Federal Reserve's Crypto Shift: Why Investors Are Rewriting the Rules

The Federal Reserve’s recent monetary policy decisions and forward guidance from Chair Jerome Powell have sparked significant attention across global financial markets, particularly within the cryptocurrency sector. On September 17, 2025, the Federal Open Market Committee (FOMC) announced a 25 basis point reduction in the federal funds rate, bringing the target range to 4.00%-4.25%. This marks the first rate cut since the beginning of the year and reflects the Fed’s response to a moderating economy, with inflation still elevated but showing signs of stabilization. The decision aligns with the central bank’s dual mandate of fostering maximum employment and maintaining price stability.

Powell emphasized during his press conference that the Fed is actively reassessing its regulatory approach to cryptocurrencies, acknowledging the industry’s maturation and growing mainstream acceptance. This shift in tone from the Fed comes amid a broader reevaluation of crypto-related policies initiated under the Biden administration. Powell noted that while the central bank remains cautious, it is open to banks engaging in crypto activities provided that risks are appropriately managed. He highlighted that regulators are revisiting decisions made during crypto’s early development phase, signaling a more flexible and forward-looking approach to digital assets.

The Fed’s decision to cut rates has immediate implications for risk assets, including cryptocurrencies. Bitcoin, for instance, rose to a high of $117,286 ahead of the announcement, buoyed by steady inflows into Bitcoin exchange-traded funds (ETFs) and market optimism around the rate cut. Ethereum, meanwhile, struggled near its $4,500 support level, reflecting a slowdown in ETF inflows and a lack of immediate catalysts for a strong rebound. Ripple’s XRP also showed resilience, with futures open interest remaining above $8 billion, suggesting sustained retail demand and potential for a short-term bullish breakout.

Beyond interest rate policy, the Fed is also continuing its quantitative tightening (QT) program, which involves reducing the size of its balance sheet by allowing maturing securities to roll off without reinvestment. As of early 2025, the Fed had reduced its holdings from a peak of nearly $9 trillion in 2022 to approximately $7.4 trillion. The central bank has signaled that it will eventually stop the QT process when reserves are deemed “ample,” a threshold estimated to be in the range of 10% to 12% of nominal GDP. This approach reflects the Fed’s evolving monetary policy framework, which now relies on maintaining ample reserves and using interest rate tools like the Overnight Reverse Repo Facility (ON RRP) to manage liquidity and stabilize short-term rates.

The Fed’s policy adjustments have broader implications for financial markets and the economy. A rate cut typically eases financial conditions, weakens the U.S. dollar, and supports risk-on sentiment, which could further benefit asset classes like equities and cryptocurrencies. However, the central bank has also made it clear that it remains vigilant against inflationary pressures and is prepared to adjust its policy stance if economic conditions change. Powell reiterated that the Fed will continue to monitor incoming data, including labor market conditions, inflation expectations, and global economic developments, to guide its next steps.

In the context of the cryptocurrency market, the Fed’s more accommodative stance and regulatory reevaluation are likely to contribute to increased institutional and retail participation. The recent uptrend in Bitcoin and the relatively strong open interest in XRP indicate that investors are closely watching the Fed’s actions and positioning themselves accordingly. As the Fed moves toward its next policy meeting, market participants will be watching for further guidance on the trajectory of interest rates and the timeline for ending QT, both of which will shape the broader economic and financial landscape in the coming months.