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Fed Commentary consistent w/our views on credit and liquidity; moderate labor cooling helpful for credit

Published on October 30, 2025

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Bill Hebel

Brian Herlihy

A number of items from today’s Fed press conference resonated relative to some of the themes coming out of the recent credit events and earnings season.
The labor picture: Embedded in today’s commentary was Jay Powell’s assertion that the rate of change in the labor market is no worse than originally contemplated at the last meeting which we take as a mild positive for consumer credit. While Powell did call out a struggling low end consumer, we would simply point out that post GFC, the banks have largely focused on banking prime and super-prime customers and have less exposure to the low end consumer. The consumer credit data coming out of the Q largely improved sequentially and we would note that an employed consumer is a paying one. To the extent the Fed can smooth the employment glidepath, the better for the credit picture.
Liquidity: With the Fed ending the runoff of securities purchases on Dec. 1 and citing recent pressures in the money markets as the impetus for the balance sheet action, concerns around funding pressures will likely subside over time. While today’s action may not be the “cure all” that money markets were looking for (ie. adding reserves), we do believe that ending quantitative tightening will at the very least stabilize the withdrawal of liquidity from the financial system which on the margin should lessen competition for deposits. While we think this will take some time to work through the system, it should be a net helper over time.
Credit/Leverage: Chair Powell also received a question regarding the recent one-off credits and the concern around subprime broadly. Powell highlighted that at the household level, balance sheets are in good shape. He doesn’t see too much leverage in the financial system and doesn’t see broader credit issues at this point, all of which is consistent with recent commentary from the banks.

December Fed Meeting: In terms of Powell’s commentary that a December cut is not a foregone conclusion, the KRE promptly traded off ~1.8%. While we understand the knee jerk to a perceived less accommodative Fed, we’d point out the commentary from a number of banks during this earnings season that successive rapid cuts in rates are harder to manage as assets under that scenario would reprice faster than liabilities weighing on margins. From our vantage point, we would actually prefer a slower glidepath as it not only helps alleviate the aforementioned problem, but it would also allow more time for the back book of loan and securities to reprice at higher rates when they mature.

In sum, we view today’s commentary from the Fed as a net positive for underlying bank fundamentals. No incremental weakness in the labor picture as a small net positive for consumer credit, an easing of liquidity constraints, solid capital in the banking system and potentially more time to reprice the back book all strike us as positives on the margin. While we realize that credit concerns have been the overhang through earnings season, we would expect that the upcoming conference season could help assuage some of those concerns as the banks will likely try to increase transparency particularly around their NDFI portfolios which have been the recent focus.

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Coverage Universe	Percent
Sector Perform	62.5
Sector Underperform	12.5
Sector Outperform	25

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