Market 12/10: FED Cuts 0.25%, Pumps $40 Billion/Month

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FOMC: Cuts 0.25%, raises GDP forecast, lowers inflation forecast

FED cuts interest rate 25bps as expected to 3.5% - 3.75%

→ Voted 9-2 with Miran wanting to cut 50bps and Schmid and Goolsbee not wanting to cut

Raised GDP forecast from September meeting and lowered PCE inflation forecast

FED Dot Plot shows one more cut in 2026 and one in 2027 but uncertain

Full FOMC statement today compared to October:

Powell: Pumps $40 billion/month to control short-term yields

Policy:

Confirms risks on both inflation and employment sides
Job market weaker than expected, predicts decline of -20,000 jobs/month → Explains why cut 0.25%
When asked about possibility of rate hike in 2026 → Powell confirms no

Economy:

When asked why raised GDP forecast and lowered inflation forecast but FED still cuts rates + pumps money
- Powell says because private investment (AI) and consumption are still holding strong in the current economic environment
- Labor productivity before and after AI is increasing so job losses haven't had a big impact on the economy yet
- Hard to assess how “weak” the job market is when labor supply is also declining
Asked about economic forecast:
- Unemployment may rise another 0.1% - 0.2% but won't get out of control
- Government will also expand spending in H1 2026 → economic forecast will improve

Inflation:

Seeing goods inflation from tariffs
- Uncertain about direction, currently waiting to see if businesses have fully passed it on to consumers
Services inflation excluding housing has made progress
Housing services inflation remains stubborn, probably need to wait for supply improvements
Current inflation assessment is not due to inflation speed but because prices have already risen previously, the only way to improve is real income growth must rise

Liquidity:

FOMC agrees liquidity level has reached full “Ample”
Will start buying $40B/month short-term bonds to control yields within the FED rate range
Will intervene as needed depending on the situation
May last several months

→ Extremely Dovish, even if FED doesn't admit it's QE it still is QE

Steve: “Extremely Dovish, even in Steve's best-case scenario only thought there would be liquidity support actions through temporary pumping programs, didn't expect FED to switch back to pumping money this quickly. Overall economic outlook better after today's FOMC.”

Ukraine: Ready for elections and reconstruction negotiations

Zelensky confirms Ukraine ready to hold elections as requested by US and Europe.
- If security can be ensured, elections will take place within 60 days
Has shared Ukraine's peace version with the US, will talk about post-war reconstruction
Calls for mutual ceasefire on energy facilities on both sides → Russia refuses
- Ukraine continues to use drones to attack Russian oil tankers

Oil continues to drop -1% this morning but temporarily rebounds slightly to opening price

China continues in deflation

Yearly CPI +0.7% YoY in line with forecast, improved from +0.2% in Oct
- Highest since 02/2024
- But CPI -0.1% MoM vs +0.2% expected
Core CPI +1.2% YoY in line with forecast and previous month, also highest since 02/2024

Goods inflation up to +0.6% YoY from -0.2% YoY in Oct, highest since 08/2024
- Food prices pull the whole basket with +0.3% MoM and +0.3% YoY

PPI -2.2% YoY weaker than -2.0% forecast and -2.1% in Oct

→ China still in deflation but showing signs of improvement

Mortgage rates stable, mortgage applications improve

30Y mortgage rate average 6.33% this week vs 6.32% last week
Mortgage applications +4.8% WoW, reversing -1.4% from previous week

Vs 2024, mortgage applications +19% YoY

→ Home sales improve whenever Mortgage Rate < 6.5% however FED preparing to restructure Balance Sheet to offload MBS, possible FED target for Mortgage Rate > 6% to not overheat housing market.