Market Minutes
A fundamental structural shift, or regime change, is taking place in the global economy.
Gone are the days of low inflation and historically low interest rates—replaced by an era of higher borrowing costs, elevated prices and scarce capital. In addition, nations are adopting protectionist trade policies as they seek to protect nascent industries and established sectors alike.
These trends are forcing significant changes in all areas of the global economy, from financial conditions to supply chains to currency markets.
RSM’s chief economist, Joe Brusuelas, has been tracking this transition, industry by industry, with his daily Market Minute. You can follow his daily briefings on The Real Economy Blog, and on X at @JoeBrusuelas.
We highlight several of Brusuelas’ observations in this month’s issue of The Real Economy.
October Market Minutes
U.S. Strategic Petroleum Reserve continues to drop
Renewed hostilities in the Middle East are again roiling global energy markets.
Brent crude, the global benchmark, has exceeded $100 in recent weeks, as has West Texas Intermediate crude, the North American benchmark. These increases are hitting consumers and businesses alike, as U.S. average retail gasoline prices have approached $4.50 a gallon nationally, while diesel has long surpassed $6 a gallon.
The high costs of distillates, which include diesel and heating oil, are bound to pressure inflation higher as inventories shrink during the harvest season and as winter approaches.
Meanwhile, the U.S. Strategic Petroleum Reserve (SPR) continues to drop toward precariously low levels, leaving the U.S. and its trading partners increasingly vulnerable to further oil supply disruptions.
The reserve has a capacity of 713.5 million barrels.
After a recovery in 2024 and 2025, the U.S. authorized the release in March of 172 million barrels from its crude oil reserves held in caverns in Texas and Louisiana. It was part of a coordinated global effort to reduce the impact of the global energy shock.
After a drawdown of approximately 130 million barrels, the reserve held about 285 million barrels as of mid-September, 33 million above the congressionally mandated minimum of 252.4 million.
If the current authorized release is completed in full, the reserve would fall to approximately 243 million barrels, about 9 million barrels below the mandated minimum and its lowest level since 1982.
Further drawdowns would not only require congressional permission but also raise concerns about possible damage to the caverns.
The weekly and monthly SPR drawdown pace has slowed as Strait of Hormuz flows have improved, raising the prospect that these minimums will not be tested.
Established in the aftermath of the 1970s oil embargoes, reserves reached 100% of the congressionally authorized requirements at the end of 2009. The system was operating at 90% capacity until the 2021 pandemic supply shock. That was followed by the coordinated reserve releases by Western allies in response to the 2022 cutoff of Russian supplies.
The current release is a “loan” to buyers, with buyers obligated to repay the loans with interest—additional crude—to help rebuild the reserves. But the loans are not due to be fully repaid until September 2028, leaving the U.S. exposed to further oil shocks in the meantime.
The takeaway
Global inventories of petroleum products have been drawn down amid the continuing disruption in the Strait of Hormuz, causing a global increase in energy prices. To moderate the loss of supply, nations have been dipping into their reserves.
In the U.S., those reserves are perilously close to minimum levels, raising additional concern for household and business affordability as the war drags on.
Rates roll higher around the world
A confluence of events is pushing the cost of borrowing higher across the developed economies.
Investors are now factoring in the increased risk of holding long-term government bonds amid rising inflation, nations’ growing national debt and unabated geopolitical risk.
Since the start of the year, the yield on 10-year UK government bonds has increased 68 basis points to 5.22% as of Sept. 1.
The benchmark 10-year U.S. Treasury note has increased 61 basis points to nearly 4.8%, while Japanese government bond yields have increased 94 basis points, reaching 3% for the first time since 1996.
The traditionally lower yields across Europe are moving higher as well, with a 60 basis point increase in France, 56 in Italy, 46 in Spain and 44 in Germany.
Higher long-term government bond yields will translate into higher costs for mortgages, automobiles and other big-ticket purchases for consumers, as well as higher investment costs for businesses.
Previous Market Minutes
September Market Minutes
Intervention, the yen and U.S. rates
Japan’s economy has been dealing with a weak currency for the past 10 years. The pressure came to a head in the last week of July, when the Ministry of Finance and the U.S. Treasury intervened in the currency market to try to avoid further disorderly depreciation of the yen.
The intervention pushed the yen up from a low of 163 against the U.S. dollar to 157 on Aug. 3.
Investors have tested the valuation since then, and have priced in the likelihood of a rate hike by the Bank of Japan this month.
In addition, investors expect three more hikes by July 2027, which would alter the dynamics of the globally important carry trade that indirectly influences American interest rates.
We have made the case that the near-term success or failure of the coordinated U.S.-Japan intervention into currency markets would be defined by a change in policy at the Bank of Japan.
But it is far more likely that global financial markets will have the last say on whether the intervention was successful.
From our vantage point, structural debt and deficit dynamics inside Japan will drive risk appetite inside that economy and shape investors’ expectations of Tokyo’s ability to sustain its challenging fiscal situation.
Unless the Bank of Japan hikes its policy rate and the government spurs stronger growth through expansionary fiscal policy, investors will likely challenge the willingness of Tokyo and Washington to sustain that initial intervention and again push the yen toward 170.
State of play
In 2016, it cost Japanese investors 100 yen to purchase one unit of a U.S. Treasury bond or one unit of a dollar-denominated barrel of oil. This year, it costs roughly 113% more to purchase each dollar needed for an international transaction.
While the cheapness of the yen might have made Japan’s exports more attractive, Japan’s economy continued to sink under the weight of its zero interest rate monetary policy.
