Analysis of Paul McCulley’s Fed Normalization Comment and Market Reaction (December 9, 2025)

This analysis is based on a CNBC interview [1] where Paul McCulley, former PIMCO chief economist, declared the Fed is “completing the normalization process” ahead of its December 2025 rate-setting meeting. The normalization process refers to unwinding extraordinary post-2008 crisis monetary policies, including raising rates from near-zero, ending quantitative easing (QE), and reducing the balance sheet via quantitative tightening (QT). The Fed formally ended QT on December 1, 2025—halting monthly Treasury runoff and transitioning to reinvesting maturing amounts [3]—a milestone that aligns with McCulley’s comments.

The immediate market reaction was muted due to two key factors: (1) the end of QT was announced at the Fed’s October 29 meeting [3], so it was already priced into markets; and (2) investors were in a holding pattern ahead of the December 10 Fed rate decision, expected to include a 25 basis point cut and updated 2026 rate projections (dot plot) [2]. On December 9, U.S. stock indices showed mixed performance (S&P 500 up 0.12% to 6,848.48, NASDAQ up 0.36% to 23,588.19, Dow down 0.20% to 47,626.77 [0]), while Treasury yields remained little changed (10-year ~4.178%, 2-year ~4.781% [2]).

1. Normalization Milestone
   : The December 1 end of QT is the final major step in the Fed’s normalization process [3], confirming McCulley’s assertion [1]. This marks a return to more traditional monetary policy after over a decade of extraordinary measures.
2. Priced-In News
   : The lack of significant market movement reflects that the end of QT was already anticipated by investors [0][2], reducing the impact of McCulley’s comments.
3. Fed Meeting Dominance
   : The December 10 Fed decision—including the expected rate cut and 2026 dot plot—is the primary driver of current market sentiment, with investors pricing in 77 basis points of cuts through 2026 [4].

• Policy Uncertainty
  : The Fed’s 2026 dot plot could reveal divided views among policymakers, potentially increasing market volatility [2].
• Delayed Economic Data
  : Updated inflation (PPI) and employment reports were delayed until January 14, 2026, limiting the Fed’s clarity on future policy [5].
• Sentiment Shifts
  : Any deviation from market expectations regarding the Fed’s rate path could lead to sharp movements in stocks and bonds [2].
• Opportunity for Clarity
  : The Fed’s December 10 announcement may resolve current uncertainty, providing a clearer direction for markets.

Paul McCulley’s comment about the Fed completing normalization aligns with the December 1 end of QT, a key post-crisis policy milestone [3]. The muted market reaction is due to the news being already priced in and investor caution ahead of the Fed’s December 10 meeting [2][3]. Key events to monitor include the Fed’s rate decision and dot plot release, as well as the delayed PPI and employment reports [5].