December 2025 Market Recap
1) Monetary policy: the Fed cuts and starts talking like a liquidity manager
At the December 10, 2025 meeting, Federal Open Market Committee lowered the federal funds target range by 25 basis points to 3.50% to 3.75%, effective December 11.
The key sentence in the statement was not the cut itself. It was the acknowledgement that reserve balances had declined to ample levels and that the Committee would initiate purchases of shorter term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis. This was reinforced in the Fed’s implementation note, which also lowered the interest rate paid on reserve balances to 3.65% effective December 11 and detailed administered rate settings used to keep overnight rates within the target range.
That operational shift matters because it draws a line between two different things that often get lumped together in market narratives:
Rate policy, which influences demand, credit, and pricing through the cost of capital
Reserve management, which is about ensuring money markets clear smoothly so the policy stance actually transmits through the system
On that second point, Federal Reserve Bank of New York published specifics around the planned reserve management purchases. The Desk indicated it would release a purchase schedule starting December 11 and that the first month would include roughly $40 billion in Treasury bills, with purchases starting December 12.
In Chair Jerome Powell’s press conference, he explicitly referenced this plan and characterized the initial purchase pace as potentially elevated for a few months to address expected near term pressures in money markets, with the pace expected to decline thereafter depending on conditions.
The takeaway is straightforward. December was not only about a lower policy rate. It was also about keeping the short end of the system stable so the easing path does not create unintended tightness in funding markets.
2) Inflation: progress continued, but the composition and the measurement both mattered
Inflation was supportive in December, but it was not a simple victory lap. The main inflation release during the month was the November CPI report from the Bureau of Labor Statistics, released December 18, 2025. It showed:
Headline CPI: 2.7% year over year
Core CPI (excluding food and energy): 2.6% year over year
Shelter: 3.0% year over year
Energy: 4.2% year over year
Two macro implications flowed from that composition.
First, the core measure was running below headline, which is a helpful signal for the Fed because core is a closer proxy for underlying inflation persistence. That said, the shelter line remained higher than core, which keeps the “last mile” narrative in play. When shelter inflation cools slowly, it tends to keep overall services inflation from falling quickly, even if goods disinflation is doing its job.
Second, energy was still a swing factor. A year over year energy reading above 4% is a reminder that inflation can look well behaved and still be vulnerable to commodity linked volatility. That matters for inflation expectations, especially in a regime where the Fed is easing and market participants are watching for any sign of re acceleration.
There was an additional, underappreciated layer in this CPI report: measurement continuity. The BLS emphasized that it did not collect survey data for October 2025 due to the lapse in appropriations and could not retroactively collect those survey data, and that CPI data collection resumed on November 14. The BLS also published a detailed explanation of how missing October data were handled, including the carry forward of many survey prices and the special handling of rent and owners’ equivalent rent.
This does not mean the report is unusable. It means December’s inflation interpretation required more humility than usual. When one month is constructed off carried forward prices and the next month is measured against that base, the month to month signal can be less clean than investors are accustomed to.
To cross check CPI with the Fed’s preferred inflation framework, the Bureau of Economic Analysis later reported that headline PCE inflation was 2.7% year over year in October and 2.8% in November, with core PCE moving from 2.7% to 2.8% over the same period. The broad message was consistent with CPI: inflation was not surging, but it also was not back at 2%.
3) Labor and growth: the shutdown distorted the trendline, not necessarily the reality
Labor market interpretation in December was also shaped by the shutdown. The Employment Situation release for November 2025 was published on December 16, 2025 and explicitly noted that household survey data were not collected for October due to the lapse and were not collected retroactively. It also noted that collection for November began a day late and was extended.
Separate BLS guidance on revised release dates clarified another important detail: the BLS did not publish an October 2025 Employment Situation news release, establishment survey data for October were published with the November data, and the collection period for November data was extended.
The macro point here is not about any single payroll number. It is about signal quality. When you have missing household survey data for a month, extended collection windows, and a break in the usual rhythm of releases, investors have to be careful about drawing strong conclusions from short term changes. Market attention naturally shifts toward broader indicators like hiring intent, corporate commentary on wages, and credit conditions.
For the Fed, this environment creates a familiar tension. If inflation is cooling and the labor market is not overheating, easing is reasonable. But when data are disrupted, the cost of a policy mistake rises because the confidence interval around “true trend” widens.
4) The consumer: resilient activity, more value seeking behavior
While policy and inflation dominated the headlines, consumer behavior remained central to the soft landing debate. Into late December, early readings on holiday spending suggested steady demand, even with evidence of tighter budgeting and more price comparison behavior.
A Reuters report summarizing early data from Visa and Mastercard indicated U.S. holiday retail sales growth of roughly 4% for 2025 based on their trackers, with consumers shopping more carefully and leaning into promotions and online convenience.
The official retail sales framework from the U.S. Census Bureau later showed that November 2025 retail and food services sales were $735.9 billion, up 0.6% from the prior month and up 3.3% from November 2024.
Even without turning this into a performance recap, the macro interpretation is important. Consumers can remain a stabilizing force even late in the cycle, but the mix often shifts: more promotion sensitivity, more substitution, and a bigger gap between categories that feel essential and categories that are more discretionary.
5) Financial conditions: easing is not only about rates
December’s defining feature was how openly the Fed linked the easing path to operational stability.
When the FOMC says it will maintain ample reserves and initiate purchases as needed, it is implicitly saying two things. First, it does not want reserve scarcity to inadvertently tighten conditions. Second, it wants to avoid episodes where funding market stress forces policy adjustments at awkward times.
The New York Fed’s plan to begin reserve management purchases and the Chair’s description of a front loaded pace, with a taper depending on conditions, is consistent with that goal.
This is a useful lens for interpreting December. The story was not simply “cut and hope.” It was “cut while actively managing the short term plumbing so that the stance of policy is what the Fed intends it to be.”
6) What mattered most coming out of December
Here are the key macro questions that framed the transition into 2026.
Does inflation keep drifting lower, or does it plateau above target. CPI and PCE were both in the high 2s year over year by the latest readings, which is progress but still above 2%.
How quickly does shelter inflation cool. Shelter remained a meaningful contributor in CPI, and sustained improvement here often determines whether core inflation can settle closer to target.
How clean is the post shutdown data signal. The October data gap and methodological workarounds mean the next few months of releases carry extra importance for confirming trend.
How the Fed calibrates the pace of cuts. The December statement paired rate cuts with reserve management language, suggesting policymakers were thinking about easing while keeping conditions orderly.
Whether liquidity operations stay in the background. Reserve management purchases were framed as a tool to maintain ample reserves, not as a broad based stimulus program. The size, pace, and market reaction were worth monitoring.
Disclosure
This commentary is provided for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Views are as of the end of December 2025 and may change as new information becomes available.