This latest intervention, while laudatory for helping a trusted ally, underscores the folly of thinking that anything other than market demand can dictate a currency’s value.
Was it necessary to join Japan’s intervention?
By all indications, the U.S. Treasury joined the intervention to keep a lid on U.S. interest rates as it attempts to finance the fiscal spending of the legislature and the executive branches of government by avoiding an increase in interest rates that would have followed a Japanese-led intervention.
All indications were that Japan’s Ministry of Finance was selling its holdings of Treasury securities to finance its intervention.
From February to May, Japan’s holdings of Treasury securities fell from $1.239 trillion to $1.143 trillion, an 8% drop. Holdings in the Netherlands dropped by 17%.
Selling Japan’s Treasury holdings would of course have the effect of lowering the demand for dollar-denominated securities, pushing down price and increasing the yield required by investors in the midst of a bond market sell-off.
In August, the front-end of the yield curve was steepening on perceptions of eventual rate hikes by the Federal Reserve contending with sustained inflation, with 2-year notes testing 4.17%. The 10-year was testing 4.7%, and the 30-year at 5.25% was the highest since 2002.
The Treasury’s part in the intervention was not to sell the dollar and buy the yen, but to sell euros in order to buy the yen.
Selling euros looks like an attempt to wish away the problem to another ally.
While Japan is the largest single holder of U.S. Treasuries, the combined official holdings of the European Union members is in fact the largest holder, with the euro the predominant currency in the EU.
Much of Europe’s international transactions take place in financial centers in the Netherlands, Belgium and London. We note the sharp drop in holdings since February in both Japan and the Netherlands as an assessment of the policy choices in both the U.S. and Japan.
As for the Treasury Department’s strategy of financing U.S. debt with short-term, lower-yielding Treasury bills, foreign holdings of bills and bonds have both moved lower in recent months, with the reduced demand for both short-term and long-term securities pushing yields higher.
The takeaway
History has proved that the market always has the last say.
Intervention in the foreign exchange market by Japan and the U.S. was in the interest of both governments as they hoped to stem the further devaluation of the yen and the U.S. bond market sell-off.
Whether this effort turns out to be successful is up for grabs.
The yen is backtracking in recent trading, but traders will be more cautious as it approaches 160 again, perhaps putting a floor under its deterioration.
U.S. interest rates are likely to continue moving higher if inflation remains above the Fed’s target and if the market deems U.S. debt at more than 120% of gross domestic product as unsustainable.
Baby boomers and Gen X leave the workforce
Long-run shifts in American demographics surfaced in the recent employment report, as July’s labor force participation rate for those 55 and older fell to 36.9%.
Over the past year, participation among that cohort has declined from 38.1%, or 1.2%, which is broadly comparable to the 1.7% decline during the worst of the pandemic.
Compared to 2005, there are now 27 million more Americans age 65 and older. In 2005, that group comprised 12% of the population; by 2025, it comprised 18%. The baby boom generation began to age around 20 years ago, with the oldest of that group now pushing 80.
This demographic shift, along with restrictive immigration policies, is having a significant impact on the supply side of the American labor market.
An aging population and immigration policy are the two major reasons why the U.S. economy needs to generate only about 35,000 jobs per month to keep labor conditions stable.
Some boomers and Generation X workers have left the workforce because of the wealth effect of the equity markets. But that group is quite small and does not explain the outsize decline in the labor supply.
Given the current data and the search costs of finding a job—the hiring rate is below 4%—we appear to be witnessing a historic exit from the American labor market.
While the debate over immigration policy gets more attention, shifting demographics are an inescapable reality.
Over the past year, labor supply growth has declined by 0.77%, compared to a 1% growth rate for years after World War II.
Public policy and long-term demographic changes have consequences.
A quarter of a century ago, when it became clear that the American economy would age as the boomers left the labor force, economists assured themselves that Washington would rely on immigration to attract high-value-added workers.
That turned out not to be the case.
So, what follows?
American businesses will need to turn to technology as a substitute for labor. That means relying more on artificial intelligence, not less.
Those who are worried about whether there will be sufficient demand for AI might want to reconsider.
July-August Market Minutes
Financial conditions remain a modest tailwind
The RSM US Financial Conditions Index implies an economy with a modest tailwind as news of an extended ceasefire suggests further easing in conditions.
Our RSM US Financial Conditions Index in mid-June stood at 0.8 standard deviations above normal, with room to improve in the second half of the year as notably large initial public offerings work their way to the market on the heels of the record SpaceX offering.
The combination of the SpaceX IPO and the prospect of a gradual normalization of energy flowing out of the Persian Gulf is bolstering risk appetite across financial markets.
In addition, equity market volatility in June receded to below its long-term average. These factors are building a bullish case for improved valuations as the economic expansion rolls on despite recent disruptions to global oil and energy markets.
Oil inventories plunge to operational stress levels
Even with the agreement to reopen the Strait of Hormuz to shipping, it will be some time before oil inventories return to normal levels. In the weeks before the deal was reached, American and global supplies of crude oil had dropped to operational stress levels.
Inventories of West Texas Intermediate crude held in Cushing, Oklahoma, the largest oil storage facility in the United States, fell to 20 million barrels, the lowest point in a decade.
That is considered the operational stress level, after which it becomes difficult to maintain pressure in the pipelines and meet demand.
We attribute the drop in the Cushing inventory to foreign demand for U.S. oil that grew out of the closing of the Strait of Hormuz.
And the decline has continued even though crude oil prices have fallen from the highs reached shortly after the war broke out and now sit below $80 per barrel.
