Cryptocurrency Markets

Federal Reserve officials are signaling a shift toward interest rate cuts as labor market weakness overshadows inflation concerns, a development that could reshape monetary policy and ripple through financial markets including cryptocurrency holdings sensitive to rate changes.

San Francisco Federal Reserve President Mary Daly outlined her assessment Monday, noting that employment growth has slowed considerably from prior year levels. The Labor Department reported just 73,000 new jobs in July 2025, while May and June figures were revised downward to show only 33,000 combined positions created across those two months.

The data prompted Daly to acknowledge a clear deceleration in labor market momentum. She stopped short of declaring a crisis, but her characterization of the employment dashboard as “mostly bad” signaled genuine concern about economic trajectory.

Fed Prepared to Move Beyond Current Stance

Though the Federal Reserve maintained interest rates in the 4.25% to 4.50% range last month, Daly made plain that holding steady cannot continue indefinitely. The central bank had penciled in two quarter-point rate cuts for 2025 during June deliberations, a projection Daly considers appropriate but not immutable.

“There’s all kinds of permutations to get those two cuts,” she said, emphasizing that the timing matters less than the commitment to ease policy when warranted. Every upcoming Fed meeting is now a “live meeting” where policy changes remain possible depending on incoming economic data.

If the labor market weakens and inflation remains subdued, more than two interest rate cuts may be necessary this year.

— Mary Daly, President, Federal Reserve Bank of San Francisco

Daly’s language suggests the Fed is positioned to accelerate its easing timeline if employment deteriorates further without corresponding inflationary pressures. This flexibility represents a notable shift from the more hawkish stance maintained throughout 2024.

Inflation Remains Contained Despite Tariff Pressures

A key factor enabling the Fed’s willingness to cut rates is the absence of broad-based inflation, even as trade policy creates headwinds. New tariffs imposed earlier in 2025 have generated localized price increases in some sectors, but Daly found no evidence these pressures are spreading systemically.

She emphasized that the Federal Reserve has greater latitude to ease monetary policy without triggering additional inflationary spirals. This distinction matters significantly: the central bank can potentially address labor market weakness without sacrificing its price stability mandate.

Import-driven costs have affected specific industries, but aggregate inflation measures have not accelerated. This resilience in the inflation picture provides the Fed with policy room it lacked during 2023 and 2024.

Market Implications and Economic Crossroads

The Fed’s emerging consensus on interest rate cuts carries implications across asset classes. Bitcoin and other digital assets have historically shown sensitivity to monetary policy shifts, with lower rates often supporting risk-on sentiment.

Daly’s comments underscore that Fed officials now view labor market deterioration as the primary economic risk. She stated explicitly that further softening of employment would constitute an “unwelcome development” requiring policy response.

The central bank’s willingness to move beyond its initially planned two rate cuts, if conditions warrant, suggests a more flexible stance than guidance suggested just months ago. Economic data over the coming weeks will likely determine whether the Fed cuts rates in September or waits until later in the year.

The shift reflects the Fed’s genuine uncertainty about the economic trajectory. Labor markets have proven surprisingly resilient for years, but recent months show cracks in that foundation.

Broader Industry Context and Rate-Sensitive Assets

The financial services industry is already positioning itself for an extended period of lower interest rates. Banks, which benefit from wider net interest margins during periods of elevated rates, are adjusting lending strategies and capital allocation plans. Credit unions and regional financial institutions face particular pressure as deposit competition intensifies in a lower-rate environment.

The commercial real estate sector, which has struggled under elevated borrowing costs, views potential rate cuts as a potential lifeline. Office properties, multifamily developments, and retail spaces have experienced distressed valuations as cap rates compressed following rate increases. Lower rates could reverse some of these dynamics, though structural challenges in certain segments persist.

Technology and growth-oriented companies have similarly anticipated monetary easing. These sectors experienced significant valuation pressure as investors rotated toward value stocks and bonds during the rate hiking cycle. A reversal toward accommodation could rebalance portfolio allocations back toward technology exposure.

The cryptocurrency industry, inherently sensitive to macroeconomic conditions and risk appetite, has structured much of its 2025 narrative around expectations of Fed easing. Bitcoin miners, decentralized finance protocols, and blockchain infrastructure projects have modeled their operational assumptions on lower borrowing costs and increased venture capital inflows.

Employment Sector Dynamics and Economic Vulnerability

Beyond headline job creation figures, the composition of employment losses reveals concerning trends. Manufacturing employment has contracted, reflecting both structural shifts and cyclical weakness. Technology sector layoffs, which accelerated through early 2025, suggest weakness in high-wage job creation specifically.

Service sector employment remains relatively stable, but wage growth in that segment significantly lags professional services categories. This bifurcation of the labor market—with lower-wage service jobs holding up while higher-wage positions weaken—creates potential implications for consumer spending patterns and overall economic resilience.

The Fed’s concern about labor market momentum thus extends beyond simple job count figures. The quality and composition of employment growth matters for sustained consumer demand and economic health. Daly’s assessment that employment trends are “mostly bad” reflects understanding that the labor market is deteriorating across multiple dimensions simultaneously.

What’s Next for Rates and Markets

Daly’s comments represent the most concrete guidance yet that rate cuts are forthcoming, not merely hypothetical. The central bank has moved from maintaining policy to actively preparing markets for accommodation.

Fed officials will continue monitoring employment, inflation, and overall economic growth. Each data release now carries outsized significance in shaping the cutting calendar. The September Federal Reserve meeting represents a critical juncture where officials will assess whether three months of employment data justify accelerating cuts beyond the previously communicated two-cut baseline.

For investors across traditional and digital asset markets, the implications are clear: monetary policy is transitioning from neutral to accommodative. Cryptocurrency price movements have historically responded positively to rate cut cycles, though past performance provides no guarantee of future results.

The Fed’s messaging has shifted from “patient” rate maintenance to active preparation for easing. This represents a meaningful recalibration of monetary stance after an extended period of restrictive policy designed to combat inflation.

Daly’s willingness to suggest that more than two cuts may be necessary signals the Fed’s seriousness about addressing labor market concerns. Whether that scenario materializes depends on data developments over the coming months and the Fed’s assessment of whether employment weakness reflects cyclical softness or broader structural deterioration.

The Federal Reserve faces a genuine policy challenge: supporting employment without reigniting inflation. Current conditions suggest that challenge can be met, but margin for error is tightening as economic headwinds intensify. The next phase of monetary policy will test whether officials can engineer a soft landing or whether deeper economic adjustments lie ahead.