In sync
December 11, 2025
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–Fed cut to 3.5-3.75% and is buying $40b t-bills to alleviate pressure on reserves going into tax season. Powell deems the new FF target as being at the upper end of neutral and was generally optimistic about inflation trending lower, saying that service inflation is easing and that goods inflation at present is mostly due to tariffs (likely to recede). He also said that NFP may be overstated by as much as 60k per month, so against a recent average of +40k that may mean payrolls have been running -20k. Three dissents: Schmid and Goolsbee wanted no ease and of course Miran favored a 50 bp cut.
–Some fairly interesting projections: just looking at 2026, GDP growth estimate revised up to 2.3% from 1.8% in Sept and PCE inflation down to 2.4% from 2.6 in Sept. FF projected to be cut only once more in 2026 to 3.4%. The implication is an improvement in productivity, with some asking whether that was due to AI, open question.
–Market response was overall muted. Curves steepened. On the SOFR strip, SFRM6 and U6 were leaders, both +4.5 at 9663.5 and 9677.0. There was a huge new buyer of U6 prior to the FOMC in size of about 100k from 9675 to 9677, with open interest gaining 82k. Deferred SOFR contracts were barely changed. SFRM6 was +4.5, SFRM7 +2 at 9677.5, M8 and M9 unch’d at 9659.5 and 9642.5. In treasuries, 2/10 edged to a new high just above 60 bps (3.557%, down 5.4 bps and 4.159% down 2.9 bps).
–It will take a few sessions to see how things shake out. As Powell said, there will be a lot of data before the Jan FOMC. Against a new Fed Effective of 3.64%, FFG6 settled 9641 or 3.59%. The next FOMC is 28-Jan, so the Feb contract projects about 20% odds of another ease. SFRZ6 settled 9681.0, up 3.5 on the day. This contract is now peak on the strip, moving up a slot from H7. So Dec’26 has a rate of 3.19% vs SEP projection of 3.4% for year-end 2026. Not a particularly wide spread. In fact, across the interest rate spectrum, despite all the hand-wringing about a divided Fed and uncertainty, yesterday’s closing prices were pretty much in sync with the Powell’s comments. The amount of projected forward easing has been pared back in terms of market pricing, and implied vol in rates is now at the low end of recent ranges. The interesting spread is 10s vs overnight funding. if EFFR is now 3.64 and SOFR somewhere around 3.7, the 10y at 4.16 is around 50 bps over. I’d bet Bessent wants this spread much tighter. 30y auction today.
–The ever-present risk is financial conditions/stability, sometimes thought of as the Fed’s third mandate. Small reminder with ORCL results post-close. This morning ORCL is down around 11%. NQH6 currently down 200 or nearly -0.8%.
