Amid 3 dissenters in both directions, FOMC cuts by 25 basis points. “Dot Plot” sees 1 cut next year, 3 members see 1 hike. Reserve management purchases of T-bills begins.
By Wolf Richter for WOLF STREET.
The FOMC voted today to cut the Fed’s five policy rates by 25 basis points, as widely expected, the third cut in 2025, after cutting by 100 basis points in 2024.
There were 3 dissenters of the 12 voting FOMC members, the most dissenters since September 2019, under Powell. Two dissenters (Goolsbee and Schmid) wanted no cut. Miran wanted a 50-basis-point cut. Dissents are a breath of fresh air.
The FOMC cut its five policy rates today:
- Target range for the federal funds rate to 3.5%-3.75%.
- Interest it pays the banks on reserve balances (IORB): 3.65%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 3.50%
- Interest it charges on overnight Repos at its Standing Repo Facility (SRF): 3.75%.
- Interest it charges banks to borrow at the “Discount Window” at 3.75%.
Major changes in the statement:
The FOMC decided to let the balance sheet grow “as needed to maintain an ample supply of reserves on an ongoing basis.” To do so, it will purchase “shorter-term Treasury securities,” mostly T-bills. Before QE, before 2009, the Fed’s balance sheet has always grown with the banking system and with the economy, and today’s policy shift reverts the Fed to the pre-2009 balance sheet management. We have discussed these reserve management purchases in detail here.
MBS continue to run off and that runoff will be replaced by T-bills, as per the Implementation Notes, which was first announced at the last meeting and has started on December 1.
This is the newly added language in the statement about it (the old language about ending QT was removed):
New in the statement about this: “The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.”
New in the Implementation Notes about this: “Increase the System Open Market Account holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves.”
And in detail: Why the Fed’s “Reserve Management Purchases” Are Not QE
Major other changes in the FOMC’s statement:
New: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
Old: “In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
Wide “Dot plot” disagreements from 1 rate hike to 6 rate cuts.
Today’s meeting was one of the four per year when the FOMC releases its “Summary of Economic Projections” (SEP), which includes the “dot plot.” The prior SEP was released at the September meeting. The SEP is one of the ways with which the Fed communicates to the public what its thoughts are about the future of the economy, the labor market, inflation, and monetary policy – given today’s state of economy. If something changes, the participants’ views change, and the dot plot changes.
Three members see 1 hike in 2026, up from 1 member seeing a rate hike in the September SEP, while at the other end, 1 member sees 6 cuts. And nearly everything in between.
The median projection for the mid-point of the federal funds rate at the end of 2026 was at 3.375%, indicating one rate cut in 2026, unchanged from the prior SEP in September.
Projections by the 19 FOMC members for the midpoint of the federal funds rate by the end of 2026 (bold = median):
- 1 sees 6 cuts
- 1 sees 4 cuts
- 2 sees 3 cuts
- 4 see 2 cuts
- 4 see 1 cut
- 4 see no change
- 3 see 1 rate hike.
These median values of the SEP are neither decisions nor commitments. Members change their projections as the economic situation changes.
Inflation projections:
- Headline PCE inflation by the end of 2026 edged down to 2.4%, from 2.6% in the September SEP.
- “Core PCE” inflation by the end of 2026 edged down to 2.5% from 2.6% in the September SEP.
- Not hitting the 2.0% inflation target till 2028 (same as in prior SEP).
“Longer-run” federal funds rate 100 basis points above inflation. The projections for the federal funds rate beyond 2028 remained at 3.0%, while PCE inflation rate projections remained at 2.0%. This means that members projected the federal funds rate to be 100 basis points higher than the rate of PCE inflation over the longer run.
GDP growth projections for 2026 ratcheted up to 2.3%, from 1.8% in the September SEP (the 15-year average real GDP growth is about 2%).
Unemployment rate projections unchanged: The median projection for the unemployment rate at the end of 2026 remained at 4.4%, same as in the September SEP. These are still historically low unemployment rates.
The whole statement:
Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months.
In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Philip N. Jefferson; Alberto G. Musalem; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting; and Austan D. Goolsbee and Jeffrey R. Schmid, who preferred no change to the target range for the federal funds rate at this meeting.
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I smell a rat.
you mean the 6 cut rate rat?