June Market Minutes
Long-term yields rise in major economies
The increase in 10- and 30-year yields across major economies in mid-May indicates growing investor skepticism around the fiscal path and political stability of those nations.
Four major nations—Italy, the UK, the U.S. and Japan— experienced significant increases in yields since the Iran war began in late February.
More specifically, U.S. and UK 30-year yields have been rising because of uncertainty around the fiscal paths of those two nations.
Each rate reflects a rising risk premium as investors act rationally to push up the price of lending to that nation.
Both the U.S. and the UK will need a period of fiscal consolidation to address these concerns, but neither country—unlike Italy, which has sought to balance its primary deficit—is ready to come to terms with its growing fiscal imbalance.
For this reason, 30-year rates, which are the most sensitive to political risk, have exceeded 5% in the U.S. and may test 6% in the UK because of political instability and the uncertainty surrounding its fiscal path.
Drawing down oil reserves
Drawing down the world’s oil inventories is reducing buffers that were built up before war broke out in the Middle East. In the first two months of the conflict, total commercial inventory of crude oil and liquid fuels fell by nearly 100 million barrels.
Oil that was in tankers on the water when the war started and the release of strategic reserves provided a cushion against what is now a historic supply shock that involves the loss to market of more than 1 billion barrels.
In addition, increased oil exports from the United States and diminished demand from China have mitigated conditions on the margin.
Still, as these buffers dissipate, the world’s economies have become more vulnerable to further disruption.
If the strait remains effectively closed, though, conditions for another round of oil price increases will likely start soon and intensify as the summer begins.
May Market Minutes
Why some countries have reduced their Treasury holdings
Much is being made of the sustainability of the dollar's primacy in international trade and finance amid declines in foreign holdings of U.S. Treasury securities.
Such talk is unsurprising given the risks to the petrodollar market, the likely depreciation of the dollar once the Iran war ends, and the 8.8% decline in the greenback against a trade-weighted, inflation-adjusted basket of currencies so far this year.
But the decreases in foreign holdings of Treasury securities have less to do with a decline in the dollar’s status than with the needs of large emerging economies like Brazil, India and China. In addition, some economies have had to prop up their own currencies as financial stress has mounted.
While China challenges dollar hegemony in a number of ways both explicit and subtle, that is not the case with India and Brazil.
India added to its Treasury holdings from February to May 2025 but then sold heavily from September to October—the months of peak rupee stress and dollar sales by India’s central bank.
The rupee’s rebound in January to $190.4 billion, up $7.5 billion from December, is a strong single-month recovery signal.
Such a large snapback would be unlikely in a true de-dollarization scenario.
As for Brazil, the plateau in holdings with no rebound, combined with the Brazilian central bank’s explicit dollar-share reduction and gold doubling, suggests a mix of currency intervention and deliberate diversification.
China's 9% reduction in holdings over the past 12 months is modest compared to India’s and Brazil's 16% sell-off.
But over the past five years, China has fallen into a different category. Its sale of $400.8 billion in Treasurys—a 36.6% structural reduction with no reversals—makes it the clearest de-dollarization signal in the dataset.
For many reasons, though, China cannot afford to liberalize its currency and needs the dollar to remain the reserve currency. Despite China’s intentions, then, the case for China‑led de‑dollarization remains weak at best.
China holds only 7.5% of total foreign holdings of U.S. Treasurys, while India and Brazil each have 2%.
In comparison, the largest single holders of Treasurys are Japan with 13% and the UK with 10%. The combined share of smaller economies is 20%.
RSM US Economist Prachi Jhamb contributed to this Market Minute.
The takeaway
Among the large emerging economies, only China is challenging dollar dominance, while the behavior of India and Brazil does not imply a sustained move against the dollar.
Rather than signaling de-dollarization, recent Treasury sales appear driven by countries’ near-term liquidity needs associated with efforts to defend domestic currencies in foreign-exchange markets.
The Fed’s SOMA holdings and the challenge of balance sheet runoff
Low rates, liquidity and leverage are the holy trinity of new finance. To properly understand that reality, it is critical to acknowledge the role of the Federal Reserve System Open Market Account.
The function of the account is to help the Fed better achieve its monetary policy objectives by adding to or draining its reserves. Holdings in the account make up the vast majority of the Fed’s overall holdings on its balance sheet.
Greater reserves in the system generally support easier funding conditions and ensure the smooth functioning of Treasury and money markets.
The SOMA is one vehicle the Fed uses in response to financial stress and other shocks to maintain orderly financial and market conditions.
Changing the size or composition of the SOMA portfolio affects liquidity and funding conditions. The Fed has approximately $788 billion in Treasury securities maturing this year and $8.64 billion in non-Treasury assets maturing.
For the SOMA overall, the weighted average maturity is 14.56 years—reflecting a heavy concentration in long-term securities.
It’s a legacy of the Fed’s quantitative easing after the 2007−09 financial crisis, when the central bank aggressively bought longer-duration Treasurys and mortgage-backed securities to pressure long-term yields lower.
Now, with a Fed chair nominee, Kevin Warsh, who has talked about reducing the Fed’s balance sheet, such a long duration in the SOMA’s weighted average maturity will only add to the challenge of unwinding these positions without adding undue upward pressure on interest rates.
April Market Minutes
Energy shock driving up long-term rates
Since the outbreak of war in the Middle East, global investors have pushed long-term interest rates higher as the energy shock threatens to increase inflation.
Adding to the upward pressure on rates is the prospect of increased defense spending in Europe and the U.S., which will only add to the fiscal strains in Washington and London.
The 10-year and 30-year gilts, in particular, are being charged a higher risk premium because of greater structural economic weakness and concerns about fiscal stability in the UK compared to the U.S. and Germany.
