Stocks Take Off as Fed Cuts by a Quarter and QE Is Back, Kind Of: Dec. 10, 2025

The Federal Reserve cut its benchmark rate by 25 basis points to a target range of 3.5%-3.75% and signaled that it will resume supporting the Treasury complex via direct purchases of shorter-term securities. The central bank has seen its balance sheet shrink a significant $2.43 trillion since its peak in April of 2022 and now judges that reserves at financial institutions have dropped to ample levels which justify acquisitions of T-bills to ease funding stress in the system. Usage of the Fed’s repo facility has begun to trend much higher in recent months, an indication that banks have too much government debt on their books but not enough cash, a condition signaling the potential for scarce reserves in the near future against the backdrop of rising fiscal issuance and liabilities. The reversal from QT to the addition of new fixed-income instruments is kind of like QE, and is music to the ears of stock bulls, as it bolsters liquidity conditions and adds fuel to the fire of some of the most speculative areas in equities. Indeed, folks, the small-cap, cyclically oriented Russell 2000 has reached a fresh all-time record for the second day in a row and all of the major domestic benchmarks are advancing on the session. The yield curve is plunging in bull steepening fashion, led south by the monetary policy sensitive front-end, while today’s accommodative tilt is sending commodities north due to stronger growth projections.

Only One Cut Next Year Offset By QE, Strong Projections

The Summary of Economic Projections signaled just one cut next year and an additional one after that, placing the Fed’s rate at a midpoint of 3.13% in 2027 and 2028. A lack of deeper reductions could have been interpreted poorly by Wall Street, but news that the balance sheet will begin expanding again, albeit slowly, is certainly a reason to get excited and more than offset the concerns of limited benchmark trims ahead. It’s precisely the purchases of Treasury securities and the resulting abundant liquidity conditions after the pandemic that have contributed to driving equity valuations meaningfully higher, supported risk appetites in markets and generated significant asset price appreciation during the period. Furthermore, the dots featured stronger growth forecasts, lighter inflation anticipations and neutral employment expectations, developments that are also supporting a bullish reaction in stocks and yields alike.

Chair Powell, Fed Allowing Economy to Overheat

There were three dissenters at today’s meeting, one that would’ve liked to see a 50-basis point (bp) reduction and two that would have preferred a pause. But 9 of the 12 voting members decided to support a 25 bp cut even as the committee doesn’t seem that worried about growth or employment. Indeed, Chair Powell mentioned that layoffs remain subdued even though hiring is softening against the backdrop of elevated inflation. The central bank chief also alluded to tariff related inflationary pressures pushing up the costs for goods and supporting a Consumer Price Index of 3%, which has been partially offset by decelerating shelter expenses. An allowance of an overheating economy is terrific news for corporate earnings and equity valuations and explains today’s bullish reaction. The last interest rate decision of 2025 has essentially paved the way for a Santa Claus rally to end the year and the S&P 500 is poised to exceed the 7,000 milestone in the next few weeks. We’re only 2% away at the moment during a seasonally friendly period for investors.

International Roundup

China Gate Prices Fall as Final Stickers Increase

Chinese gate prices fell last month but consumers were hit with higher costs relative to the year-ago period. The Producer Price Index, which measures wholesale, or gate, prices, slipped 2.2% year over year (y/y), a worse reading than the economist consensus forecast for a 2% drop and October’s 2.1% descent. Higher prices in the year-ago period created a base effect situation that intensified the extent of the November price decline.

Inflationary pressures as measured by the Consumer Price Index (CPI), meanwhile, eased on a monthly basis but persisted y/y. The index depicted a 0.1% month-over-month (m/m) dip in November stickers. Economists anticipated a repeat of October’s 0.2% m/m increase. Relative to November 2024, however, the gauge was 0.7% higher, which matched the economist consensus estimate and accelerated from 0.2% in the preceding period.

As Expected, Bank of Canada Maintains Key Rate

Bank of Canada (BoC) policymakers voted this morning in favor of maintaining the organization’s 2.25% overnight interest rate. The country has experienced three months of job growth and a 2.2% inflation rate. Perhaps more significantly, Canada’s third-quarter gross domestic product (GDP) grew 2.6%, much stronger than the central bank anticipated. BoC Gov. Tiff Macklem opined that a strong drop in imports shored up the GDP result while domestic consumption has been flat. Volatility of international commerce and a lack of trade data due to the US government shutdown, however, is creating uncertainty in the outlook for Canada’s economy.

Japan Publishes In-Line PPI

The Japan Producer Price Index, which is also called the Corporate Goods Price Index, depicted wholesale price pressures easing on a m/m basis in November and continuing unabated y/y.

After a 0.5% m/m ascent in October, the gauge climbed 0.3% last month on a yen basis, matching the economist consensus estimate. Relative to November 2024, wholesale prices expanded 2.7%, matching both the consensus estimate and October’s print. The electric power, gas and water category and the nonferrous metal classification led the m/m metric with 0.15% and 0.12% increases. Other categories were virtually unchanged except for the petroleum and coals product group, which slipped 0.1%. Exporters fetched 2% and 2.4% more m/m and y/y respectively last month. Foreign customers paid 0.22% more for electric and electronic products and 0.20% more for metal and related products. Chemicals and related products slipped 0.10%. 

Additionally, import costs were 1.5% higher m/m but down 1.8% y/y. Businesses dished out 0.20% more for metals and related products and 0.11% more for beverages and foods and agriculture products for food. Conversely, petroleum, coal, and natural gas costs dipped 0.86%.

South Korea Unemployment Rate Inches Up

South Korea’s unemployment rate rose from 2.6% in October to 2.7% last month, according to official data released this morning.