They are desperate to avoid a spectacular implosion of their enormous asset bubbles.
That is because they won’t be able to reflate it again without destroying the currency. Why are they buying 40 billion in Tbills? What is the reasoning? They know demand in the size they need doesn’t exist at these low rates?
I agree on it wads a circus, cuz all participants are clowns
The rat you smell is the cancer destroying the American people. Pandering to Wall Street is what the government is doing. They’re doing that because the government is in control of a demonic group that hates everything America stands for.
That tribe pretends to be like us, except that they wear little hats a few times a year.
Bingo !
The FED is clearly only interested in juicing asset prices for the wealthy, inflation be damned. I don’t know how anybody could take them seriously insofar as their actual mandate is concerned. This may have been the most outrageous rate cut in history, all things considered.
It seems the Fed does not know what is happening in the economy. Not having data is part of that but also not knowing future impacts of tariffs, AI, etc. My own hope is the Fed maintains its independence and does not become too political.
Powell also said inflation is due to tariffs. He is not mistaken. He lied.
He also said “no inflation in services” which I found peculiar.
You hope they maintain their independence? From reason or common sense?
Andrew Jackson was the first and only U.S. President to pay off the national debt. After doing so, he also closed the central bank. The central bank was re-opened in 1913, and since then, the U.S. dollar has lost 96% of its purchasing power, and the U.S. has accumulated $38 trillion in debt, adding another trillion dollars every 100 days with nothing to show for it. A 0.25% rate cut (or six) will hardly make a dent in that picture.
Andy that conversation needs the prequal from 1836 in the first industrial revolution.
“with nothing to show for it”
Yeah we’re just burning the money right?
Your “independence” is my “unaccountable.” No one at the Federal Reserve has paid the (figurative) price for their actions; while hundreds of millions of Americans have paid the literal price for more expensive housing, insurance, services, groceries etc. that have outpaced wage gains.
Y,ou understand that Trump was putting pressure on the Fed, and that a Fed under the control of the executive would be much more expansionary?
The result of this very stupid direction by the Federal Reserve today in cutting short term interest rates will be higher mortgage rates along with rising yields in 10 year and 30 year US Treasuries.
Let’s hope that’s the case and it will hold….at least then this rate cut might have some redeeming quality to it, although small, but higher mortgage rates is a win in my book.
Perhaps they’ve given up on the long end and the short end is the only thing they can control since 2022 or so. They didn’t raise rates because they wanted to, look at 08 until 2016 for an example. They raised rates because they had to, and now whatever they fear is overpowering that.
“1 sees 6 cuts.” WTF
Please make it make sense why bond yields are falling across the board. Both short and long. 2:57 PM Eastern.
It will be temporary.
Just wait till all the hurr durr QE headlines die off. 10y will revisit 4.2% soon.
My memory may be faulty, but I seem to recall that the Fed changes the language to “extent and timing of additional adjustments” when they think they’re near the end of a cycle and considering either a pause or reversal in direction.
AI search says they inserted that phrase in 2006 (end of hiking cycle), 2018-2019 (end of hiking cycle) and late 2024 (uncertain about future rate cuts).
I wonder if the bond market is reacting to that change in posture. Longer-term bonds were leery of short rates being too low. If short rates are going to stabilize then long rates may come down due to reduced fears of inflation re-igniting.
On the other hand it could just be bankers front-running the additional reserve purchases and spending their new holiday money in advance?
And there’s no reason it can’t be “all of the above”!
Howdy Folks. Perfect heading Lone Wolf. I have always considered the FED a clown show too.
Pending on the outcome of Trump vs Slaughter case. If this admin got the favorable ruling from Supreme court (which seems very likley), even though this case is about the FTCs, it might lend a precedent in which they will have full power to fire agency appointee, one has to wonder if the entire Fed Reserve will fall into this category as well. We already know Pow Pow is on the crosshair but imagine the entire board is no longer data dependent as they say and will change interest rates and monetary policy based on one person’s wish (if not, they will simply be fire and replace with loyalist)….let the real clown show begin then.
That case specifically EXCLUDES the Federal Reserve.
Not really, that case is only about the FTC.
Not quite settled, this is still being brought up in the arguement and while the case is neither about the FED but let’s be real that’s on everyone’s mind, including the justices.
