Hotcoin Research | Market Bets on Over 80% Probability of a September Rate Cut: A Scenario Analysis of the Fed’s Q4 Easing Path and Its Implications

I. Introduction

On August 22, Fed Chair Jerome Powell noted that downside risks in the labor market are rising and that it may “require adjusting our policy stance.” Markets widely expect the Fed to begin cutting rates at the September FOMC meeting. This remark immediately triggered a strong response in risk assets: U.S. equities rallied across the board, while the crypto market reversed from a multi-day downtrend. ETH surged sharply, breaking previous highs and reaching nearly $4,956.

Ultimately, what drives the Fed’s policy decisions are hard data on employment and inflation. The timeline is clear: the FOMC is scheduled for September 16–17, where the decision will not only set interest rates but also update the “dot plot” and macroeconomic forecasts. Before that, two “life-or-death” data points — August nonfarm payrolls and unemployment rate (September 5) and August CPI (September 11) — will largely determine whether a rate cut materializes. This means any unexpected surprises in the next three weeks (such as wage acceleration, sticky service inflation, or a decline in unemployment) could derail the expected “September cut + one more this year” trajectory.

This report analyzes the Fed’s decision-making framework, the transmission mechanisms of rate cuts to crypto assets, and historical experience. It then projects the likelihood of a September rate cut and models potential Q4 easing scenarios, along with the possible performance of the crypto market — ultimately providing investors with a multi-dimensional outlook and probability-weighted forecasts.

II. Determinants of Federal Reserve Policy

The Fed’s dual mandate is “maximum employment” and “price stability.” Its core policy instrument is the Federal Funds Rate — the target range for overnight interbank lending of excess reserves, set by the Federal Open Market Committee (FOMC). In essence, this is the banking system’s “wholesale borrowing rate.” By adjusting it, the Fed influences funding costs and liquidity across the financial system, indirectly shaping credit rates, the U.S. dollar, asset prices, and the trajectory of employment and inflation.

The Fed’s policy is constrained by three major factors: employment, inflation, and financial conditions. Decisions are never driven by a single indicator but rather a dynamic balance of multiple forces. Key drivers include: the labor market (job creation, unemployment rate, wage growth), inflation (CPI, core CPI, PCE, inflation expectations), and financial conditions (credit spreads, equity/bond market reactions, systemic stability risks). In the 2025 macro environment, these elements collectively are pushing the Fed from a “higher for longer” stance toward a “gradual easing bias.”

1) Rising Employment Risks

Nonfarm payrolls in July rose by only 73,000, far below expectations, with prior data revised downward; unemployment climbed to 4.2%. This suggests the labor market is approaching stall speed, weakening the Fed’s “safety cushion.” Persistent labor weakness would directly threaten the Fed’s maximum employment mandate, compelling a more dovish stance.

2) Inflation Moderation with Sticky Pockets

July CPI rose 2.7% YoY, with core CPI up 3.1% YoY. On a monthly basis, both advanced 0.2% and 0.3% respectively, with core posting the largest monthly gain this year. While still above the 2% target, inflation has not deteriorated into “broad re-acceleration.” Upstream pressures are evident in rising PPI, though transmission to consumer prices remains slow. This “upstream firming, downstream mild” pattern implies inflation remains sticky but not out of control.

3) Financial Conditions & Policy Signaling

Beyond hard data, the Fed closely monitors market feedback and systemic stability. Powell’s Jackson Hole speech emphasized “no rush to aggressive easing but room for incremental adjustment.” This implies limited cuts aimed at cushioning labor risks. Markets interpreted this as: if jobs data weaken further, the Fed could cut 25bps in September and possibly adjust again by year-end.

III. Impacts of Monetary Policy on the Crypto Market: Historical Lessons

The Fed’s rate decisions not only affect the U.S. dollar and domestic economy but also cascade through global financial markets, shaping risk assets such as cryptocurrencies. This transmission broadly follows three intertwined channels: discount rate effects, dollar flows, and risk appetite.

1) Discount Rate Channel: Lower Rates Boost Valuations

Rates are the foundation of asset pricing. Cuts lower Treasury yields and discount rates, boosting valuations of growth and high-duration assets such as tech equities and crypto (BTC, ETH). For example, in 2020 the Fed’s rapid cuts and QE fueled a dual bull run in equities and crypto, with BTC soaring from under $10K to $60K in a year. Conversely, in 2022 aggressive hikes halved BTC and ETH, as higher discount rates pressured valuations.

2) Dollar & Capital Flow Channel: Weak USD Supports Crypto

Rate cuts weaken the U.S. dollar’s appeal, pushing capital toward alternative stores of value like gold and BTC. In 2019, when the Fed ended QT and resumed cuts, the dollar weakened while BTC more than doubled off its lows. In contrast, in 2022, Fed hikes coincided with dollar strength and BTC breaking below $20K. This dollar–BTC inverse relationship is a key indicator of policy impact.

3) Risk Appetite & ETF Flows: Equity–Crypto Linkages

Policy easing boosts equity risk appetite, which in turn supports crypto. BTC’s correlation with the Nasdaq is often strongly positive. When the Fed turns dovish, stocks rise and crypto gains even greater upside. With BTC and ETH spot ETFs now live, policy expectations feed directly into ETF inflows/outflows. For instance, dovish pivot signals in early 2024 coincided with sustained ETF inflows, while policy uncertainty in July–August triggered brief ETF outflows and crypto pullbacks.

Since 2019, nearly every monetary policy inflection has aligned with crypto market trends, underscoring the increasingly negative correlation between rates and BTC. With markets betting on a September cut, these historical lessons highlight how policy shifts may shape the next crypto cycle.