In 2022, the Russian invasion of Ukraine led to a 10-week, 116-basis-point increase in the benchmark 10-year Treasury yield, while the UK long bond increased by 54 basis points.
The cutoff of Russian oil to Europe was accompanied by a global inflation shock, with bond yields in the U.S. and UK surpassing 4% after decades of abnormally low inflation and interest rates.
The result was a regime change in long-term interest rates across all three economies.
In Europe, where Germany’s manufacturing economy was already struggling with the China shock, the yield on 10-year bunds moved above 2% by late 2022 and has hovered around 3% as the cost of energy increases.
While Germany has considerable fiscal space, it too observed a 30-basis-point increase in long-term rates during the first two weeks of the energy shock caused by the war in the Middle East.
Lofty jet fuel costs to curb travel
Jet fuel costs have surged since the start of the war in Iran, an increase that is likely to cause a sharp pullback in corporate and household travel.
Because jet fuel accounts for 30% of airline operating costs, a surge in airfares and business operating costs is imminent.
Cathay Pacific, for example, said in March that it would hike its fuel surcharge by 105% across all flights, joining a host of other airlines announcing such surcharges, including Air France-KLM, Air India and Hong Kong Airlines.
Like all energy-sensitive firms, airlines will need to align their balance sheets with the cost increases caused by the oil shock.
The choices are always a mix of accepting thinner profit margins, passing along costs to customers and reducing head count.
The Bloomberg fair value price on jet fuel futures in mid-March showed a similar increase of 108% for the year and 60% since the start of the war.
Any way one slices and dices the data, we are on our way to a price shock similar to the one observed in the aftermath of Russia’s invasion of Ukraine.
March Market Minutes
The dollar may be in decline, but it's not going away
Mike Campbell, the protagonist in Ernest Hemingway’s “The Sun Also Rises,” has a succinct response when asked how he went bankrupt: “Gradually, then suddenly.”
The sturm und drang over risks around the long-term decline in the U.S. dollar is a little like that.
The global diversification away from the dollar will be a slow, gradual process with occasional large and unexpected moves.
But diversification is far different from an outright end of the greenback as the global reserve currency.
At some point the dollar may no longer be the global reserve currency, but not anytime soon.
Its resilience is because of the size and distribution of the $35.9 trillion in dollar-denominated securities held across the global economy and the role of American finance in the basic operation of international finance.
Consider the holdings of dollar-denominated securities among the major economies. A quarter of all U.S. securities are held by 20 of the largest U.S. trading partners and financial centers.
These economies include the UK, the European Union, Japan and, more recently, centers along the Pacific rim, according to Treasury International Capital data through November 2025.
It’s not just American investors willing to finance the U.S. government and business.
The global investment community is also attracted to the U.S., for many reasons:
- The liquidity of the U.S. public and private bond markets
- The safety and returns of the U.S. equity exchanges
- The liquidity of a large foreign-exchange market dominated by dollar transactions
- The presence of global trade carried out in dollars
- The presence of the U.S. trade deficit, which in turn supplies the funding for investment in U.S. securities
This status as a safe haven is not going to change anytime soon given that Europe does not yet have an integrated bond market, Japan is normalizing its monetary and fiscal policies, and China is simply not going to liberalize its market to become the center of global finance.
Total holdings of U.S. securities
Investors in Europe hold roughly 20% of total U.S. long-term securities, which includes Treasurys, corporate bonds and corporate equities.
Investors in the UK, Luxembourg and Ireland hold $8.5 trillion of U.S. securities, with Canada holding $3.2 trillion and Japan $2.9 trillion.
Taking foreign investment for granted
As reliable as the international investment community is for the U.S., it has, at times of extreme stress, turned to cash holdings, as it did during the financial crisis of 2007−09 and again during the pandemic.
More recently, there have been two episodes when EU investors sold more U.S. securities than they purchased (other than at year end).
The first was in the spring of 2023 during the U.S. regional banking turmoil and the second was in April 2025, when the U.S. announced sweeping new tariffs.
These examples suggest that in times of geopolitical stress or during a breakdown of the global economy, the U.S. might not be able to rely on global investors to bail it out.
Foreign holdings of Treasury securities
The top 20 foreign investors in the Treasury market hold more than 20% of the outstanding Treasury bills, notes and bonds as of November 2025.
Japan has been the leading buyer of Treasury securities. Its dependence on zero interest rates and the trashing of the yen have led global investors to use Japan as a funding source for carry trades and Treasurys.
But Japan has turned off that spigot, which will push the demand for securities lower while raising financing costs for U.S. businesses and households.
Foreign holdings of U.S. corporate bonds
Foreign holdings of U.S. corporate bonds are centered in EU financial centers in Luxembourg, Belgium and Ireland as well as in the UK, Japan and Canada.
The top 20 countries hold roughly 37% of the U.S. corporate bond market, which had helped raise the value of the dollar before its recent decline.
Foreign holdings of U.S. equities
The same financial centers are the dominant buyers of U.S. stocks, with Canada and the UK the top two.
The top 20 foreign investors of U.S. equities hold 29% of U.S. stocks.
The takeaway
The U.S. budget deficit has traditionally mirrored the U.S. trade deficit. Consequently, the U.S. trade deficit provides the means for foreign investors to invest in the U.S. economy and finance U.S. deficit spending.
The idea that the U.S. could simply withdraw from the global economy to reduce its trade deficit is a relic of mercantilist thinking from a century ago.
The U.S. depends on foreign investors to supply it with goods and financial support while it maintains the global financial markets and provides the global security, education, technology and innovation that underpin them.
