The Federal Reserve just blinked. On December 10, 2025, the Federal Open Market Committee delivered its third consecutive 25-basis-point interest rate cut, dragging the federal funds target range down to 3.50% to 3.75%. This move officially solidifies a policy shift that Jerome Powell spent most of the year resisting. The central bank is no longer leading the market. It is frantically chasing the two-year Treasury yield, which sat at 3.52% on the morning of December 11, 2025. This alignment is not a coincidence. It is a desperate attempt to engineer a soft landing that mirrors the mid-cycle adjustment of 1995.
Greenspan Echoes and the 1995 Ghost
Jeffrey Gundlach, CEO of DoubleLine Capital, has spent the last quarter highlighting the technical similarities between the current easing cycle and Alan Greenspan’s 1995 maneuver. In 1995, the Fed reversed a tightening cycle to prevent a recession that never came. Today, the data is far more fractured. While the S&P 500 pushed toward 6,900 on December 11, the underlying labor data tells a story of exhaustion. The unemployment rate has climbed to 4.6%, a level that historically signals a recessionary trigger according to the Sahm Rule. Powell’s decision to cut, despite three dissenting votes from committee members Austan Goolsbee, Jeffrey Schmid, and Stephen Miran, highlights an internal civil war over the definition of price stability.
Gundlach’s “Man Leaving a Bus” analogy remains the dominant framework for this volatility. Once the Fed steps off the vehicle of high rates, it cannot easily get back on. The market understands this. As short-term rates fall, the long end of the curve is starting to rise, reflecting fears of structural inflation that the Fed is choosing to ignore in favor of propping up a softening jobs market. Per reports from Bloomberg, the divergence between short-term easing and long-term inflation expectations is the widest it has been in two decades.
| Metric | December 2024 | December 2025 (Current) | 1995 Historical Peak |
|---|---|---|---|
| Fed Funds Target Rate | 5.25% – 5.50% | 3.50% – 3.75% | 6.00% |
| 2-Year Treasury Yield | 4.25% | 3.52% | 5.20% |
| Unemployment Rate | 3.7% | 4.6% | 5.6% |
| S&P 500 Index Level | 4,780 | 6,901 | 615 |
The Mechanics of the Spread Collapse
The spread between the Fed Funds Rate and the two-year yield has evaporated. This is the market’s way of saying the Fed is still behind the curve. When the two-year yield drops below the overnight rate, it serves as a mandate for the Fed to follow. If they refuse, they risk an accidental tightening that could crush regional banks like New York Community Bancorp or the broader KRE Regional Banking ETF. The following chart visualizes the convergence of these two critical rates over the last twelve months of 2025.
Institutional Pressure and Ticker Volatility
Equities are currently operating in a state of cognitive dissonance. NVIDIA (NVDA), the primary engine of the 2025 rally, closed at a staggering valuation on December 11, buoyed by the prospect of cheaper capital. However, the cost of debt for the rest of the S&P 500 remains significantly higher than during the post-pandemic era. JPMorgan Chase (JPM) recently noted in their quarterly outlook that net interest margins are beginning to compress as the yield curve de-inverts. Banks are seeing the benefit of higher rates on their loan books vanish, while the risk of defaults in commercial real estate remains a lingering threat.
For the retail investor, the iShares 20+ Year Treasury Bond ETF (TLT) has become a primary vehicle for betting on the recession trade. As the Fed cuts the front end, the long end is resisting, creating a bear steepening effect. This means that while your savings account rate is plummeting, mortgage rates are staying stubbornly high because the market does not believe the Fed has conquered inflation. According to Reuters, the November CPI data, scheduled for release on December 18, 2025, is expected to show core inflation remaining entrenched at 2.6%. This is a dangerous level for a central bank that is currently cutting rates.
The Neutral Rate Mirage
The primary investigative question is whether the Fed has already overshot. The neutral rate, the mythical interest rate that neither stimulates nor restricts the economy, is likely higher than the 2.5% target the Fed has historically cited. If the neutral rate is actually closer to 3.5%, then this December cut has moved policy from restrictive to stimulative. This is fuel for the asset bubbles Gundlach warned about. If the Fed continues to cut into a period of rising commodity prices and tariff-induced supply shocks, we are not looking at 1995. We are looking at 1974.
The next major data point to watch is the January 28, 2026, FOMC meeting. The market is currently pricing in a 75% probability of a pause, but that could change instantly if the December jobs report shows another leg down in hiring. On the other hand, if the December CPI print on January 13 surprises to the upside, the Fed will find itself trapped between a labor market that needs lower rates and a currency that is beginning to lose its inflation-fighting credibility. Watch the 2-year yield carefully. If it breaks below 3.40% before the year ends, the Fed will have no choice but to accelerate its easing, regardless of what the inflation data says.
