Laurie Mount, Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how investors have flocked to money markets and short-term securities amid uncertainty.
Watch time: {{ formattedDuration }}
View transcript
Welcome back to The Weekly Fix. My name is Laurie Mount, Portfolio Manager with RBC’s BlueBay US Fixed Income team focusing on cash management strategies.
Last week, as expected, the Federal Reserve delivered a 25-basis point cut to the fed funds rate, bringing the target range to 3.50–3.75%. For the third straight meeting there were dissents and similar to October there were dissents in both directions, with Fed presidents Goolsbee and Schmid voting in favor of a hold and Governor Miran dissenting for the third straight meeting in favor of a 50-basis point cut.
The Fed also released its updated Summary of Economic Projections (SEP) with the GDP growth forecast revised higher and little change to inflation and unemployment rate projections. The dot plot's median rate path remained unchanged, showing one 25bp cut in 2026 and one in 2027. The post meeting statement added hawkish language around the "extent and timing" of further cuts, but no longer characterized unemployment as low.
During the press conference Chair Powell repeatedly said that the fed funds rate is now at the upper end of the Fed's estimate of the neutral rate, meaning any further moves will be data dependent. He balanced this by taking out upside risk to the policy rate path and expressing concerns around a labor market that is still cooling. Chair Powell reiterated his message that there is no risk-free path for policy given the challenges to both of the Fed’s goals for prices and employment. In explaining the rate cut, the Fed chair said it appears that most of the above-target inflation seen today is driven by tariffs and said the labor market faces significant downside risks.
With short-term rates still above 3% cash continues to enter the money market space. According to Crane Data on December 1st money market balances broke the $8 trillion mark. Money market funds have continued to be a place for investors to park cash as they adopt a wait-and-see approach.
Our view in 2026 is that the labor market is the key uncertainty for the Fed’s dual mandate of maximum employment and stable prices. Strong job openings and business optimism highlight resilient demand. Government policies (tax cuts, deregulation) and past rate cuts support job growth, driving predictions of 3.5% GDP growth in early 2026 – outpacing Fed forecasts – and 3.5% inflation. This makes further rate cuts unlikely. A tight labor market could boost wages and inflation, potentially exceeding the Fed’s 2% target, while weakness might trigger rate cuts. Thus, the labor market’s performance will be critical for balancing inflation and growth next year.
As we look ahead, our cash strategies continue to focus on identifying opportunities in floating-rate securities and shorter-duration fixed-rate instruments with maturities under one year. With the nomination of a new Fed chair expected shortly after the 1st of the year and an expected more dovish Fed in the second half of 2026 we will be closely monitoring Federal Reserve communications and all available economic data for insights into the policy outlook and market implications for 2026.
As always, thank you for joining us today and have a joyful holiday season and a prosperous new year.
Key points
The Fed cut the fed funds rate by 25 basis points to 3.50–3.75%, with dissents from three officials—two favoring no change and one advocating a larger 50bp cut.
The Fed raised GDP growth forecasts but maintained inflation/unemployment outlooks. The dot plot signals gradual cuts (2026–2027), while Chair Powell emphasized data dependency.
Money market assets surpassed $8T amid high short-term rates, with investors employing a cautious approach.