The Fed Surrenders to the Liquidity Wall
Yesterday, December 17, 2025, the Federal Reserve effectively signaled the end of the ‘Higher for Longer’ era. While the official statement maintained a cautious posture, the market is laser-focused on the commentary from Goldman Sachs. Ashok Varadhan, co-head of global banking and markets, is no longer speaking in hypotheticals. In a briefing released yesterday afternoon, Varadhan stated that the ‘friction of high real rates has finally met the wall of slowing corporate CAPEX,’ providing what he calls a green light for significant cuts through the first half of next year. This is not the speculative optimism of early 2024. This is a response to the hard data hitting terminals this week.
November CPI and the Death of the Inflation Ghost
The November CPI report, released just days ago, showed headline inflation cooling to 2.7 percent. More importantly, the ‘supercore’ services component, which remained stubborn throughout 2024, has finally dipped below the 3.0 percent threshold. This validates Varadhan’s internal thesis at Goldman: the lag effect of monetary policy has finally caught up with the services sector. The spread between the Fed Funds Rate and the falling CPI now represents the tightest real policy stance in two decades. It is a restrictive vice that the Fed must loosen to avoid a hard landing in the second quarter.
Visualizing the 2025 Rate Descent
The Alpha is in the Term Premium
Mainstream analysts are busy celebrating the nominal rate cut, but the real play is in the steepening of the yield curve. Per current Bloomberg terminal data, the 10-year Treasury yield is hovering at 4.12 percent, while the 2-year has plummeted to 3.85 percent. This ‘un-inversion’ is the most violent shift we have seen since the 2008 era. Varadhan argues that the market is underestimating the term premium. As the Fed cuts, the long end of the curve will likely stay elevated due to the massive Treasury issuance required to fund the 2025 fiscal deficit. This creates a unique opportunity in mid-duration assets while making long-dated ‘safe’ bonds a potential value trap.
The Disconnect Between 2024 Projections and 2025 Reality
To understand why the Goldman signal matters, we must look at how far off the consensus was just twelve months ago. The following data compares the median projections from December 2024 against the actual closing figures of today, December 18, 2025.
| Metric | 2024 Forecast (Median) | Dec 18, 2025 Reality | Variance |
|---|---|---|---|
| Fed Funds Rate | 4.75% | 4.25% | -50 bps |
| 10-Year Treasury | 3.50% | 4.12% | +62 bps |
| S&P 500 P/E Ratio | 19.5x | 22.1x | +13.3% |
| Core PCE Inflation | 2.4% | 2.8% | +40 bps |
Sector Specific Strategies: Real Estate vs. Financials
The ‘Green Light’ from Goldman triggers a massive rotation. Real Estate Investment Trusts (REITs) like Realty Income (O) are finally seeing relief as their cost of capital drops. However, the mechanism is different this time. It is not just about cheaper debt. It is about the return of the private equity ‘dry powder’ that has been sitting on the sidelines for two years. Varadhan expects a 15 percent surge in M&A activity within the industrial sector by February. Conversely, the major money center banks like JPMorgan Chase (JPM) are facing a tightening of net interest margins. The easy money made from parking cash at the Fed is evaporating. The alpha has shifted from the lenders to the builders.
Watching the January 30 PCE Print
The market is currently pricing in a 75 percent probability of a 25-basis point cut in January. However, the true test of the Goldman Sachs thesis will arrive on January 30, 2026, with the release of the December Personal Consumption Expenditures (PCE) data. If that figure comes in below 2.6 percent, the Fed will be forced to accelerate its easing cycle to prevent the real rate from becoming accidentally restrictive. Investors should ignore the noise of the retail sales headlines and focus exclusively on the PCE deflator. This single data point will determine whether the 10-year yield breaks below the 4.0 percent psychological barrier or if the term premium trap snaps shut on the bulls.
