How the Fed impacts stocks, bonds, crypto and other investments

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

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

After three interest rate cuts in the last half of 2025, the Fed appears poised to hold rates steady for the first quarter of 2026. Economic conditions remain in an uneasy equilibrium as we enter the new year, and policy makers want to digest new economic data before taking further action. 

The labor market slowed over the course of 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 it hits the Fed’s 2% target.

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

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.

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

While interest 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 stock 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% in 2023 and 23% in 2024, and then ended 2025 with a 16% annual return after rebounding from a meltdown over President Trump’s tariffs in April.

In 2022, cryptocurrency prices struggled as interest rates looked to move higher. When rates began to top, crypto prices bottomed and then rose in 2023 and throughout 2024. The introduction of bitcoin ETFs initially helped boost the price of bitcoin, ethereum and other cryptocurrencies, but prices deteriorated throughout the end of 2025 while other assets, including precious metals took off 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 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 easier access to capital and higher corporate profits. Lower short-term interest rates make stocks more attractive as long-term investments compared with conservative alternatives such as bonds.

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

How interest rates have affected crypto and commodities markets

Some other major asset classes have had varied responses 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, whether that’s inflation, low interest rates, lack of purchasing power or devaluation of the dollar. The shifting narratives were easy to believe in as long as crypto was rising, but haven’t proved helpful as many of the largest coins failed to follow metals — such as gold, silver and copper — higher.

Crypto’s volatility and liquidity-dependent performance makes it an impossible asset class to forecast overall. Individual coins, including mainstays like bitcoin or ethereum, have languished amid anemic inflows and competition for trading from newer investment opportunities such as prediction markets. 

President Trump, perceived as a crypto-friendly president, hasn’t proven to offer sustainable benefits for investors. While many of the largest coins have appreciated in value since the early 2020s, many remain well off their most recent highs. 

The recent performance of commodities is mixed. Metals, specifically precious metals, have been posting record-breaking performances. Oil bounced around between $70 and $85 for much of 2024, though in 2025 it fell under $60 on fears of a slowing economy and excess supply. 

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 investments: Bond prices and interest rates move in opposite directions. This is true for individual bonds as well as bond mutual funds and ETFs. 

Calculating the impact of interest rate changes on an individual bond is relatively simple and your broker will do that automatically for you. Investors who plan to hold their individual bonds until maturity don’t have to worry about price fluctuations in the short-term. Excluding callable bonds, interest rate changes will not impact expected coupon payments, bond term or face-value payback at maturity. 

Bond funds, whether they are 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 varying maturities, prices and payouts. To measure a given fund’s sensitivity to interest rate changes, the fund will calculate duration for you. Duration is the weighted average time until a bond’s cash flow is received. The larger 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 fall by one percentage point, the bond fund would increase by the value of its duration. Using our example, a bond fund with a duration of one would increase in value by one percentage point. A bond fund with a duration of two would increase by two percentage points. The inverse 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 sole 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 stew of volatility for investors. With so much volatility, investors should proceed with intention and stay diversified.

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

Interest rate policy isn’t the same tradable event it used to be a few decades ago. The Fed is open and transparent about policy expectations, which makes it easier to tell where rates will go ahead of each meeting. Business, economic and geopolitical risk are driving the policy responses that will impact your investments. 

When it happens, buy-and-hold investors can use the market’s volatility to their advantage by dollar-cost averaging into 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 you aren’t caught off guard by swift market movements.

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.