Federal Reserve — FOMC Statement (USA, 2025)

FOMC Minutes of the Federal Open Market Committee December 9 10, 2025 F E D E R A L R E S E R V E S Y S T E M Minutes of the Federal Open Market Committee December 9 10, 2025 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, December 9, 2025, at 9:00 a.m. and continued on Wednesday, December 10, 2025, at 9:00 a.m.1 Developments in Financial Markets and Open Market Operations The manager turned first to an overview of broad market developments during the intermeeting period. Market participants did not materially change their macroeconomic outlooks and continued to interpret data made available over the intermeeting period as consistent with a resilient economy. Investors  expectations for the path of the policy rate, whether market based or survey based, were little changed, on net, over the period. Market participants and respondents to the Open Market Desk s Survey of Market Expectations (Desk survey) generally expected a 25 basis point reduction in the target range for the federal funds rate at the December FOMC meeting, and the modal outlook from the survey as well as from options pricing implied two additional rate cuts next year. The manager turned next to developments in Treasury markets and market-based measures of inflation compensation. Treasury yields rose a little over the intermeeting period, on net, but remained within recent ranges. Inflation compensation moved lower over the period, particularly for shorter tenors. The manager attributed the decline in inflation compensation at shorter tenors to lower energy prices as well as a reassessment by some market participants of the likely effect of tariffs on near- term inflation. In contrast to market-based measures of inflation compensation, survey- and model- based measures of inflation expectations were little changed over the intermeeting period. Broad equity price indexes were volatile but changed little, on net, over the intermeeting period. Equity prices showed sensitivity to economic data and policymaker communications. Developments regarding artificial intelligence (AI) also contributed to the volatility of the stock prices of the largest technology companies. The manager noted that capital expenditures on equipment and infrastructure 1 The Federal Open Market Committee is referenced as the  FOMC  and the  Committee  in these minutes; the Board of Governors of the Federal Reserve System is referenced as the  Board  in these minutes. 2 December 9 10, 2025 related to AI by a set of large technology companies accelerated this year and that these firms were increasingly relying on debt to finance such expenditures. Regarding international developments, the trade-weighted dollar index was little changed over the intermeeting period. Outside forecasters continued to expect that the dollar would depreciate modestly next year. Many of these forecasters expected a larger reduction in policy rates in the U.S. than in other advanced-economy jurisdictions, though their confidence in this view appeared to diminish somewhat in light of the resilience of the U.S. economy. The manager noted that money market conditions continued to tighten over the intermeeting period and that the staff assessed that conditions were consistent with the level of reserves having declined to the ample region. Rates on Treasury repurchase agreements (repo) remained relatively elevated and volatile over the intermeeting period. Investors attributed firmness in repo rates to a decline in available liquidity and continued large Treasury debt issuance. Higher repo rates, along with a lower level of reserves, continued to contribute to upward pressure on the spread between the effective federal funds rate (EFFR) and the interest rate on reserve balances. The manager noted that the correlation between this spread and the level of reserve balances had risen notably over the past couple of months and that the EFFR had moved up faster than it had during the previous episode of balance sheet runoff. Consistent with elevated repo rates, usage of overnight reverse repo operations remained low, while both the frequency and volume of standing repo operations increased over the intermeeting period. Some other key indicators of reserve ampleness, such as the share of payments by banks occurring later in the day and the share of domestic banks borrowing in the federal funds market, also pointed to ample reserve conditions. The manager next discussed the expected trajectory of key components of the Federal Reserve s balance sheet. Over the next several months, seasonal fluctuations in nonreserve liabilities were projected to lead to significant declines in reserves at the end of December, in late January, and especially in mid-to-late April if securities holdings in the System Open Market Account (SOMA) were to remain unchanged. The manager noted that the projected fall in reserves in April caused by tax inflows to the Treasury General Account (TGA) which is a Federal Reserve liability was particularly large and thus judged that reserves were likely to fall below the ample range if the size of the SOMA portfolio were to remain unchanged. In light of this projected decline in reserves as well as recent developments in money markets, the manager recommended that the Committee consider starting reserve management purchases (RMPs) this month to maintain an ample level of reserves on an ongoing basis. Because of the substantial projected decline in reserves in mid-to-late April, the manager judged that it would be prudent to start RMPs soon, maintain a somewhat elevated pace of net purchases until then, and then decrease the Minutes of the Federal Open Market Committee 3 monthly pace substantially thereafter. Respondents to the Desk survey expected RMPs to begin soon. Over one-third of respondents expected RMPs to be announced at this meeting and begin by next month, and most respondents anticipated them to begin before the end of the first quarter of 2026. While the estimated size of expected purchases varied considerably across respondents, on average, respondents anticipated net purchases of about $220 billion over the first 12 months of purchases. The manager then turned to a discussion of standing repo operations and the essential role they play in supporting the implementation of monetary policy. While usage of these operations had increased recently, there had been days when a large volume of repo trades occurred well above the operations  minimum bid rate, suggesting reluctance by some potential participants to engage in standing repo operations. Market outreach suggested that this reluctance reflected misperceptions about the intended purpose of standing repo operations and that the effectiveness of these operations could be enhanced by Federal Reserve communications that explicitly clarified that the purpose of the operations is to support monetary policy implementation. Market participants also suggested that reluctance to use standing repo operations reflected in part specific operational features, and they offered a number of suggestions to enhance the effectiveness of the operations, such as allowing them to be centrally cleared and eliminating the aggregate limit of $500 billion per day. Given the importance of standing repo operations for monetary policy implementation, the manager proposed to clarify their intended role in official communications, convey the expectation that they would be used when economically sensible, and eliminate their aggregate limit. By unanimous vote, the Committee ratified the Desk s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System s account during the intermeeting period. Special Topic: Balance Sheet Issues Participants discussed developments in money markets and whether starting RMPs was warranted to maintain reserves at levels consistent with the Committee s ample-reserves framework laid out in its 2019 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization. With the continued increases in the spreads between money market interest rates and administered rates, as well as some other indicators of tightening money market conditions, participants judged that reserve balances had declined to ample levels. Accordingly, participants assessed that it was appropriate to begin RMPs and initiate purchases of shorter-term Treasury securities to maintain an ample supply of reserves over time. The discussion was preceded by staff presentations. The staff emphasized that a range of levels of reserve balances was consistent with ample and presented indicators showing that money market 4 December 9 10, 2025 conditions pointed to reserves being within the ample range. In particular, the spreads of the EFFR and of other money market rates to the interest rate on reserve balances had increased relatively quickly since mid-September. Additionally, several other indicators of liquidity in short-term funding markets, including the volatility of repo rates and their sensitivity to Treasury coupon issuance, pointed to reserves being within the ample range. The staff emphasized the role that standing repo operations had played in ensuring that the federal funds rate remained within its target range, even on days of elevated demand for nonreserve liabilities. The staff also noted the implications of reserves varying within the ample range for volatility and market functioning in money markets, the size of the Federal Reserve s balance sheet,