Consensus has converged on a comfortable story for next year: modest Fed easing, a steeper curve, broader equity participation, and growth normalising without a recession. The story is plausible. What is harder to defend is the price the rates market is putting on everything that is not that story. Downside tail risk in rates — the scenario where labour cracks faster than inflation falls and the Fed is dragged back toward the lower bound — is being treated as a curiosity rather than a position.
The FOMC itself has stopped pretending the committee is unified. The October minutes describe a split in plain language: some participants remain focused on inflation progress toward the 2 percent target having stalled, while others are increasingly attentive to emerging weakness in the labour market. That is not a committee with a base case. It is a committee with two base cases, each held by a different faction, and a policy path that will be dictated by whichever data series moves first. Markets are pricing the inflation-dominant branch and almost nothing else.
Deer Point Macro's base case captures the constructive consensus cleanly: the short end drifts toward roughly 310 basis points while the 10-year stays anchored near 410, delivering another 30 basis points of 2s10s steepening — the spread between two- and ten-year Treasury yields — and clearing the way for financials and small caps. The same shop, however, flags that historically the Fed has cut rates with a positive output gap (actual GDP running above potential) only 22.6 percent of the time, and rarely when the gap exceeds one to two percent. Easing into an economy that is not yet slack is the unusual path, not the comfortable one.
The zero lower bound is not dead
The cleanest evidence of mispriced downside comes from the derivatives complex itself. Liberty Street Economics, working from SOFR (the Secured Overnight Financing Rate) options, puts the market-implied probability of rates returning to the zero lower bound within seven years at roughly 9 percent. That is not nothing, and it is materially higher than the qualitative tone of risk-asset positioning would imply. Capital Flows Research argues the melt-up in credit and equities is being driven precisely by collapsing short real rates and a regime-priced SOFR curve — in other words, the same instruments that quietly carry the left-tail premium are funding the right-tail trade.
Two base cases inside one committee is not consensus. It is a coin flip dressed as guidance.
The operational read. The forecasts in the dossier sit overwhelmingly on the same side — curve steepener, modest easing, no return to the lower bound — with Deer Point's roughly 310 basis point short-end call and the Fed's own balance-sheet pivot (ending quantitative tightening on 1 December and reinvesting MBS principal into Treasury bills) reinforcing the constructive frame. The only genuine dissent comes from the SOFR options market itself, which keeps quietly bidding the 9 percent ZLB tail. For a macro book, the cleaner expression is not to fade the base case but to own the convexity the base case is leaving on the floor: receivers in the front end, long-dated TIPS as inflation insurance on the other tail, and short duration in nominal credit where the carry no longer compensates. As one allocator put it, the bond book is the safe part of the portfolio — which is precisely why it should not be the place taking directional risk into a two-headed Fed.
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