The Fed and the curve

The Fed will conclude today the last FOMC meeting of 2025, and a critical one. With a probability of 85% the market expects a 25 bps rate cut, so it’s now looking for more: what is the dynamic on the committee, how many dissents have been in the discussion, and above all what’s the most likely path for rates in 2026. Bitcoin and precious metals are being bid, and the 2 year treasury is in perfect unison with Fed funds rate. But the real question is what will happen with the long end of the curve. The 10 year Treasury bond has been in a trading range for almost 2 years, between 4-5%, as if it was waiting for news from the Fed and inflation, to decide what direction to take. If inflation is indeed under control, with AI compensating the irrational government expenditures, the long end of the curve could be ready for new issuance allowing the government to lock these rates. If the market is not convinced about the ability form the Fed to control inflation, yields will go up, creating a new paradigm where all assets will be repriced. That’s the set up for 2026.

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