Markets are Jolly as Powell Pivots Again
A hawkish expectation let down as Fed cuts 25bp, intros RMP & pivoted dovish
Summary
The FOMC cut rates for a third time at its last meeting of 2025 by 25 bps, bringing the target range to 3.50-3.75%. The FOMC also launched a reserve management program (RMP) and changes to the standing repo facility (SRF). Where going forward the Fed SRF will no longer have an operational limit and the new RMP will look to maintain “ample level of reserves through purchases in the secondary market of T-bills (or, if needed, of UST securities with remaining maturities of 3 years or less).” The RMP came sooner than we expected (we thought launching closer to when reserves would get hit in Q2 tax season made more sense), but they are being preemptive and don’t want to take risks into year-end.
Market Implications: With the rates and risk markets bracing for a more forceful hawkish message, this shift again in tone (in stark contrast to the attempt in October to push back on Fed cut expectations in December) and the launch of the RMP not-QE has investors expecting that rates will continue to grind lower, and that US rate vol will grind (especially in the front-end) which was viewed constructively by stocks and credit. The 2yr had its biggest rally at a Fed meeting in 2025. So, with next week’s NFP as the last macro-obstacle before 2026, we expect rates to remain bid. We continue to recommend buying the dip now that Fed is out of the way. We also maintain our expectations for at least 3 more rate cuts in 2026.
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