One thing for sure, as this case will likely be a win for this admin, and these people will take an itch and run a mile with it and expand what the court ruling allow for to beyond what they can get away with (or not get away with in many cases), so the FED IMHO will be at risk. You can also search for this article and it will give you some food for thought.
“Supreme Court Struggles With How to Insulate the Federal Reserve From Politics”
What a joke….oh well, market got another rally since the kid throwing the tantrum got what they want as always….good times.
Re the comment above “Supreme Court Struggles With How to Insulate the Federal Reserve From Politics” it doesnt seem they are trying very hard to me. Just sayin.
I wish I could even be surprised by this.
/agreed … what happened to his October meeting driving on a foggy road analogy ~ “slowing down”?
The fed is not only a circus it is an echo chamber of useless idiots.
I bought that analogy hook, line, and sinker. Based on the October meeting, I was convinced the Fed was going to take a hard line without any October data for this go-around and hold rates steady. My intuition was very wrong. My faith in the federal reserve and U.S. government (both parties and the electorate) is falling rapidly.
:’(
They did invent math formulas to try to define economics as a science but the dot plot suggests it is a combination of politics and complete guessing. Kind of like looking at weather where most models predict where a storm will go, often in early stages with an outlier. That is not this. I don’t have issue per se with the cut but the belief people have it is not what it objectively appears on the surface and of course will keep moving in that direction.
Economics is not a science. It is a “social science”, like sociology and other bs fields. Economics does have sophisticated statistical methods (econometrics), but the empirical support for its theories is just as lame as in sociology. Economics is not in the same league, ballpark, or universe as physics or chemistry, which are real sciences.
Yes, that was my point but they do sell their formulas as if it was real science in the same arena as Net present value and so on. They basically created an entire language and set of formulas that is mostly nonsense but peddling on same level as Einstein or Newton. Probably got them nice University jobs and big pay raises.
There are lies, damned lies, and then there are Economics.
– Ancient Chinese proverb
The only way to save a Pine Tree Republic is to shake it until all the superflous ornaments fall to the ground and smash into thousands of pieces. Instead, the Fed thinks we need lower financing rates to buy a bigger color wheel so everyone can ooh and awe about how pretty it all looks for the annual shore leave holiday spending season which is already running 24/365. Thank gawd there’s other uses for branches in the future. We’re gonna need a bigger rope factory soon. And the shape of that dot plot…is it begining to resemble the outline of a Chinese temple or perhaps Nomad itself? At any rate, there appears to be a lightning rod formation at the top…expecting a howling storm of electric bolts that could short out the entire card house? More bad ink to start the day is all we need. Red sky at morning, sailor take warning.
The Fed knows the future is bleak, they don’t want it to collapse on their watch.
This Miran guy is a moron haha. How do you, when giving a professional opinion, forecast 6 cuts next year based on the data available, all of which is screaming the opposite? Crazy what’s going on in this administration.
Miran is a lightweight and doesn’t belong in such a position of power.
The PCE downgrade for next year is total BS. Just the huge surge in health insurance premiums would push up annual PCE by a few tenths of a percent. Never mind all the price increases we will see as a result of total abdication of the FOMC’s responsibility to control inflation.
Insurance is one of the biggest items in my budget (health, auto) and it is going WAY up 12% next year. Services deflation my arse.
Hey guys, I feel like this is not what Juvenal meant when he was talking about bread and circuses. The government is supposed to amass power by distracting people *with* circuses; it’s not supposed to actually become the circus itself. There’s a crucial distinction there that I think the reigning political party is missing.
How couldn’t it be a circus when dissenting voices are blocked and clowns hire and promote other clowns? But they’ve got “credentials”!
I read somewhere the other day “a culture war is what you start to keep people from noticing the class war you are engaged in”.
Yep, it all ramped up after occupy wall street. All the people that now hate each other were marching in unison back then. Do a google search on media mentions of social justice before and after.
It’s the same old “divide and conquer” strategy they’ve been employing since forever. I believe the end of the US is going to come more swiftly than most imagine, especially the ones “in charge.”
I am old enough to remember the USSR. Nobody would have believed it would crumble a few years before it actually did.
I take no issue with the Fed buying treasuries to grow it’s balance sheet in line with the economy.
