The October CPI Hangover and the December Pivot Fallacy
The euphoria of the late summer rally met a cold reality on November 12, 2025. The Bureau of Labor Statistics released the October CPI report, printing a stubborn 2.8 percent year on year headline figure. This exceeds the Federal Reserve 2.0 percent mandate. It also exposes a widening schism between institutional forecasting and the Fed restrictive stance. Markets expected a cooling trend. They received a reminder that the last mile of disinflation is the most arduous. Core services, excluding housing, remain the primary culprit. This keeps the hawks firmly in control of the narrative at the Eccles Building.
The Federal Reserve communications since the October meeting have been surgically precise. They are signaling a higher for longer plateau. This is not the news equity markets wanted. Jerome Powell recent rhetoric emphasizes that the risk of cutting too early outweighs the risk of a minor economic contraction. This stance has sent the 10 Year Treasury yield back toward the 4.5 percent threshold. It is a level that historically creates significant friction for mid cap valuations and commercial real estate refinancing. The transmission mechanism of monetary policy is finally biting into the real economy. Yet, the central bank appears unwilling to loosen its grip until the labor market shows more than just a hairline fracture.
The Goldman Sachs Contrarian Thesis and the Labor Market Silent Scream
In the face of this hawkish wall, Goldman Sachs Research has maintained a provocative stance. Their economists are pricing in a 25 basis point cut for the December FOMC meeting. This is a high stakes bet against the prevailing wind. The Goldman thesis rests on the cooling of the U-3 unemployment rate, which has quietly crept toward 4.4 percent. They argue that the Fed dual mandate is now imbalanced. While inflation remains elevated, the risk to full employment has surpassed the risk of a secondary price spike. This is a classic alpha generating insight that contradicts the CME FedWatch Tool, which currently assigns only a 35 percent probability to a December cut.
Institutional investors are watching the quit rate and the Job Openings and Labor Turnover Survey (JOLTS) data with increasing anxiety. The labor market is no longer tight. It is brittle. If the Fed waits until the January 2026 meeting to act, they risk a hard landing. Goldman Sachs argues that the neutral rate, or r-star, has shifted higher. They believe the current 5.25 to 5.50 percent range is deeply restrictive. By cutting in December, the Fed could perform a soft landing maneuver that saves the 2026 fiscal year from a deep recessionary start. This is not about stimulating growth. It is about preventing a systemic collapse in consumer discretionary spending.
Visualizing the Interest Rate Trajectory and Market Expectations
The Liquidity Squeeze and the Reverse Repo Drain
Beyond the headline interest rates, the technical plumbing of the financial system is under duress. The Federal Reserve Quantitative Tightening (QT) program continues to drain liquidity from the system at a pace of approximately 60 billion dollars per month in Treasuries. The Overnight Reverse Repo (RRP) facility, which once acted as a massive liquidity buffer, has seen its balances dwindle to near zero. This is a critical inflection point. When the RRP is empty, the Fed drain comes directly from bank reserves. This increases the risk of a repo market spike similar to the liquidity crisis of September 2019.
For the sophisticated investor, the play is no longer about simple equity beta. It is about duration management and liquidity positioning. The spread between the 2 Year and 10 Year Treasury remains inverted, but the curve is bear steepening. This typically precedes a significant economic shift. If the Fed maintains its hawkish stance through December, the pressure on the banking sector will intensify. Small and mid sized regional banks are still nursing unrealized losses on their hold to maturity securities. A failure to cut rates soon could trigger a secondary wave of regional banking stress as we enter the first quarter of 2026.
Probability of Policy Shifts for the December 17 FOMC Meeting
| Outcome | Market Probability | Goldman Sachs Forecast | Impact on USD |
|---|---|---|---|
| 25bps Cut | 35% | Primary Case | Bearish |
| No Change | 62% | Risk Scenario | Bullish |
| 25bps Hike | 3% | Negligible | Parabolic |
The divergence in expectations creates a volatile environment for the USD. A hawkish hold in December would likely propel the DXY index toward 107.00. This would further pressure emerging market debt and domestic exporters. Conversely, the Goldman Sachs cut scenario would provide a much needed relief valve for global liquidity. The market is currently pricing in a perfection narrative that the data does not support. Investors must look toward the FOMC meeting schedule to understand the potential for a January 2026 pivot if December proves to be a hold.
The Forward Milestone for 2026
The ultimate test of the current monetary experiment arrives on January 20, 2026. This date marks the beginning of a new fiscal cycle that will likely introduce fresh inflationary or deflationary pressures depending on the new administration policy. Investors should watch the December 17, 2025 Summary of Economic Projections (SEP) with extreme scrutiny. Specifically, the dot plot for 2026 will reveal if the Fed expects the terminal rate to settle above 4 percent. If the median dot for 2026 shifts higher, it signals that the era of cheap money is not just paused, but permanently over. The key data point to watch is the 4.6 percent mark on the 2026 dot plot. Any movement above this level will trigger a massive repricing of long duration assets across the board.
