Tension Over Fed's Dual Mandate, AI Growth's Impact on Spreads, Credits | Real Yield 12/12/2025

Federal Reserve Policy & Economic Outlook - The Federal Reserve cut rates for the third consecutive time this year, despite growing dissent [1] - The Fed is committed to purchasing $40 billion of Treasury bills per month [1] - The base case is a hold on further rate cuts, contingent on weakening labor market or improved inflation [3] - Markets are predicting a different path than the Fed's dot plot, with expectations of rate cuts between 3% and 3.25% [5] - There is a risk of losing Fed independence, which could cause yields to rise [17] Inflation & Labor Market - Tariffs are estimated to contribute approximately 0.5 percentage points to inflation [9] - The Fed is facing a difficult balancing act with inflation above target and a weakening labor market [8] - The Fed has delivered 175 basis points of cuts [43] Credit Market Dynamics - High-grade bond sales cooled in December, with $4.7 billion sold, a quarter below the previous period [26] - December bond sales in high yield exceeded $20 billion, the busiest December since 2020 [26] - Investment grade supply is expected to grow year-over-year, reaching approximately $1.8 trillion to $1.9 trillion in 2026 [30] - Tech supply was up 75% and is expected to double, driven by hyperscalers' CAPEX expansion [32]