Fed’s $40B/Month T-Bill Purchases and Rate Cut: Market Reaction Amid Strong Economy

On December 10, 2025, the FOMC announced a 25-basis-point interest rate cut (to the 3.50%-3.75% range) and a $40B/month T-bill purchase program starting December 2025. The Fed framed the purchases as “reserve management asset buying” to maintain control of its interest rate target, distinguishing it from traditional quantitative easing (QE) [3]. However, a Seeking Alpha article labeled the move “covert QE” due to its timing amid strong economic conditions [7].

The policy was met with counterintuitive market reactions: major U.S. indices declined (S&P 500 -0.64% [0], NASDAQ -1.17% [0], Dow -0.37% [0]), the 3-month T-bill yield (^IRX) rose 0.28% to 3.54% [0] (contrary to typical Fed purchase effects), and long-term Treasury yields also increased [3]. These reactions reflect investor skepticism that the easing measures are premature amid elevated inflation (~3% in September 2025, 50% above the Fed’s target) [4], robust GDP growth projections (3% for 2025) [4], and low unemployment (4.4% in September) [5]. The FOMC vote was split (7-3 in favor of the rate cut), indicating internal disagreement about the balance between growth and inflation [1][2].

1. Market Skepticism of Fed Rationale
   : Investors may view the T-bill purchases as implicit QE rather than a technical operation, fearing additional liquidity will exacerbate inflation.
2. Policy Uncertainty from FOMC Split
   : The three dissents highlight ongoing internal disagreement, which could increase market volatility as investors anticipate mixed signals.
3. Inflation Concerns Dwarf Easing Expectations
   : Rising short-term T-bill yields despite Fed purchases suggest investors prioritize inflation risks over the potential benefits of rate cuts and liquidity injections.
4. Delayed Inflation Data Gap
   : The November CPI report (delayed to December 18 due to a government shutdown) [6] leaves a critical gap in assessing whether inflation is moderating as the Fed expects.

• Inflation Persistence
  : If the delayed November CPI shows inflation remains near 3%, the Fed’s easing could stoke further price increases, leading to potential policy reversal and significant market volatility.
• Rate-Sensitive Sector Pressure
  : Rising long-term yields could increase borrowing costs for sectors like real estate, utilities, and technology, weighing on their performance.
• Policy Uncertainty
  : The split FOMC vote may prolong market uncertainty as investors struggle to predict future rate decisions.

• Reduced Borrowing Costs
  : The rate cut could benefit businesses with high debt burdens, supporting growth if inflation cools to the Fed’s target.
• Market Sentiment Rebound
  : If the November CPI reveals moderating inflation, the Fed’s actions may later be viewed as prudent, potentially boosting market confidence.

This analysis synthesizes the Fed’s December 2025 policy announcements, their unexpected market impact, and the underlying economic context. Critical considerations include elevated inflation, a split FOMC, and delayed CPI data. Decision-makers should closely monitor upcoming inflation reports and Fed communications to assess the policy’s effectiveness and potential for market volatility.