Is private investment being crowded out?
The idea that excessive federal deficit spending can crowd out private investment when interest rates are elevated is not new or controversial.
A look at debt by sector as a percentage of total debt shows that through the end of Q3 2025, the federal debt accounted for 42% of total debt, according to the Federal Reserve’s Flow of Funds.
Now, with interest rates staying higher for longer and spending on data center construction continuing to soar, government borrowing and artificial intelligence investment may be diverting capital and critical materials away from other private investment.
For example, the shortage of DRAM chips because of the build-out of AI data centers is likely going to lead to an increase in the price of goods that use those chips, like smartphones.
As with almost all things within the world of economics and finance, pricing and lending are highly conditional.
At a time when inflation remains well above the Federal Reserve’s 2% target, the availability of capital and commodities to support economic development is going to be part of the larger inflation narrative this year.
Fed policy, productivity and easy money
An emerging policy narrative is that artificial intelligence will spur a productivity boom that will permit the Federal Reserve to lower interest rates more than would otherwise be the case.
While we agree that AI could lead to a productivity boom, it is premature to think that it will create the conditions for lower rates in the near term.
Consider total factor productivity, which measures how efficiently an economy turns labor and capital into output. Today, total factor productivity stands at 3.5%, well below the levels seen during 1995−2004, the dawn of the internet age.
Perhaps AI will spur an increase in total factor productivity. At this point, though, a persuasive argument for rate cuts based on rising AI-driven productivity cannot be made.
Whatever productivity increases have been realized recently are a function of private sector investment made during the depths of the pandemic and its aftermath, and are not because of AI.
Recall that during the pandemic, many younger workers opted out of the workforce. Many businesses acted rationally to increase investment on productivity-enhancing equipment, intellectual property and software. Those investments are starting to pay off.
AI is in the early stages of deployment, with businesses still figuring out how to use it. If a productivity boom is coming from AI, it is just over the horizon.
If productivity keeps pace with economic growth, tax revenues could surge—but only if total factor productivity does not significantly disrupt employment.
Whatever the case, any calls to lower rates now because of AI should be taken with a very large grain of salt.
February Market Minutes
The risks of the Treasury’s shift to T-bills
The Treasury Department has changed the way it is financing the government’s debt, relying more on short-term Treasury bills.
While short-term securities normally come with lower interest rates, the overreliance on securities with maturities of less than 12 months carries risks to the financial markets and the economy.
The extent of short-term issuance
In 2025, 84% of the government’s debt issuance was made up of T-bills with maturities of 12 months or less, the highest ratio since the 2007−09 financial crisis.
After the financial crisis, the Treasury was able to issue longer-term notes in the range of 1% to 2% as the Federal Reserve held interest rates near zero.
Those days are over. But the Treasury seems intent on stretching its ability to issue short-term paper as it seeks to keep its debt costs down. As with anything, there is no free lunch.
Risk No. 1: Turnover
The risk of an undiversified stock of debt is known in finance as turnover risk. In the months ahead, as those T-bills mature, the Treasury faces the risk of refinancing those securities at much higher rates. Higher interest payments would only add to the cost of carrying the original debt.
Risk No. 2: Insufficient bank reserves
The unusual period from 2023 to 2024, characterized by high inflation, tight monetary policy and increased short-term debt issuance, created the basis for low levels of bank reserves and, consequently, eroded the safety of the banking industry.
When the returns on T-bills were within the range of longer-term Treasury notes, investors parked their holdings in the Fed’s overnight money market facilities.
Because funds in those facilities are essentially cash, the level of bank reserves surged, moving from ample to abundant.
This abundance was reflected in the significant size of the Fed’s overnight repo facility before 2025. But as money markets bought up T-bills in 2025, the overnight repo facility was drained, sending bank reserves from abundant to merely ample and possibly worse.
The minutes of the December meeting of the Federal Open Market Committee pointed to members’ concerns about this decline, particularly with the April tax season approaching.
In response, the Fed has been purchasing T-bills, injecting cash into the financial system and maintaining ample bank reserves.
Risk No. 3: Distortions in monetary policy
The reliance on T-bill issuance is affecting how monetary policy is transmitted to the financial sector. The repo market has become a major source of funding for the economy, and the resulting distortions—wider spreads between repo (market) rates and the administered federal funds rate—need to be managed.
To address what the Fed sees as a reluctance to park funds in its repo facility, the FOMC minutes suggested that the Fed clarify the purpose of this tool, convey that the funds are meant to be used when warranted, and eliminate the existing limits on their use.
Risk No. 4: Unsustainable debt
Finally, the government’s debt has been growing since 2016. The ratio of debt to gross domestic product approached 100% in 2020 during the pandemic and again in 2024 and 2025 when government spending matched the economy’s output.
While this ratio does not determine the economy’s ability to generate output, and while we have yet to see interest rates surge because of a loss of confidence in the country’s ability to manage its debt, more and more tax revenues are going toward the cost of servicing that debt.
That implies the possible crowding out of private investment and the degradation of growth, as is the case in Japan.
The takeaway
While the issuance of short-term T-bills might make sense in the short run, overreliance on that strategy risks creating distortions in the financial markets and raising borrowing costs should inflation spike higher.
Productivity surges, helping drive economic growth
U.S. productivity grew by 4.9% in the third quarter of 2025, marking the biggest increase in two years, the Bureau of Labor Statistics reported recently. The strong gains were accompanied by an upward revision for the second quarter to 4.1%.
That’s an average of 4.5% over the past six months and unmitigated good news. Unit labor costs declined by 1.9%, which is also encouraging.