But, I strongly disagree with the balance sheet base it chooses to start from. The current starting point is a level that allows for rampant speculation and record stock valuations and RE prices, relative to income. Plus high inflation and high deficit spending.
Simply put, the policy is designed to support an asset price bubble, as well as a deficit spending bubble.
_Is there_ such thing as an asset price or deficit spending bubble?
As someone uneducated, it feels like what we’re seeing is economic planning in action. The Stock Market prevents money from sitting on the sidelines in people’s savings accounts after they are paid; instead, it goes right back to where the financial industry can reach it and redirect it, and thus ensure economic activity continues, regardless of how people actually feel about it. As long as money can flow quickly enough through the economy, it doesn’t matter how much of a “bubble” it is — the “bubble” seems to only be a measure of where labor is occurring.
But the American economy is interesting, because it’s so consumer-based (but maybe every economy is), in the sense that it’s based on people buying more and more and more through and more ads — but it also feels, in a way, that they’ve saturated how much consumer spending can actually be increased by using ads to get people to buy more frequently. Absent that, the only avenue left is to get people to buy things that are more expensive.
its also an excellent inflation release valve and has been since the 80’s. Kinda like bit coin. Helps to hide your printing and keep inflation in check.
Not when the “wealth effect” spending of the top 10% is spurring inflation, especially in housing.
I’m talking about a bubble in asset prices because there is too much liquidity in the system being passed around like a hot potato. Nobody wants to hold excess cash. They’d rather buy an asset with it. Even if that asset is greatly overvalued, they still get an expected return.
I think you would enjoy reading Hussmans market comments. He frequently talks about the impact of having too much liquidity in the system.
Yep, and then the elite wonder why the national mood on the economy is so sour. Simply put, the vast majority Americans don’t care about the stock market.
I disagree with this premise. I don’t think “the elite wonder why the national mood on the economy is so sour.” They could not care less.
IF the SOFR people liked rates over 4% , they’re gonna love 3.75
The SRF will be buzzier than before, IMO.
Why does MBS need to be replaced with Tbills? What is the economic reasoning?
There is no economic reasoning. The reasoning is the balance sheet. The Fed wants MBS off its balance sheet entirely because their principal payments are unpredictable, based on mortgage payoffs (refis, sales), and because having MBS on the balance sheet favors one class of private-sector debt over other classes of private-sector debt. They just want government debt on the balance sheet. That’s how they explained it for the past 3 or so years. And so far, they’ve been doing it.
Thank you for the explanation. I think they should state a target for the balance sheet and get to it hell or high water. Reducing it until you have a crisis (2016-2019) and flying by the seat of your pants is no way to run a country.
Independence was fun while it lasted.
There was no independence under Biden either. The government issued $3 trillion in debt in March-June 2020 and the Fed bought $3 trillion in securities over the same period in a well-coordinated move. An independent Fed would have said, forget it, we’re doing repos to calm the Treasury market and the money markets, and we’ll buy a few T-bills, and as soon as stuff calms down, we’ll unwind this stuff. That’s how the Fed did it during 9-11 when markets were shut down for days.
Now that increasing the balance sheet is clear policy…what do you think the repercussions of this given:
2009 the Balance sheets grew from a starting point of 4% of GDP
Now it’s starting from 9% of GDP
I assume I am misunderstanding your charts from 12/8/25? How can the FED achieve 6% of GDP?
“Reserve management purchases” that the Fed is now talking about are similar to the classic method before 2009 with which the Fed has kept reserves and its balance sheet roughly proportional to the economy and the banking system, with total assets at around 6% of GDP.
This will clarify things for you, including both charts — the thing is, the balance sheet will increase, but less than nominal GDP, and so so the Total-Assets-to-GDP ratio will continue to decline.
https://wolfstreet.com/2025/12/11/why-the-feds-reserve-management-purchases-are-not-qe/
March-June 2020 was Trump 1.0, Wolf. It has been a long day so if I’m not understanding what you wrote I apologize.
OOPS 🤣
So my comment should start out with: “There was no independence under Trump 1 either….”
Wolf, your point still stands. Biden was inaugurated in January of 2021, and the Fed continued to print another $2 trillion until the beginning of 2022, effectively monetizing the March 2021 stimulus bill.
