Why the Federal Reserve’s December Pivot Failed to Materialize

The Fed’s December 11 Decision Exposed a Fragile Consensus

The numbers do not lie. On Wednesday, December 11, the Federal Open Market Committee (FOMC) maintained the federal funds rate at 4.25 percent to 4.50 percent. This was not the holiday gift Wall Street anticipated. While the market priced in a 65 percent probability of a 25-basis-point cut just two weeks ago, the reality of ‘sticky’ services inflation forced Jerome Powell’s hand. The statement was surgically cold. It noted that progress toward the 2 percent objective has effectively stalled over the last quarter. This is not a ‘cautious approach’ as generic analysts suggest. This is a policy dead end. The Fed is boxed in by a fiscal deficit that demands high rates to attract buyers for Treasury auctions, even as those same rates threaten to break the regional banking backbone.

Inflation Persistence Shatters the Goldilocks Narrative

Data released on December 12, 2024, confirmed the nightmare scenario. The Consumer Price Index (CPI) rose 0.4 percent in November, bringing the year over year figure to 3.1 percent. Per the December 12 CPI report, shelter costs and insurance premiums remain the primary culprits, accounting for over 70 percent of the monthly increase. The ‘higher for longer’ mantra has shifted from a threat to a permanent fixture of the 2025 economic landscape. Josh Schiffrin, head of financial risk for Goldman Sachs, recently noted that the ‘volatility of volatility’ in the rates market is reaching levels not seen since the 2023 regional banking crisis. Schiffrin argues that the market is mispricing the ‘term premium,’ the extra yield investors demand for holding long-term debt. As the Treasury prepares to dump another $1.8 trillion in net issuance onto the market in the coming months, that premium is set to explode.

Banking Sector Stress and the Net Interest Margin Trap

The big banks are hurting. While the B-grade analysis suggests banks benefit from high rates, the Q4 2025 preliminary data tells a different story. Net Interest Margin (NIM) compression is accelerating. JPMorgan Chase and Bank of America are facing a dual-threat: rising deposit costs and a stagnant mortgage market. Customers are no longer leaving cash in 0.01 percent savings accounts. They are migrating to Money Market Funds (MMFs) at record speeds. This ‘deposit flight’ forces banks to borrow from the Fed’s more expensive facilities or raise their own deposit rates, eating into profits. JPMorgan’s internal guidance now suggests a 4 percent decline in net interest income for the first half of the coming year. The chart below visualizes this divergence between the Fed’s target rate and the effective yield banks are capturing.

The Shadow Liquidity Crisis in Treasury Markets

Liquidity is evaporating. The spread between the bid and ask on the 10-year Treasury note has widened by 15 percent since the December 11 meeting. This is a clear signal that primary dealers, including Goldman Sachs and Citigroup, are unwilling to warehouse risk. The ‘Tilt Test’ for the current cycle is this: the dollar is not strengthening because the US economy is robust. It is strengthening because of a global dollar shortage. Foreign central banks are liquidating Treasuries to support their own crashing currencies, which ironically creates a ‘forced bid’ for dollars in the short term. This is a non-linear feedback loop. As the dollar rises, global trade slows, which leads to more Treasury liquidation. This is the exact mechanism that triggered the 1997 Asian Financial Crisis, but this time it is happening in the heart of the G7.

Yield Curve Metrics as of December 13, 2025

The following data points represent the closing marks from the last trading session before this report. These figures highlight the extreme flattening occurring at the long end of the curve.

Institutional investors are rotating out of ‘Growth’ tech stocks like Apple and Microsoft. These firms carry massive cash piles, but their valuations are predicated on a discount rate that is now fundamentally broken. According to data from Yahoo Finance, the Nasdaq 100 has underperformed the equal-weighted S&P 500 by 4.2 percent since the December FOMC meeting. This is a flight to quality, but not the quality of the last decade. Investors are seeking ‘hard’ cash flows and companies with zero refinancing needs through 2027. The era of cheap leverage is not just over. It is being actively dismantled by a central bank that is more afraid of a 1970s-style inflation rebound than a 2008-style credit contraction.

The critical data point to monitor is the January 28, 2026, FOMC meeting. Specifically, the ‘Dot Plot’ will be updated for the first time in three months. If the median projection for 2026 rates shifts upward by even 25 basis points, the current support levels for the S&P 500 at 5,400 will likely disintegrate. Watch the 10-year yield. If it breaks 4.75 percent before year-end, the Fed may be forced to intervene in the repo market to prevent a total seizure of the plumbing.