 500 basis points. The Federal Reserve aimed to stimulate corporate reinvestment and consumer spending through extremely low borrowing costs, stabilizing the economic fundamentals.
The policy did indeed prevent a more severe systemic crisis, but the recovery process was not smooth. In 2002, the U.S. real GDP growth rate was only 1.7%, with weak corporate investment and persistently high unemployment rates, making the economic recovery arduous. However, as the easing policies gradually took effect, the growth momentum significantly rebounded in 2003–2004, with GDP growth rising to 3.85% in 2004, stabilizing the U.S. economy.
2007–2009: The Financial Crisis and the Zero Interest Rate Era
From 2007 to 2008, the global financial crisis erupted comprehensively, causing profound impacts on the U.S. economy and financial system. The crisis stemmed from the collapse of the housing bubble and the concentrated emergence of subprime mortgage issues. Previously, the U.S. real estate market had enjoyed a prolonged boom, but with falling housing prices, a large number of borrowers defaulted, and financial institutions suffered heavy losses due to holding substantial amounts of subprime loans and related derivatives, leading to a freezing of the credit market and a sudden depletion of liquidity.
In response to the suddenly intensified crisis, the Federal Reserve initiated an aggressive interest rate cut cycle starting in September 2007, reducing the federal funds rate from 5.25% to a range of 0–0.25% by the end of 2008, with a total reduction of 450 basis points, nearly reaching the zero lower bound. The core objective was to stabilize financial markets and the banking system through extremely loose liquidity supply, mitigating the impact of credit tightening on the real economy. In March 2008, the Federal Reserve even facilitated JPMorgan's acquisition of the nearly bankrupt Bear Stearns to prevent a chain reaction of the crisis.
However, the panic in the market did not dissipate as a result. In September 2008, Lehman Brothers collapsed, marking the full-blown outbreak of the financial crisis. Subsequently, global markets fell into a liquidity panic, the unemployment rate in the United States soared above 10%, corporate and household assets significantly shrank, and the economy fell into the most severe recession since the 'Great Depression.' The CPI exhibited rare deflationary pressures, reflecting a dramatic decline in demand.
From a macroeconomic perspective, the interest rate cuts did not prevent the spread of economic recession. The growth rate of U.S. GDP had already dropped to 1.9% in 2007, further declining to -0.1% in 2008, and contracting by -2.5% in 2009. It was not until 2010, under the combined effects of ultra-loose monetary and fiscal stimulus policies, that the U.S. economy began to stabilize gradually, with the GDP growth rate rebounding to 2.6%, laying the foundation for a subsequent decade-long expansion cycle.
2019–2021: Preemptive Easing and Pandemic Impact
In August 2019, the Federal Reserve initiated a new round of interest rate cuts, originally intended to address the pressures arising from slowing global economic growth and uncertainties stemming from U.S.-China trade frictions. However, this seemingly moderate preemptive easing was pushed to extremes by the sudden outbreak of the COVID-19 pandemic in early 2020. The pandemic spread rapidly, leading to unprecedented economic lockdowns and work stoppages, global supply chain disruptions, a sharp decline in consumption, and skyrocketing unemployment rates, resulting in severe turbulence in financial markets.
To stabilize the situation, the Federal Reserve urgently cut the federal funds rate from 2.25% to nearly zero at 0.25% in March 2020, and, in conjunction with massive fiscal stimulus from the government, launched an unlimited quantitative easing policy, leading to a dramatic expansion of its balance sheet. This was not merely an interest rate cut, but a rare 'unconventional operation' in the history of monetary policy, demonstrating the central bank's determination to stabilize the financial system and the economic fundamentals.
From a macroeconomic perspective, the U.S. economy remained relatively stable in 2019, with a GDP growth rate of 2.3%, although lower than in previous years, it was still within a healthy range. However, 2020, impacted by the pandemic, became a turning point, with U.S. GDP experiencing a historic contraction of -3.4%, the most severe shrinkage since the 2008 financial crisis. Thanks to the ultra-loose monetary and fiscal combination, the U.S. economy rebounded rapidly in 2021, with a GDP growth rate as high as 5.7%, marking one of the fastest recoveries in forty years.