That money was of course “unprinted” through QT, but it still means that the Fed was enabling Biden for the first half of his term or so.
“The government issued $3 trillion in debt in March-June 2020 and the Fed bought $3 trillion in securities over the same period”
the Fed is the great enabler, and that is the great flaw in the system
The United States has the same financial condition as the State of Illinois
The Fed cut rate and poured in liquidity, to prevent recession, until
JP retirement.
TNX gapped up to 4.20%, but closed below Dec 8.
I too also need ample reserves, perhaps i can write some BS on pieces of paper and the fed will give me 100% on the dollar?
The Fed seems to like to play Cracker Barrel and Bud Light (do stupid stuff), but never suffer any consequences from their stupidity. On the contrary, their friends and lawyers invest in the stock market for them (members of FOMC are not allowed to), and reap huge profits when cutting rates, while tanking the US economy with more and more inflation. Powell especially is making hay while the sun shines before his departure next year. Expect more cuts before he leaves.
Yields are down across the board in Treasuries, but not by much in the 20 and 30 years because traders are expecting higher inflation, and in the very short-term bills because the cut was already priced in.
It is sad to see these Politburo-wannabes trying to plan our so-called free market economic system. We all know what happened to the USSR.
When they say say “Blind Trust” that means the taxpayers are not allowed to see how the sausage is made.
This only proves that the Fed does not really know how to handle the changes in the economy. They went along with the previous administrations inflationary, money spending agenda and kept the interst rates low. Then hiked the rates up so fast they are killing the real estate market specifically home prices and home sales (or lack thereof), and now they have no idea what to do next.
No, they know exactly what they’re doing.
Exactly. Jerry and team take their orders from the oligarchs and adjacent bankers, speculators, and grifters. Asset bubbles are a feature, not a bug.
I find it shocking when every action taken since 2008 has been to protect asset holders (making retirement 401k and dependent on market was stupid) that people still think they don’t know what they’re doing (then again they defaulted on pensions to the mill workers in 70’s and 80’s, i talked with those guys in the late 90’s early 2000’s so i’m not sure why people don’t think it won’t happen again). Remember when Nancy P wanted to nationalize 401ks in 08?
I dont get why the Fed is a clown.
Repo market was giving some bad signals so, in my head, lowering the rates is not a bad move
The fed is going back to prior 2009 fed strategy which I assume is better than QE, and, as I see, QT is not an option … Am I wrong? QE is still an option? Maybe the projections of rate cuts are why everyone thinks the fed is a circus?
Going back to prior 2009 strategy means buble enlargement?
higher mortage rates are less common in the past ten years but not in old times. Is this really a problem?
Sorry if i’m wrong, if some of my statements are not true. I came to the comments section and Wolf place just to learn about economy and to have fun (really, a lot) with your analogies or educated ways of diminishing the Fed and Drunken Sailors
If the repo market gives bad signals, why do people rush to a conclusion that increased liquidity levels are required.
It could be that private market participants have mismanaged their liquidity levels, or their interest rate expectations. In that case, the correct action is for thise private entities to adjust their treasury and risk management policies to avoid future problems.
I missed the presser and wonder what kind of dumb questions Powell was asked this time.
I’m waiting for this Q:
“Mr. Powell, are you willing to require monthly drug testing for each voting member, including yourself?”
It’s the only one that might make sense of the FED.
I’m sure he wasnt asked…
Where is the 2% inflation trend line for the past 4.5 years?
Because we are way above it, does that mean we are at “unacceptable” prices per the 2% “acceptable” rate as set by the Fed?
With nearly every asset at all time highs, from metals to stocks, to services such as medical …..unemployment well below 5%, if this is the time to cut rates, when would be a good time to raise rates? What conditions would warrant a raise?
See my comment below, it was funny!
Guess T bill and chill is looking worse and worse by the month….and with 20yr/30yr still yielding less than 5%, with long term lock in and that rate is not all that appealing to go notes or bonds
On the other hand, been looking at agency bonds and you can get some over 5% in 10/20yrs maturity. As high as 5.5% and first callable being in 2027 or 2028, meaning you will get full 5.5% for 2026, is this a decent strategy to counter Tbill at closer to 3.3 to 3.5% now? I guess the only downside is being locked in and screw again if treasure notes and bonds spike above 5 or 6% and those agency bonds won’t be call in for a long time. Just hard to imagine long term treasury will spike over 6% anytime soon but perhaps I am wrong on this..