The strong increase in nonfarm productivity—the hourly output per worker—may translate into higher total factor productivity, a measure of how efficiently businesses use labor and capital, including through investments in artificial intelligence.
Improved total factor productivity would give the Federal Reserve greater freedom to lower interest rates and signal better living standards for Americans.
This estimate will need to survive upcoming revisions to benchmark data on hiring and the first estimate of third-quarter gross domestic product, which came in at a robust 4.3%—but for now the productivity data is something to celebrate.
How women are helping Japan's resurgence
After a long period of malaise, Japan’s economy is stirring back to life.
One reason is that women are entering the workforce in larger numbers. Similar to the U.S. shift when baby boom-era women entered the workforce, the economic dynamics inside Japan are about to change. Even as its population ages, Japan’s labor force is expanding its reach, thanks to the entry of women.
This trend should be good news for an economy that has long been trapped in the doldrums and for the financial markets that have suffered through near-zero rates of return.
Today, women’s labor force participation in Japan has reached a record high, with 56% of women working in 2025, up from 48% in 2012.
As reported by the Organisation for Economic Co-operation and Development, this increase stems not only from stronger wage growth and government programs to encourage women’s participation, but also from the evolving nature of work as Japan’s economy relies less on heavy industry.
The increase of women in the labor force comes at a time of tightness in Japan’s labor market, which began before the pandemic.
In its recent Tankan survey, the Bank of Japan reported that companies are having difficulty finding employees, with the diffusion index now as low as negative 36.
The OECD points to Japan’s widening gender pay group as a barrier to maximizing women’s workforce participation, which government programs are attempting to address.
The transformation of the U.S. labor force did not happen overnight and is still underway. The participation rate for women peaked at 70% in 2000, only to drift down to 57% last year.
For Japan, the numbers suggest that the changes in the workplace and society are already in motion—changes that are necessary to overcome the intractable problems of an aging population and limited immigration.
January Market Minutes
Deindustrialization and the rise in worker discontent
The gap between U.S. productivity and the hourly wage paid to nonsupervisory employees continues to widen.
If anything, the gap is accelerating as the American economy continues to be transformed by the global supply chain and technological advances.
One result has been the erosion of workers’ pay. During the postwar era of industrialization until 1979, wages in nonsupervisory occupations grew at roughly the same rate as productivity. That is, wage growth was directly associated with the growth of output.
Since 1979, however, that relationship has broken down. Nonsupervisory wage growth flattened out through 1995 and has grown only modestly since then, all while productivity has advanced.
Workers have taken notice: They are producing more, but they aren’t seeing the benefits. Class resentment has followed.
Today, the result is the K-shaped economy, in which those with higher incomes are benefiting from the rise in productivity while those with lower incomes, in the bottom of the K, are not.
The United States is not the only economy going through this transition. East Germany is a hotbed of discontent as manufacturing has been usurped by cheaper labor and higher productivity in China.
In the UK, discontent is quite serious in the midlands and in the northern area of the country.
As the U.S. enters a period where millions are facing sharply higher medical insurance premiums and as artificial intelligence is stirring anxiety among workers over the potential loss of millions of jobs, the discontent is likely to grow.
Indian rupee depreciation
India’s rupee broke above a benchmark barrier of 90 rupees per dollar recently, continuing a 10-year weakening trend even as its economy is expected to grow at a rate of 6.2% per year.
This latest bout of rupee weakness has been attributed to the breakdown of trade talks, with the U.S. imposing an effective tariff rate of about 35% on imports from India.
The softening came amid reports that the Bank of India was selling small amounts of dollars, which moderated the rupee’s decline.
Still, the rupee has been depreciating at 3.7% per year since the start of the Modi administration in 2014. And the forward market is now projecting a 3.1% yearly decline over the next five years.
In its latest assessment of India’s economy, the International Monetary Fund finds that faced with an uncertain external environment, an easing of monetary policy and greater exchange rate flexibility would help India absorb external shocks.
The balance sheets of global firms operating in India would be affected by a liberalized policy structure—implying more volatility, not less, and requiring more sophisticated hedging strategies.
The Modi administration has already undertaken structural changes that have facilitated domestic private consumption and improved living standards.
India is less exposed to global trade than other Asian economies, and its large domestic market holds the potential for resilience and growth.
In our view, the Bank of India’s intervention in the foreign exchange market is a stumbling block in that country’s effort to attain developed-market status.
The foreign exchange market is the first line of defense for any economy, a buffer to both external and domestic shocks.
An absence of government interference in the foreign exchange market would allow for the expansion of India’s bond market and encourage foreign investment in India’s assets. Both are necessary components of the greater national modernization project in India.
December Market Minutes
The K-shaped loan market
Demand for lending remains brisk across the economy. But a look at loan growth over the past year illustrates a large divergence in loan provisions to traditional borrowers versus nondepository financial institutions.
The divergence speaks volumes about risk—think private credit, private equity and cryptocurrency—and the growing imbalances underscoring the American economy.
It vividly portrays the growing risk of leverage across financial institutions inside an increasingly financialized economy.
Through mid-October, credit to nondepository financial institutions had increased by 44.6% from a year ago in contrast with the more pedestrian 4.5% increase among traditional borrowers.
Given the increase in leverage across the economy to chase returns, the idea of a K-shaped lending market should be of little surprise.
It fits within the context of a financialized economy driven by low rates, liquidity and leverage.
Anyone who has been paying close attention to the evolution of risk and the American economy understands that imbalances like that cannot endure indefinitely.
