December FOMC Review: Where Is the Market Headed Next?

The Federal Reserve’s latest move was outwardly framed as a response to “slowing employment,” but its true purpose was unmistakable: to relieve pressure in the short-term funding market and stabilize the financial system’s core.

As bank reserves fell below $3 trillion, repo rates spiked and the Standing Repo Facility (SRF) saw surging usage. The Fed could no longer stand by. The result was clear: the end of quantitative tightening (QT), a temporary $40 billion “lite QE,” and an interest rate cut. On the surface, it looked like a response to economic softening; in reality, it was an emergency restoration of the system’s liquidity backbone.

Why the Fed Couldn’t Wait

The market turmoil in November — from the crypto selloff to the equity correction — all traced back to the breakdown of leveraged short-term funding structures. Basis trades, total return swaps (TRS), and CLO-linked shadow leverage were driving asset prices. As repo rates rose and SRF emergency lending kicked in, both investor confidence and leveraged positions collapsed.The Fed’s intervention wasn’t optional; it was a forced liquidity rescue.

The Meaning of “Lite QE”

The key takeaway from this FOMC was not the rate cut, but the reference to “Lite QE.”Though small and temporary in scale, it signaled a turning point in policy direction.The Fed’s purchase of short-term Treasuries will immediately boost bank reserves, reduce repo borrowing needs, and lower short-term rates. Combined with rate cuts, this should naturally ease margin-call pressure across basis trades, TRS, and CLO structures — the heart of the shadow-financing ecosystem.

As SRF demand declines, the system climbs back above its “break line.” This was not a stimulus for market rallies, but an emergency patch to prevent a leveraged liquidation spiral. A modest Santa-rally may follow, but a full-fledged bull market still looks premature.

The Real Question: Who’s Next at the Fed?

The Powell era effectively ends here.The next Fed Chair will determine the structure of global liquidity.The leading candidate is Kevin Hassett, a Trump-aligned economist who served as the Council of Economic Advisers chair and architect of the tax-cut, fiscal-expansion, and industrial-protection agenda.

The logic behind the market’s expectation is simple:

“Tightening is over. Easing will be institutionalized.”

The Trump economic doctrine favors growth over inflation control, preferring to absorb price pressures through productivity gains and investment expansion rather than aggressive monetary restraint.

Toward a New Monetary Regime

Under a new Fed Chair, policy will likely tilt toward rate cuts, deregulation, and liquidity expansion — including mechanisms to boost Treasury demand and systemic funding flexibility.Both Trump and Hassett hinted that the new Fed Chair will be announced within the month, signaling an imminent policy realignment.

Thus, while today’s FOMC outcome suggests only one rate cut for 2026, a market-friendly new Chair could dramatically shift expectations and liquidity flows.In short: the FOMC passed smoothly, and liquidity conditions are set to improve versus November.

Market Implications

This shift could spark a small but meaningful rally in risk assets, particularly Ethereum and Bitcoin, as liquidity tension eases.Yet the true driver will be the identity and agenda of the next Fed Chair — their stance on regulatory relief, balance-sheet expansion, and SLR (e.g., Supplementary Leverage Ratio) relaxation.

Ultimately, that decision will hold the key to the next phase of market upside.