I have been noticing a potential return to a TINA type environment. Another way to get air into the bubbly assets.
I don’t see much room for the 10-yr yield to drop, with ample technical and fundamental support. 6% seems like the fair yield, as of yesterday.
I don’t know the exact mechanics of the treasury market, as to why the yields have remained so low (the official “projection” is that we won’t return to 2% inflation… basically ever?). It seems like 200bps higher is only fair (to me).
Obviously the factors of foreign money, large US funds, insurers and pensions, and more have been conditioned by the ZIRP and become thirsty for anything that appears to be better (and I am not sure if inflation will outpace the 4% average over the next decade?).
My only open is does the S&P 500 get to 8000 solely based on 7 companies irrationally spending on AI, mostly among themselves, or does revenue and profit matter? It would not be surprising in an empire in decline from a hegemony for those to bump it as high as possible regardless of the standard way it has worked prior to recent. The 100s of billions being passed among the big 7 like from Nvidia to Open AI to Oracle and so on would ideally have a viable future business model that is profitable.
..does revenue and profit matter?
Get this – Apple went from $1.5 Trillion to $4 Trillion market cap (2021-2025) while revenue and profits stayed the same. Hope that answers that question. Only indexing (i.e. buy at any price) matters.
Case and point 0.014 of stocks represent 40% of “value”. QED
I didnt understand why the Fed is conducting QT when they go later in the opposite direction? The monetary policy looks more like “we didnt know what we doing.” Sure it is not the classical QE, but a exanding of their balance sheet.
These Reserve Management Purchases are likely smaller than nominal GDP growth, and the assets-to-GDP ratio will likely continue to fall, but more slowly than under QT.
Before 2009, the assets-to-GDP ratio was roughly flat for decades at around 6% as assets grew with the economy, driven by demand for the Fed’s liabilities (at the time, currency in circulation was the largest one).
Article coming.
Wolf,
Could lower rates be needed because corporates need to rollover and can’t afford higher rates? Karl Denninger seems to be leaning in that direction.
That would only benefit debt with floating rates that are pegged to SOFR, and there is some of that. But most corporate bonds are fixed rate. And when they’re rolled over, they depend on lower long-term rates, but that’s not a function of the Fed’s short-term policy rates, but of the bond market’s fears longer term about inflation and other factors.
How much of corporate financing is short-term commercial paper (which would be more dependent on short-term rates)? I don’t know the answer.
Total commercial paper outstanding (short-term debt that money markets invest in) is only $1.3 trillion. It’s pegged on short-term rates when issued. Most corporate bonds, including junk bonds, are fixed rate and pegged on long-term rates. That’s the biggest part of corporate debt. Many loans, including leveraged loans, are floating rate tied to SOFR and adjust periodically. Nearly all revolving corporate credit, such as working capital lines of credit, floorplan credit, etc. are floating rate. The majority of CRE loans are fixed rate, but still a pile is floating rate.
In 2026 TNX can drop below 3.00% < 3M, to close Aug 2022 open gaps.
Tariffs inflation bs.
So I understand the concept of the Fed’s balance sheet expanding with the overall economy, but I’m struggling to understand why the balance sheet moved from 6% of GDP to more than 20% of GDP. Why do the markets need so much liquidity now? Is there a mechanism to shrink the balance sheet back to 6%? Is that desirable?
Simple, because your oligarchs need the liquidity to stay solvent. This is what happens when the majority of your GDP becomes paper-pushing bullshit (grift) instead of production of real things.
Remember when we used to have real business cycles or when we sent bad actors to prison and allowed asset prices to decrease? The metrics have also changed (moving of goal posts) to the point where reality is completely disconnected from the paper(now digital) world.
Are you kidding me, The Fed will expand their balance sheet (print) with prices where they are now?
This is insane. Commodity super cycle incoming (barring the sudden death of half of the world’s population).
Hedge accordingly.
because we’re bankrupt. What happens to your assets when you’re bankrupt? We’ve been that since 2008. It is why the “temporary” measures as honest ben bernake called them have never gone away. Its why you had 0% from 08 until 2015, when Janet raised .25 and then decided not to raise again until a new unlikable president was elected (its all part of a show, they work together, Trump included) and its why they panicked in 2019, but i’m not allowed to say more on that.