The performance of the stock market has also been breathtaking. Following the plunge in March 2020, fueled by loose policies and a flood of liquidity, the U.S. stock market experienced a "V-shaped recovery," soaring thereafter: from 2019 to 2021, the S&P 500 index increased by a cumulative 98.3%, the Nasdaq surged by as much as 166.7%, and the Dow Jones Industrial Average recorded a substantial rise of 53.6%. The extreme interest rate cuts and massive liquidity injections during the pandemic ultimately gave rise to the fastest liquidity-driven bull market in U.S. stock market history.
How did the two largest bull markets in cryptocurrency history occur?
2017: The ICO Frenzy and the First Cryptocurrency Bubble
2017 is widely regarded as the "first major explosion" of the cryptocurrency market and the starting point for altcoins to truly enter the public eye. In terms of macroeconomic context, the global economy was in a recovery phase at that time, the U.S. economy was performing robustly, and although the Federal Reserve had begun to attempt interest rate hikes, overall interest rates remained at historically low levels, with liquidity from previous years of monetary easing still lingering in the market. This macro environment provided a fertile ground for the growth of cryptocurrency assets.
$Bitcoin (BTC.CC)$ That year, the price skyrocketed from less than $1,000 at the beginning of the year to nearly $20,000 by the end of the year. The explosive rise of Bitcoin, as the leading asset, directly attracted a large influx of new capital and retail investors into the market. Against this backdrop, altcoins experienced unprecedented prosperity. Unlike in previous years, the biggest driver of the altcoin market in 2017 was the ICO model: almost any project that issued tokens based on Ethereum could complete financing in a short period. A plethora of new coins emerged, leading to a scene of "a hundred coins flying together" in the market.
$Ethereum (ETH.CC)$ Undoubtedly, it is the core beneficiary of this round of market activity. Since ICO projects are generally issued based on Ethereum, it has become the primary entry point for market funds. The price of ETH soared from a few dollars to $1,400 within a year, driving the valuations of the entire altcoin sector to take off. Meanwhile, from public chains to payments, storage, and various new concept tokens, regardless of the solidity of the narrative, almost all have attracted capital interest in the short term.
However, behind the frenzy often lies a bubble. The altcoin season of 2017 was essentially a liquidity-driven speculative feast, where investment logic relied more on "new stories" than on actual applications. As 2018 began, with Bitcoin peaking and then declining, altcoin prices generally experienced a deep pullback of 80% to 90%. Numerous projects lacking fundamental value quickly went to zero, leaving a trail of wreckage.
Looking back at this history, the altcoin season of 2017 established the first global recognition of the cryptocurrency market: that crypto assets can generate a significant wealth effect driven by liquidity and narratives, but they can also exhibit extremely high risks when bubbles burst.
2021: A Flood of Liquidity and the DeFi and NFT Frenzy
If the altcoin season of 2017 was a speculative feast ignited by ICOs, then the altcoin market of 2021 was a comprehensive carnival set against the backdrop of rampant global liquidity.
In terms of the macro environment, the outbreak of the COVID-19 pandemic in early 2020 prompted the Federal Reserve to rapidly lower interest rates to near zero and initiate unprecedented quantitative easing (QE). At the same time, the U.S. government rolled out large-scale fiscal stimulus, directly distributing cash checks to residents. The combination of loose monetary and fiscal policies resulted in an overflow of liquidity in financial markets, with both traditional and risk assets inflating simultaneously. Following a V-shaped rebound in U.S. equities in 2020, Bitcoin broke through the $20,000 mark by the end of the year and surged to $60,000 in the first quarter of 2021, creating space for the altcoin market.
Unlike the 'single point explosion' centered on ICOs in 2017, the altcoin season of 2021 presented a pattern of 'multi-track simultaneous rise.' First was the rapid development of DeFi. Protocols such as Uniswap, Aave, and Compound saw their Total Value Locked (TVL) grow rapidly, propelling DeFi concept tokens into independent market performances; secondly, the emergence of NFTs, with projects like CryptoPunks and Bored Ape making 'digital collectibles' a global talking point, leading to explosive trading volumes on platforms like OpenSea; meanwhile, the flourishing Ethereum ecosystem spurred the rise of new public chains such as Solana, Avalanche, and Polygon, officially starting the competition among public chains.
