Monthly Update – November 2025

Summary: The Fed is stepping on the brakes

• The US economy is currently in a Goldilocks environment, with moderate inflation and solid growth. Accordingly, the Fed is stepping on the brakes and has cast doubt on the likelihood of another rate cut before year-end.
• Global liquidity continues to rise, providing tailwinds for equity and credit markets. At the same time, this exerts upward pressure on inflation and long-term interest rates.
• In this environment, we maintain a neutral to slightly overweight risk exposure and a neutral to slightly shorter duration positioning.

Overall economic situation

The US economy remains in a Goldilocks environment with moderate inflation and solid growth, validated by the latest Atlanta Fed GDPNow estimate of 3.9% for the third quarter. Key drivers include rising global liquidity, elevated government spending, and the ongoing boom in AI-related investment. Europe, too, shows signs of mild acceleration in growth. Despite higher US tariffs, the previously weak global manufacturing sector is experiencing a broad-based recovery.

Recent developments: Cautious monetary easing

• Despite the Goldilocks environment and booming stock markets, the Fed lowered its policy rate by a further 0.25% to a target range of 3.75-4% at the end of October. The move was once again justified with a cooling labor market. However, it only appears weak at first glance – the significant decline in new jobs is primarily related to the US government's strict immigration policy.
• Fed Chair Powell seems to share this view: he struck a cautious tone on the prospect of another rate cut later this year, effectively stepping on the brakes and pushing back against market expectations. Powell also noted that, given data limitations following the government shutdown, a prudent stance was warranted.
• At the same time, the Fed announced that it would end its Quantitative Tightening programme as of 1 December due to signs of refinancing stress in money markets.
• Meanwhile, the ECB left its policy rate unchanged at 2%, as expected. The latest purchasing managers’ indices confirm that the euro area remains surprisingly resilient despite headwinds from declining exports to the US, a stronger euro, and increased competition from China.

Overview & outlook: Global economy surprises on the upside

• The tug-of-war between the Fed and the US Treasury enters the next round. Although the Fed is forced to end Quantitative Tightening on 1 December in response to signs of money market stress, Chair Powell remains sceptical about a further rate cut at the end of the year, given the Goldilocks conditions – moderate inflation and full employment. By contrast, US Treasury Secretary Bessent continues to call for additional rate reductions, citing pockets of weakness such as the housing market.
• However, Bessent's argument does not really hold water. The Treasury’s current funding strategy relies heavily on issuing Treasury Bills, aiming to reduce interest costs through lower short-term rates and hoping to compress long-term yields. However, in the present Goldilocks environment, further rate cuts would likely produce the opposite effect.
• Unlike Fed-generated liquidity, which directly influences equity and money markets, the liquidity created by the Treasury through T-Bill issuance primarily stimulates the real economy via higher public spending. This is reflected in the recovery of the manufacturing sector, where capital goods orders have risen sharply despite higher US tariffs, signalling renewed business investment both in the US and globally. This is also confirmed by leading indicators of global activity, such as the copper price.
• In addition, the M1 money supply in China is rising sharply, which is stimulating not only the Chinese economy but also the global economy. Another positive factor here is the “truce” in the trade dispute between the US and China following the Trump-Xi summit in South Korea. Overall, China increasingly has the upper hand – the latest export data show that it has further diversified its sales markets and can thus compensate for the sharp decline in exports to the US. In addition, China has an ace up its sleeve with its quasi-monopoly on rare earths, which the US government has clearly underestimated.

Chart: Revival in US manufacturing

Positioning: Liquidity remains the key driver

• It is currently important for global financial markets that global liquidity continues to rise, particularly thanks to strong money supply growth in China. However, Fed liquidity (i.e., bank reserves), which has fallen into the danger zone at 2.85 trillion US dollar, must be closely monitored. This has been evident in recent weeks in the increased spread between money market interest rates (SOFR) and the Fed Funds rate. The Fed is attempting to counteract this with its announced end to quantitative tightening. However, a further decline in bank reserves below the 2.8 trillion US dollar mark would be a strong warning signal for risky assets.
• Liquidity creation by the US Treasury through T-Bill issuance more than offsets the Fed’s still mildly restrictive stance. Overall, we expect this to support the economy, lead to slightly higher inflation, and exert upward pressure on long-term yields. Accordingly, we remain neutral to slightly short in duration.
• Corporate bonds, particularly in the high yield and emerging markets segments, continue to benefit from the robust global economy despite higher US tariffs and the still high level of liquidity in the financial markets. At the same time, valuations are high and credit spreads are tight. We are therefore maintaining a neutral to slightly positive positioning.
• Potential reasons to reduce risk exposure would include a further widening of SOFR–Fed Funds spreads, a sharp decline in the US dollar, or a rapid increase in long-term government bond yields in the US and Japan. For now, these appear as warning signs rather than sell signals.

On the radar: US bank reserves in the danger zone

A combination of factors has recently created a liquidity shortage in US money markets. Excess reserves in the Fed’s reverse repo facility have been almost completely depleted, while the Treasury General Account has been replenished – draining liquidity from the system – and Quantitative Tightening continued in the background. As a result, bank reserves have fallen to around 2.85 trillion US dollar, and the spread between SOFR and the Fed Funds rate has widened significantly.

The Fed had allowed this decline, based on its own estimates of the adequate reserve level below which banks might face refinancing stress. The 2019 episode offers a useful parallel: at that time, reserves were reduced until a sudden spike in repo rates triggered a money market crisis. Since bank reserves fell to below 8% of GDP at that time, the Fed assumed that the level of bank reserves required today, including a buffer, would be around 9% or the equivalent of 2.7 trillion US dollar.

Market reactions now suggest that this threshold was set too low. We estimate that approximately 3.3 trillion US dollar in reserves is required for smooth money market functioning. The accompanying chart illustrates that once reserves fell below this level in August, SOFR–Fed Funds spreads widened, signalling stress. In response, the Fed announced on 29 October that it would end Quantitative Tightening as of 1 December and intends to reintroduce liquidity through T-Bill purchases.

Bank reserves therefore remain in a danger zone and warrant close monitoring. Whether the Fed will be able to manage the required reserve level with precision remains to be seen.

Chart: The US money market under pressure