Markets just cleared a big hurdle to a year-end risk rally, with the Fed delivering a dovish message and juicing liquidity as well as effectively downgrading next week’s data to background noise.
Fed Chair Jerome Powell delivered enough caveats to preserve optionality, but rallies for stocks and gold show investors regard this as a dovish cut rather than the hawkish one some had feared. He leaned hard into growing labor market weakness, framed tariff-driven goods inflation as largely done, and pointed to services disinflation ahead, even as he acknowledged policy now sits within the plausible neutral range rather than clearly restrictive.
The new Summary of Economic Projections left the unemployment rate unchanged even as inflation forecasts were marked lower and growth pushed higher, contrasting with Powell’s more intense rhetoric about labor concerns. With three formal dissents and a dot plot split between “on hold” and “more cuts,” the committee has bought itself further flexibility.
The real surprise came from the liquidity boost offered by sooner and larger reserve management actions. The Fed will shortly start buying roughly $40b a month in T-bills to rebuild reserves, on top of the existing practice of recycling MBS runoff into bills. That larger monthly demand for bills roughly through April will create notably more reserve growth, reducing cash scarcity and front-end volatility.
Officials can insist this is not a return to QE, only a way to keep the system in an “ample reserves” regime, but for traders the distinction is semantic the direction of travel flipped from years of balance-sheet runoff and liquidity drainage to net injections, backed by a standing repo facility that now has no aggregate cap. Funding stresses that had begun to sap risk appetite suddenly look contained again, and the front end has a visible volatility suppressant.
That backdrop sharply reduces the policy weight on the next batch of data. The upcoming labor and inflation prints are already compromised by collection gaps in October and early November, and Powell explicitly highlighted the risk of distortions. This means next week’s releases are less likely to reshape the Fed path, buying time before the December data is received in January.
As a result, risk sentiment will be more impacted by micro and thematic stories rather than Fed speakers and new data into year end, supporting the existing reacceleration narrative that markets had already started to front-run.
Recent price action fits that frame: cyclicals and higher-beta recent laggards have been outperforming. The Treasury curve has been steepening and historically growth sensitive metals like copper and silver have pushed higher.
Each of these assets/markets have nuanced stories some of the equity rotation is short covering, the long end is reacting to global forces, and the metals are grappling with supply and policy more than organic demand but nuance rarely stands in the way of a good narrative. With the Fed now adding liquidity and signalling optionality, the path of least resistance into year-end is traders leaning into a “hotter growth, easier money” theme and treating the remaining data prints as noise around that core rather than tier one risk events.
