Monetary Policy Market Wrap December 2025
Markets paused as Fed split on cuts, liquidity strains and China's interest-bearing digital yuan boost FX volatility and inflation risk.
Key Trends
December closed with markets largely paused as investors digested a split Federal Reserve on the timing of cuts and rising liquidity strains, alongside China’s unveiling of an interest-bearing digital yuan. Market-implied forward curves moved toward steady policy into 2026, while central-bank FX interventions and reserve tweaks amplified FX volatility. Energy-price swings, tariff-driven input-costs and heavy AI capex lifted upside inflation risk, complicating the higher-for-longer debate.
Notable Events
- Fed minutes (late December) revealed officials divided over a December cut, increasing short‑term rate-path uncertainty. - China introduced an interest-bearing digital yuan, prompting questions about domestic liquidity dynamics and cross‑border capital flows. - Multiple central banks conducted FX interventions and reserve adjustments, pressuring carry positions and raising FX vols. - Political signals on U.S. Fed leadership added an extra layer of policy uncertainty. - Commodity moves (energy gains, precious‑metals demand) and tariff developments pushed inflation expectations higher.
Performance
Rate-sensitive assets showed muted returns and elevated intraday swings as liquidity strains widened short-term funding spreads. FX volatility spiked amid intervention flows; EM currencies and carry trades were particularly pressured. Commodities—notably energy and precious metals—outperformed, feeding higher inflation breakevens. Market pricing reflected low near-term cut probabilities and a flattening of expectations for policy easing into 2026.
Outlook
Near term, focus on incoming CPI prints (energy components), short‑term funding indicators (repo, T‑bills), Fed communications and any leadership developments, plus adoption metrics for China’s digital yuan. Risks are skewed toward delayed cuts if commodity and tariff-driven inflation persists; absence of disinflationary signals would keep markets positioned for policy patience.