Ya, I don’t understand this either and likely need another dozen Wolf articles this week to help. Why can’t the market absorb this $40B per month, half a trillion per year? We’re issuing tremendous debt to fund government efforts but now we need to buy half the amount of treasuries the Fed Reserve bought during COVID recovery per month (a third when including MBS). How does this differ from “no crisis QE”? Is this “pre-emptive crisis QE”? Isn’t this direct monetization of the national debt? Help, Wolf!
The market can absorb them just fine — that’s not the issue. The issue is reserve balances (liquidity) are running low and on certain key dates are pressuring the repo market. So that’s a sign for the Fed that the “ample” line of its “ample reserves regime” has been hit, and from now no reserves need to grow with demand for them.
Before 2009, before QE, the Fed’s balance sheet always grew with the economy. They’re reverting to that.
But didn’t Powell say a few months ago that they’d do a pseudo-QE by not increasing the balance sheet as fast as the economy is growing, meaning that the percentage of the economy that is the balance sheet would drop? Did I misunderstand that?
Yes, that’s what they announced today:
https://wolfstreet.com/2025/12/11/why-the-feds-reserve-management-purchases-are-not-qe/
in 2008 US GDP was 14.4 Trillion with a debt of 10 Trillion.
In 2025 US GDP is 30.48 Trillion with a debt of 37.6 Trillion.
Make of that what you will and why they have to keep using “temporary” measures.
You have to go look at the size of the new yachts these guys are buying. The money’s got to come from somewhere!
Most of the recent pressers have not been too bad imho. A few fibs here and there. Not many. This one…. Pressers like this, I wish Wolf would do a fact checking video. Just stop the recording and tear every shred of what was said. And the Journalists played ball or were maybe the worst informed I have seen in recent history. Guhhhhhhhhhhh.
How much of the the Treasuries soon to be 40 Trillion in debt can they reasonably hope to float on the short end of the duration curve ? Do you think there is a limit ?
Is there a perverse effect in having Treasury dominate the short end as far as undermining the credibility of the long end ?
Seems like the Bond market , ultimately wont be fooled…but maybe the sense is that money has nowhere else to go ?
The Fed is way short on T-bills. It only holds minuscule portions of them. It’s starting to shift to T-bills, so over the years, it’ll end up replacing its MBS and some notes and bonds with T-bills. So maybe $3 trillion or more over the years. There are currently a little over $6 trillion in T-bills outstanding. The government has been increasing issuance recently and will further increase issuance as the Fed switches into them. There have been periods when T-bills accounted for over 30% of total debt outstanding. So I don’t see this as an issue. T-bills are a well-oiled machine.
I loved the question of why the 10 year US bond yielding 25 points more after 75 point cut. Jay responded maybe the bond market is expecting accelerated growth. I LMAO, ha
I only listened to part of the interview questions, but I got the vibe that they’re committed to keeping the bubbles inflated when asked about housing and the K shaped recovery. Powell seemed irritated like obviously most of the spending should come from the upper third of income earners with no concern for the distortions that and inequality this caused. If you invested heavily in housing and the stock market in 2019 you’re in a great place. If you were too young to have significant assets invested you’re going to be behind for life because never again (without significant risk) will there be the opportunity to basically double your net worth in 5 years.
They’re terrified of letting the bubbles deflate. One thing they haven’t really thought about is inflation historically is the killer of nations and giant wealth gaps is typically the cause of social unrest. It’s bad path to be on. And Trump today “growth is not inflation”. Lol. Good luck brainwashing people paying more for groceries into believing that.
Double? Try triple from the March 2020 lows.
As I said in another article, the general political discontent, in my opinion, is due to the wealth inequality.
The average person doesn’t like that he’s struggling to pay his bills, even with wage increases, while the top are living high on the hog. And yes, I recognize that it’s always been like that, but it’s gotten markedly worse. That’s why the average new car is now $50,000.
That’s why vacation costs have skyrocketed. They are catering to the group that has the money.