Long-term interest rates and policy uncertainty
One of the more interesting phenomena in the economy these days is the seeming disconnect between economists’ muted forecasts of long-term interest rates and the arrival of expansionary fiscal policies next year.
According to a Bloomberg survey of economists conducted in mid-November, respondents expect the U.S. 10-year Treasury yield to end 2026 at 4.07%, just below the 4.09% at the time of the survey, and the 30-year yield to stand at 4.61% compared with the current 4.69%.
One would think that given the imminent arrival of tax cuts and the full expensing of capital expenditures, yields would be rising to reflect greater risk-taking as investors and the government compete for scarce capital.
But the economic forecasting community expects that these policies will result in only a 1.8% growth rate next year.
What gives?
In our estimation, long-run yields remain muted because of pervasive uncertainty linked to the policy incoherence around trade, the status and constitutionality of tariffs, restrictive immigration policies, and the impact of the longest government shutdown in U.S. history.
If economic history is any guide, long-term rates should be rising. Expansionary policies, like the Reagan tax cuts of the 1980s, have traditionally spurred strong growth—and inflation is on the rise again, increasing by 3% over the past year and by 3.6% at an annualized pace over the past 90 days as of mid-November.
Lenders remain cautious
It is a sign of the times that while businesses are now looking to expand, a modest majority of lenders have retained their more cautious approach.
We expect an increase in loan demand as well as a less cautious risk stance among lenders, though, as the administration follows through on a more aggressive form of deregulation across the banking industry.
This will most likely be part of what we expect will be a reacceleration of growth next year following an uneven year because of the broad policy changes across trade and immigration.
The Federal Reserve released its quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices on Oct. 31, roughly covering the months of the third quarter.
On the demand side, the survey found stronger demand for commercial and industrial loans from large and middle market firms; demand among small firms was basically unchanged.
On the supply side, a modest majority of lenders reported tighter standards for commercial and industrial loans to firms of all sizes. Although this was an improvement over surveys taken earlier in the year, the banking community continues to show a reluctance to take on risk given the economic uncertainty.
Similar to C&I lending, a modest net share of banks reported stronger demand for commercial real estate loans over the third quarter and unchanged standards for those loans.
Finally, both the supply and demand for commercial lending follow the trend in the RSM US Financial Conditions Index. This suggests that borrowers and lenders are more willing to take on investment risk at times of improved economic activity.
Financial conditions are moderately accommodative, which implies less investment risk than would normally be expected. The recent movement in financial conditions, however, best resembles being stuck in neutral.
November Market Minutes
Rate cuts are taking longer to have an impact
The Federal Reserve has been grappling with setting monetary policy amid a weakening labor market and persistent inflation.
When the central bank wants to bolster accommodation, it relies on the financial channel to affect economic activity.
But with the housing market in a slump and lower-income households feeling the sting of higher inflation, this transmission mechanism—whether it manifests as consumers having more cash or businesses taking on more risk—may not be as effective as in the past.
The result is a longer lag between rate cuts and their impact on the real economy—a delay now evident in several areas:
- Consumer finance: With many households holding mortgages well below the current rate on a 30-year mortgage of 6.38%, the usual wave of refinancing that has accompanied rate cuts in the past is simply not going to happen. Consumers, as a result, will not see a rise in their disposable income.
- The labor market: Labor supply constraints are impeding what has traditionally been a key growth lever: lower rates and a resulting increase in corporate risk taking. With a slow-hire, slow-fire labor market, the transmission of monetary policy becomes far less effective.
- Corporate finance: With corporate balance sheets in their best condition in decades—improved by substantial reductions in short-term debt—the lag between rate cuts and their impact on the economy is likely longer than in the recent past.
As we illustrate, monetary policy is transmitted to the economy via changes in the policy rate. An increase or decrease in the policy rate directly affects financial conditions and the degree of risk priced into the cost of credit.
A reduction in the Fed’s policy rate decreases the day-to-day cost of doing business, which reduces prices and stimulates consumer spending.
That spending dictates the level of economic activity and the level of inflation as the demand for goods increases or decreases.
While we are certain that lower rates, increasing liquidity and rising leverage bolster financial activity among businesses and higher-income households, these benefits are taking longer to reach lower-income households than in the past.
Tariff revenues, rates and rebates
One positive aspect of the disruption of global trade relationships by Washington is the extraordinary increase in tariff revenues.
The U.S. Customs and Border Protection agency is now collecting tariffs at a rate of $30 billion per month compared with the $6.8 billion per month normally collected from importers.
That means that in the six months since the tariffs were enacted, CBP has already collected roughly $110 billion more in custom duties than it otherwise would have.
Before this year, custom duties accounted for about 1.3% of total government revenue. Customs receipts are now approaching 4% of total revenue and would move higher if tariffs were to continue.
But there’s a catch. As happened during the 2018−19 trade spat with China, when a good portion of that revenue was used to subsidize American farmers hit by tariffs, whatever revenue gains are generated this time around will most likely be redirected to support soybean farmers whose exports to China have collapsed, or be used to pay for assistance to lower-income households in the U.S.
Bailing out American farmers would result in tariffs becoming another transfer payment, taking money from importers and the public and giving it to a protected group, which then becomes difficult to end.
Additionally, there is a chance that the Supreme Court may declare tariffs unconstitutional, forcing the government to refund the tariff money to importers.
If that happens, the loss of revenue would further strain the U.S. budget, with the increase in debt pressuring long-term interest rates higher.
At the same time, it would restore the revenue and profitability of corporations that have absorbed the tariffs, which would increase their tax payments.
