• FOMC: The FOMC reduced rates by 25 bps on 12/18/24 and projects two more 25 bp cuts in 2025. They increased core inflation forecasts for 2025 (2.2% to 2.5%) and slightly lowered unemployment forecasts (4.4% to 4.3%). The neutral real interest rate estimate rose from 2.9% to 3.1%. Global Liquidity products are expected to remain attractive in 2025.
  • JP Morgan's Outlook: JP Morgan Global Liquidity anticipates the FOMC will cut rates by up to 50 bps in 2025, contingent on employment and inflation data.
  • Fiscal Policy: The Fed and market will watch economic policies, including fiscal initiatives and tax cuts, for their impact on growth and inflation. This could create volatility in the longer end of the yield curve, where Global Liquidity products have minimal exposure.
  • Inflation and Steep Curves: With inflation between 2.5% and 3% and a Fed Funds rate starting at 4.25%, money market and ultra-short duration funds will offer real yields in 2025. A steep yield curve ranging from a lower bound Fed Funds rate of 4.25% to 1–3-year A3/A- or better credit at 4.5–5%, presents opportunities for investors to segment cash between these funds.

Employment Data

Chairman Powell noted a gradual cooling in the labor market, with unemployment rising from 3.7% to 4.2% . The 6-month moving average of payrolls decreased to 143k from 213k at the end of 2023. Risks lean towards further deceleration in the labor market. See chart below:

Inflation Data

The FOMC is pleased with long-term progress on inflation but concerned about recent stickiness. On 12/18/24 Chairman Powell stated,” We've made a great deal of progress. 12-month core inflation through November is estimated at 2.8%, down from a high of 5.6%. But 12-month inflation has been moving sideways as we are lapping the low readings of late last year. “ Core inflation is estimated at 2.8% for November, down from 5.6%. The FOMC aims for 2% inflation long-term, with current policy deemed restrictive. The Core PCE forecast for 2025 is 2.5%, up from 2.2% in September. With inflation stalling, and the Fed slowing rate cuts in 2025, Global Liquidity investors will continue to enjoy real and attractive yields in 2025.

Fiscal Policy

Fiscal initiatives, tariffs, and tax cuts are under scrutiny following the Republican sweep in November elections. The FOMC’s December projections reflect concerns about inflation risks.

Global Liquidity will monitor fiscal policies in 2025, expecting less pronounced pricing effects in their investable universe. Investors can capitalize on current market pricing by allocating between money market and ultra-short duration products. The Global Liquidity product line up gives investors an opportunity to take advantage of the current pricing of less than 2 cuts in 2025 (see below) by allocating between money market and ultra short duration products. 

Conclusion

U.S. Global Liquidity investors can expect continued real yields in 2025. With anticipated Fed rate cuts and market pricing, clients with cash not needed for at least six months should consider segmenting cash between money market and ultra-short duration funds. The market will continue to navigate the impact of fiscal policies on inflation and the FOMC’s terminal rate, potentially causing volatility out along the yield curve, where Global Liquidity products have minimal exposure.