Fed STAFF summary does not justify further easing
December 31, 2025
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HAPPY NEW YEAR to all!!
–First, as of this note March Silver is 71.58, down 6.34. Unsurprisingly, the CME again raised margins on prec metals, with Silver going from $27.5k to $35,750. Gold initial margin went from $24.2k to $26.4k
https://www.cmegroup.com/content/dam/cmegroup/notices/clearing/2025/chadv25-399.pdf
–Once again, rate futures/options were quiet yesterday. 2y yield fell 1 bp 3.45%, tens rose 1.6 to 4.128 and 30s up 1 to 4.812. 2/10 treasury spread squeaked to a new high 67.8. In SOFR, the peak contract remains SFRZ6 at 9691.5 which was unch’d. New buyer of 20k 0QZ6 (SFRZ7 underlying at 9677.5) 9750/9800cs for 5.75 to 6.0, settled 5.75. SOFR curve edged a bit steeper, for example red to green pack spread (2nd to 3rd year) rose 1 bp to 22.25 bps. (9685.0/9662.75)
–I didn’t read the entirety of the Fed minutes, but I am often struck by the difference between “STAFF” discussions and “MEMBERS or PARTICIPANTS”. If one just reads the STAFF projections, there is NO case made for additional rate cuts, in fact one might conclude the opposite. My personal perception is that staff presents the FOMC with politically unbiased information. According to the financial press (and, indeed, SOFR calendars) the narrative is an expectation of additional rate cuts (BBG). But here’s a small clip from STAFF:
Staff Review of the Economic Situation
The information available at the time of the meeting indicated that real gross domestic product (GDP) had expanded moderately over this year. The unemployment rate had edged up and the pace of payroll employment increases had slowed through September; more recent labor market indicators were consistent with these developments. Consumer price inflation had moved up since earlier in the year and remained somewhat elevated.
Real private domestic final purchases—which comprises PCE and private fixed investment spending and which often provides a better signal of underlying economic momentum than does GDP—appeared to have risen faster than GDP over the first three quarters of the year but also had slowed relative to last year.
–A lot of the discussion centered around reserves management. As Powell alluded to in the press conference, there’s substantial concern about the April tax date which will draw funds out of reserves and into the TGA. I’m sure the Fed will provide plenty of liquidity. Bessent had mentioned some time ago that tax refunds would be large in Q1, however, the gov’t appears to expect HUGE tax payments in April. Again, would that be a sign of a faltering economy in need of monetary stimulus?
The manager next discussed the expected trajectory of key components of the Federal Reserve’s balance sheet. Over the next several months, seasonal fluctuations in nonreserve liabilities were projected to lead to significant declines in reserves at the end of December, in late January, and especially in mid-to-late April if securities holdings in the System Open Market Account (SOMA) were to remain unchanged. The manager noted that the projected fall in reserves in April caused by tax inflows to the Treasury General Account (TGA)—which is a Federal Reserve liability—was particularly large and thus judged that reserves were likely to fall below the ample range if the size of the SOMA portfolio were to remain unchanged. [Fed needs to buy t-bills]
–One side note: SF Gate reports that Las Vegas air traffic has posted a decline for ten months in a row. Gambling site cannibalization? Or general slowdown?
Finally, Dominick Critelli, a 104 year-old WWII vet performs the national anthem at a NY Islanders game.