Driven by this narrative, ETH rose from under $1,000 at the beginning of the year to $4,800. $Solana (SOL.CC)$It surged from less than $2 to $250, becoming one of the biggest dark horses of the year. The total market capitalization of the cryptocurrency market surpassed $3 trillion in November 2021, reaching an all-time high.
However, the rapid expansion of the market also sowed the seeds of a bubble. A large number of imitation projects, overly financialized DeFi products, and meme coins lacking fundamental support quickly gained popularity amid the influx of hot money, but also saw significant declines after liquidity receded. As the Federal Reserve initiated an interest rate hike cycle in 2022, global liquidity tightened, and the cryptocurrency market rapidly cooled, with altcoins generally experiencing a deep correction of 70% to 90%.
Reflecting on this period, the altcoin season of 2021 showcased the extreme prosperity that the cryptocurrency market could achieve under the dual forces of flooding liquidity and diverse narratives.
Current Insights: Preventive Easing and Altcoin Season
Historically, the Federal Reserve's interest rate cuts can be categorized into two types: preventive cuts and crisis cuts. The years 1990, 1995, and 2019 belong to the former, where cuts occurred before a comprehensive economic downturn, primarily to hedge against risks, often injecting a new round of growth momentum into the market; conversely, 2001 and 2008 saw forced substantial cuts under the heavy pressure of financial crises, leading to sharp market declines. In the current context, the labor market is weak, and tariffs and geopolitical factors introduce uncertainty, yet inflation shows signs of easing, making the overall environment more akin to 'preventive easing' rather than a crisis backdrop. This is precisely why risk assets have continued to strengthen this year, with both Bitcoin and U.S. stocks reaching historic highs.
The environment facing the cryptocurrency market is also different from the past. Policy-wise, it has welcomed unprecedented favorable developments: stablecoins are gradually being integrated into compliance frameworks, digital asset treasury (DAT) management, exemplified by MicroStrategy, has become a trend in corporate allocation, and institutions are officially entering the market through ETFs, while the narrative of tokenizing real-world assets (RWA) is accelerating in popularity. Various narratives are interwoven, driving a market foundation that is broader than ever before.
Despite many debating whether the interest rate cuts in September will cause a short-term peak in the cryptocurrency market, from a capital flow perspective, such concerns may be overstated. The scale of U.S. money market funds has reached a record $7.2 trillion, with substantial funds trapped in low-risk instruments. Historically, outflows from money market funds have often correlated positively with the rise of risk assets. As interest rate cuts take effect, their yield attractiveness will gradually diminish, and more funds are expected to flow into cryptocurrencies and other high-risk assets. It can be said that this unprecedented cash reserve represents the strongest potential ammunition for this bull market.
Additionally, structurally, funds have begun to gradually exit Bitcoin. BTC's market dominance has declined from 65% in May this year to 59% in August, while the total market capitalization of altcoins has grown by more than 50% since early July, reaching $1.4 trillion. Although CoinMarketCap's 'Altcoin Season Index' remains around 40, far from the traditional 75 threshold that defines an altcoin season, this divergence of 'indicator stagnation—market capitalization surge' precisely reveals that funds are selectively entering specific sectors, especially Ethereum (ETH). ETH not only benefits from institutional interest with ETF sizes surpassing $22 billion, but it also embodies the core narratives of stablecoins and RWA, possessing a capital attraction that surpasses Bitcoin.
Summary
The logic of this bull market is markedly different from the past. Given the vast number of projects, the market can no longer replicate the phenomenon of "all coins soaring together." Investors' attention is gradually shifting towards value investing and structural opportunities—capital is increasingly inclined to flow towards leading projects with genuine cash flow, compliant prospects, or narrative advantages, while long-tail assets lacking fundamental support are destined to be marginalized.
Therefore, although we are optimistic about the performance of crypto assets during the interest rate cut cycle and favorable policies, it must be acknowledged that this resembles a structural bull market rather than an indiscriminate rally. Rational investment and careful selection of sectors are key to navigating through volatility.
Editor/joryn