Source：https://newhedge.io/bitcoin/bitcoin-vs-federal-funds-rate

IV. September Rate Cut Probability and Uncertainties

The Fed’s monetary policy is at a critical turning point. The September 17 FOMC meeting is not only a routine rate decision but could also set the tone for 2025 monetary policy as a whole. Markets are almost fully pricing in a “September 25bps cut,” but the deeper question is: will this be a one-off “insurance adjustment” or the beginning of a new easing cycle? The answer hinges on two crucial data points — August nonfarm payrolls (Sept. 5) and August CPI inflation (Sept. 11). These will directly shape the dot plot’s hawk-dove distribution and market expectations for Q4 policy.

1) Probability of a September Cut

• Employment: July nonfarm payrolls added just 73,000, far below consensus, with prior data revised down and unemployment rising to 4.2%. This indicates the labor market is cooling rapidly, near stall speed. If August payrolls come in below 100K and unemployment rises to 4.3% or higher, the rationale for “higher for longer” collapses. Weak jobs mean weak economic momentum, the most direct driver of policy shifts.
• Inflation: July CPI came in at 2.7% YoY, core CPI at 3.1% YoY; MoM increases were 0.2% and 0.3% respectively. While core saw its highest monthly gain this year, the trend does not yet signal broad re-acceleration. If August CPI MoM stays at 0.2% or lower, the Fed would have ample justification to cut, citing labor risks. Even if core CPI rises to 0.3%+, that would affect the pace of later cuts more than September’s initial move.
• Market Pricing: CME FedWatch shows ~87.3% probability of a 25bps cut in September; prediction markets like Polymarket price ~78%. This indicates consensus that easing begins in September.

Source：https://polymarket.com/event/fed-decision-in-september

Source：https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

In sum, the Fed has little reason to stay on hold in September. Even with sticky inflation, concerns about labor deterioration outweigh. A modest rate cut in September is highly probable.

2) Key Uncertainties

While September easing looks likely, the pace depends on the data mix. Three scenarios emerge:

• Jobs weaken + inflation mild: If payrolls <100K, unemployment ≥4.3%, and core CPI MoM ≤0.2%, then a 25bps cut is almost guaranteed, with strong odds of another 25bps in December.
• Jobs rebound + inflation sticky: If payrolls >150K and core CPI ≥0.3%, the Fed may still cut in September (as insurance), but the dot plot would tilt hawkish. Markets would read this as “precautionary,” not a cycle opener, lowering odds of a December follow-up.
• Mixed signals: If jobs improve but inflation falls, or jobs weaken but inflation resurges, the path complicates. For example, if wages re-accelerate and service inflation proves sticky, the Fed might delay action to October. Though low probability, such cases could spike volatility.

Overall, a 25bps September cut is nearly certain, but the Q4 path remains uncertain, hinging on whether labor continues weakening and inflation stays tame.

V. Q4 Policy Path: Three Scenarios and Market Implications

If September easing is a near certainty, the real suspense lies in October–December. Outcomes depend on further labor deterioration and inflation dynamics. Three scenarios are plausible:

(A) Baseline Scenario: Sept + Dec cumulative 50bps (probability ~55%)

• Conditions: Weak payrolls, mild core CPI.
• Policy path: Sept -25bps → October pause → Dec -25bps.
• Market impact: Matches most Wall Street forecasts (50bps total). Crypto market sees steady liquidity tailwinds, favoring gradual uptrend over explosive rallies.

(B) Cautious Scenario: One-off September cut (probability ~30%)

• Conditions: Core CPI ≥0.3%, sticky services inflation; jobs not worsening further.
• Policy path: Sept -25bps → pause for rest of year.
• Market impact: Short-term relief but hawkish dot plot caps optimism. Crypto likely range-bound, with capital rotating into hot sectors but lacking sustained trends.

© Surprise Scenario: Accelerated Q4 easing (probability ~15%)

• Conditions: Payrolls <50K, unemployment ~4.5%, core CPI falling.
• Policy path: Sept -25bps → consecutive cuts in Oct and Dec, ≥75bps total.
• Market impact: Ultra-loose liquidity fuels risk-on frenzy, echoing 2020 bull run. BTC and ETH could make new highs, altcoins and DeFi enter high-volatility boom. But if recession deepens, both equities and crypto may see turbulence before recovery.

Key differences hinge on the jobs–inflation mix. The baseline (moderate easing) is most likely; cautious and surprise cases reflect slower vs faster cycles. For investors, Sept. 5 jobs data and Sept. 11 CPI are decisive not only for September but for the entire year’s trajectory.

Conclusion

In conclusion, the U.S. economy’s combination of weakening jobs and unanchored inflation is pushing the Fed to a turning point. The probability of a September rate cut cycle starting is very high. For the crypto market, under macro pressure for two years, this is a strong tailwind: lower rates remove a key overhang, restoring confidence in liquidity and growth. The swift rally after Powell hinted at easing shows capital is already positioning for the next cycle. The crypto market now stands at a critical intersection, where macro inflection and rising adoption may jointly shape its next phase.

However, as analyzed, the Fed’s policy impact on crypto is multi-layered: liquidity-driven upside also comes with volatility from shifting expectations. Investors should closely monitor upcoming jobs and inflation data and whether policy signals align with market bets. On-chain data and flow metrics already show institutions and whales positioning, though short-term pullbacks and rotations remain common. This suggests the path will not be smooth.

Looking ahead, the most probable scenario is a supportive easing environment driving sustained upward momentum in crypto. But whether through an accelerated bull market or delayed easing, achieving stable returns will require dynamic strategy adjustments and robust risk management. Staying alert to September data and the Fed’s moves is critical. When consensus is extreme, maintain caution; when panic strikes, consider contrarian positioning. That balance is key to navigating uncertainty.

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