“Powell seemed irritated like obviously most of the spending should come from the upper third of income earners with no concern for the distortions that and inequality this caused…”
He was irritated because the question was braindead stupid, and it keeps getting repeated and turned into clickbait by stupid-ass reporters. Lower income people always spend nearly all their money; they make more than they used to, and they spend more than they used to. But they cannot spend more than they make. And so they don’t spend a lot because they don’t make a lot. High income people can spend a lot of money; what else should they do with it? Not spend it? And their spending creates jobs and income for workers. This has always been the case. Just basic financial mechanics. It’s a good thing that wealthy people spend their money and make it circulate and create jobs and incomes. Is Powell supposed to tell the low-income people to spend more than they make? Should he tell the high-income people to spend less and kick the workers out of their jobs?
If that moron reporter had asked about income inequality, or wealth inequality, there would have been a case to be made.
Powell should have Tasered that reporter on the spot with the special Fed-chair Taser.
If our (Free Market) worked, there would be no reason to set interest rates, pay interest on bank reserves, or provide liquidity.
Not sure what we have, but it is not a Free Market.
We have the best goverment money can but. The question is who owns it?
If there were a truly free market, you would have five monopolies running the country.
Possible to deduce fed’s neutral rate estimate from this data?
This drop in interest rates is inconsequential , the resumption of QE is the headline. Intentionally or incidentally, it does benefit US debt given the focus to refinance it at lower short term rates.
At some QE higher than $40 billion per month the bond market will get nervous about arbitrage of the debt. For now most will likely accept the explanation of it’s necessity being that of liquidity.
Keep in mind Powell has said 1 trillion added by QE is roughly the equivalent of an interest rate cut of a quarter percent.
Thus today’s cuts, assuming ongoing QE is effectively 0.375.
If you are lending money to the government, and the interest you receive is what you are living off of, then this rate cut is not inconsequential.
Dick Burns
THIS IS NOT QE, you QE goofballs, READ THIS:
https://wolfstreet.com/2025/12/11/why-the-feds-reserve-management-purchases-are-not-qe/
“The Chicago Fed’s National Financial Conditions Index (NFCI) provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems. Because U.S. economic and financial conditions tend to be highly correlated, we also present an alternative index, the adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on financial conditions relative to current economic conditions.”
How is it the NFCI and ANFCI are the loosest they have been in more than two years and there is a liquidity problem?
It is not a hawkish cut if they started QE again. Lemmings.
THIS IS NOT QE, you QE goofballs, READ THIS:
https://wolfstreet.com/2025/12/11/why-the-feds-reserve-management-purchases-are-not-qe/
Tomorrow John Thune senate will vote to replace ACA subsidies
directly to insurance co with checks directly to the people.
For me, this rate cut signaled the end of the US as we knew it. The damage is irreversible. The corruption is too deep. The FED has no cover for this one. Inflation surging, job market tightening, asset price bubbles exploding into levels that are cartoonish – rate cut.
I was hoping to see Reckless word in the article. I guess Wolf doesn’t think this was Reckless move.
FED could have easily waited for another meeting to see the Inflation trend. They already dropped 50 BP in last 2 meetings as Risk management.
FED is just lying to Americans about their commitment on Inflation mandate. Powell is claiming Services inflation is down and what inflation we have is Tariff transitory. It will go away in 9-12 months. He is giving same BS as 2021.
When I said “most reckless Fed ever,” the Fed’s policy rate was near 0%, and it was doing a ton of QE, and inflation was heading toward 9%. That’s a drastically difference scenario than today.
Clowns, clowns everywhere. I should be laughing, but instead I’m crying. I don’t like this circus. I’m outta here!
Remember when the FED was talking about a “soft landing” and then there was no landing? And now they’re cutting rates. They seem to have just given up on any landing and now their aim is higher altitude.
Wolf, is this latest move like a brush fire in the woods and the local troublemaker kid going to his backyard and getting the gasoline can and going back to the brush fire and pouring the contents on the fire? It sure seems so. There’s always a troublemaker kid…..
Wolf, Powell repeatedly said that Service inflation was falling while goods inflation, affected by tariffs, were the culprit in Inflation being above target (at 3%).
Your work has clearly shown the opposite is occurring. I think you’re right.
Every time Powell went through some explanation of the high inflation I was wondering what you thought.
Can you address why Powell said that?
Perhaps justifying the rate cut that was forced on him?