For the importers that were able to pass along the tariffs to consumers, it is hard to imagine households benefiting directly from rebates, except perhaps through lower prices in the future.
We also anticipate that the administration would declare almost anything having to do with China as a national security risk under section 232 of the Trade Expansion Act, which would result in a far smaller rebate to U.S. corporations that have absorbed the tariffs through thinner margins.
As the dollar dominates foreign exchange, investors hedge exposure
Data provided by the Bank for International Settlements shows that the U.S. dollar continues to dominate foreign exchange markets.
In its latest triennial survey, conducted in April and published in September, the BIS found that the dollar was on one side of 89% of all international transactions, an increase from its 88% share in 2022.
The euro’s share of spot transactions fell to 28.9% from 30.6% in 2022, while remaining the currency of choice for nearby developing markets.
The Japanese yen’s share was virtually unchanged at 16.8%, and the British pound sterling declined to 10.2% from 12.9%.
The BIS also noted that sales desks in the United Kingdom, the United States, Singapore and Hong Kong account for 75% of all FX trading, highlighting the importance of international finance in those economies.
Hedging the dollar’s value
The BIS observed that the April survey was conducted at a time of elevated volatility on FX markets and a surge in trading that followed trade policy announcements.
As we have noted, there is a growing consensus that while global investors would continue to purchase U.S. financial assets for their high returns, the dollar was likely to depreciate after years of strength, prompting investors to hedge their exposure to the dollar.
We see this playing out in the increased share of spot transactions and outright forwards used to lock in future exchange rates. Additionally, in the average daily turnover of FX options, which are mainly used to hedge currency risk or to speculate on currency movements, option activity more than doubled from 2022 to 2025.
Finally, the BIS analysis noted the critical role of FX swaps, which typically combine a spot transaction with an outright forward and are widely used to manage FX funding liquidity and to hedge currency risk.
Currency swaps, by contrast, are mainly used to manage longer-term exposure and to hedge currency risk. Since they typically have longer maturities than FX swaps or outright forwards, their daily turnover tends to be much lower.
October Market Minutes
Low rates, liquidity and leverage
Why was the Federal Reserve’s recent 25-basis-point rate reduction so important? It is a question I often heard as I traveled the country speaking about the economy.
The truth is that for most Americans, a quarter-point rate cut is not that important. At best, consumers get a modicum of relief on the average 21.1% variable interest rate they are paying on their credit cards while their rates on auto and home loans fall by a few basis points.
So even though those payments become a little less expensive, that answer does not adequately explain the sound and fury that accompanied the debate leading up to the Fed’s rate cut on Sept. 17.
Why all the angst?
On Wall Street, low rates, liquidity and leverage are the holy trinity of new finance.
Those low rates create conditions at the front end of the curve that result in rising liquidity, which then permits those who work in modern finance to increase leverage to chase higher returns across asset markets.
On Wall Street, money matters and credit counts. Low rates spur risk-taking through higher leverage, which then stokes credit-fueled expansions that benefit those who work in modern finance.
Lower rates at the front end of the Treasury curve support greater risk-taking—hopefully, well hedged—which generates outsized returns and in turn drives asset prices higher.
The intense debate over whether the Fed should cut its policy rate is another reminder that the realities of Main Street are quite different from those on Wall Street.
Do falling sales of heavy trucks indicate a recession?
One alternative measure of economic activity is the sales of heavy trucks, which move everything from food to basic materials to retail goods.
Since 1979, when the data became available, a collapse in sales of heavy trucks has coincided with recessions. The recent downturn in heavy truck sales, which started in 2023, should be a concern for policymakers.
We note, however, three episodes in which a drop in heavy truck sales did not precede a recession. Rather, those declines turned out to be midcycle corrections that presaged a recession by several years.
Looking at the year-over-year growth of heavy truck sales and real gross domestic product growth, we notice a correlation from 1979 to 2009 and more deviation thereafter.
Clearly, while heavy truck sales growth has been predominantly negative during the past 24 months, real gross domestic product growth has remained positive, averaging 2.7% over the same period.
This perhaps speaks to underlying changes in the economy as it moves further from production to intellectual activities. There is an underlying strength in the economy.
As Fed Chair Jerome Powell said in August at the annual Jackson Hole Economic Symposium, the economy has shown resilience amid sweeping changes in policy, all of which makes for difficult decision making for the Federal Open Market Committee.
U.S. oil producers facing headwinds as global supply grows
Global oil production has resulted in an oversupply that, if sustained, will drive prices down toward breakeven levels and trigger consolidation among domestic producers.
Futures prices for the benchmark West Texas Intermediate in mid-September fell below $61 per barrel for 12-month forward contracts after OPEC+ announced it intends to increase production.
While this is all good news for U.S. households and businesses anxious about inflation, the price of $62 per barrel in mid-September was perilously close to the breakeven price for U.S. producers. In short, lower prices will make it tougher for U.S. producers to remain competitive with OPEC+.
Current estimates of the breakeven rate for U.S. producers range from $61 to $70 per barrel, depending on the producer’s size and region.
That price level implies that the recent push by OPEC+ for increased production will make it difficult for U.S. producers to maintain output and market share.
As we show below, the number of rigs and the price of crude are historically related. But the global energy market is complex, with the relationship between supply and demand distorted by a cartel of highly efficient suppliers and with demand undergoing a structural shift.
The latest decline in rig count reflects greater efficiency among U.S. producers and weakening demand as consumers shift to electric vehicles and more energy-efficient homes.
In the end, if OPEC+ continues to increase production, there is a growing risk that smaller and less efficient U.S. oil producers will fall by the wayside, costing U.S. market share and jobs.