Invesco Global Liquidity Monthly

2025 Recap: Fed Cuts, Short-Term Strategy Gains, and 2026 Outlook

2025 performance recap: ultrashort and short-term strategies did best. Enhanced short-term duration strategies coupled with corporate credit exposure outperformed cash indices in 2025¹ as yields declined and credit spreads were kept in check, despite some first-half volatility. Short-term to intermediate yields declined year-over-year as the Fed cut policy rates and the yield curve steepened. Credit spreads were generally well contained in 2025 - apart from “Liberation Day” tariff induced volatility in April - and ended the year a few basis points (bps) tighter.

Fed cut 25bps in December amid split dissents. As expected, the Federal Open Market Committee (FOMC) cut policy rates by 25 bps in December on a divided 9-3 vote. The target range for the effective federal funds rate (EFFR) is now 3.50% to 3.75%.²

Fed 2026 distractions? Looking forward, the outlook for the 2026 FOMC could be muddied by potential ongoing dissention due to voting member rotations, a board seat change, and the end of Jay Powell’s term as Chair in May. The market is expecting at least two 25bps rate cuts in 2026 but not much beyond that.³

Fed buying T-bills to maintain ample reserves. The FOMC also announced short-term US Treasury purchases “to maintain an ample supply of reserves on an ongoing basis.” These reserve management purchases (RMPs) of approximately $40 billion per month started December 12 and are expected to remain elevated for a few months, at least through the April 2025 tax season. This should provide some relief to funding markets and potentially alleviate elevated repo rates.⁴