Introduction to Interest Rates
The Federal Reserve has been cutting short-term rates, and this has had a significant impact on stocks, cryptocurrency, and commodities over the past few years. In December, the central bank reduced its benchmark interest rate by 25 basis points to a range of 3.5% to 3.75%, following similar decreases in October and September. This move has left many investors wondering what to expect going forward and how long the shifting rate environment will affect markets.
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.
The Impact of Rising Interest Rates
When the Fed introduced restrictive monetary policies by increasing rates in 2022, this caused equity markets and cryptocurrencies to decline in valuation. The stock market will never not worry about future interest rates. The cost of borrowing impacts all areas of investing, purchasing, and savings. Just the anticipation of what may happen is enough to cause a stock market reaction. While interest rates were moving higher, many stocks were moving lower, anticipating slower economic conditions.
The Impact of Lower Interest Rates
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, while the Nasdaq Composite climbed around 43%. They followed that up strongly in 2024, and have risen to new all-time highs in 2025 after rebounding from a meltdown over President Donald Trump’s tariffs in April.
How 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 higher corporate profits. Lower short-term interest rates make stocks and other risky investments look like more attractive investments compared to alternatives such as bonds. In contrast, when short-term rates are high or expected to move higher, stocks endure notable volatility as investors factor in rising 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. While cryptocurrency prices plummeted along with other risky assets, many commodities spiked higher in early 2022, including oil, but many of those moves proved short-lived. With the rising federal funds rate slowing and then pausing in 2023, both oil and crypto found some support, while gold powered higher. Gold has long been a safe haven in times of volatility, and has been on a tear in 2024 and 2025.
How Should Interest Rates Impact Your Investing Strategy
Interest rates, inflation, and uncertainty — all can create a stew of volatility for investors. With so much volatility, investors may want to tread cautiously. However, the best way for most investors to approach the market is to stick to their long-term game plan. For many, the long-term plan means continuing to invest regularly in a diversified portfolio of stocks or bonds and mostly disregarding the noise around the world. For others, the game plan may involve buying and holding well-diversified index funds. Either way, don’t let emotions get in the way of an effective long-term investing plan.
Conclusion
The Federal Reserve’s decision to lower interest rates has had a significant impact on the market. Investors with a long-term investing horizon may view any downturn as an ideal time to pick up some quality investments at bargain prices. As Warren Buffett once said, "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." By understanding how interest rates impact investments and sticking to a long-term game plan, investors can navigate the shifting rate environment and make informed decisions about their investments.
