Federal Reserve Cuts Rates Again to Support Weakening Labor Market, Ends Balance Sheet Run-Off

The Federal Reserve has cut interest rates for the second consecutive time in December 2025, signaling a shift toward a more accommodative monetary policy in response to a weakening labor market. The move reflects concerns over employment trends and the need to bolster economic activity through lower borrowing costs.

The (FOMC) reduced the federal funds rate by 25 basis points, bringing the target range to a range consistent with supporting long-term growth. The decision follows the November rate cut, which marked the first easing since 2023. The cumulative action of two rate reductions underscores the Fed’s readiness to act in response to emerging economic vulnerabilities.

Labor market indicators have shown signs of deterioration over recent months, with employment gains slowing and wage growth moderating. The Fed cited these developments as key factors in its decision to cut rates further. The central bank emphasized that a sustained recovery in the labor market remains a critical precondition for the resumption of tightening, which has been on hold since late 2024.

In addition to the rate cut, the Fed announced that it will halt its starting on December 1, 2025. This decision aligns with its broader strategy to provide additional liquidity to financial markets and support credit conditions. The balance sheet run-off, which had been a key part of the Fed’s normalization efforts after the pandemic, had been gradually scaled back over the past year. Ending the program entirely represents a reversal of prior policy direction.

The Fed’s latest actions are consistent with a broader trend of central banks recalibrating policy in the face of evolving economic conditions. While inflation has remained broadly contained, the Fed remains cautious about the risk of a prolonged slowdown in activity. The central bank emphasized that its policy response will remain data-dependent, with a continued focus on the labor market and overall economic performance.

Policy makers acknowledged that the current environment remains complex, with uncertainty surrounding global demand and domestic spending. However, the decision to cut rates and suspend balance sheet reduction suggests a preference for flexibility in the short term. The Fed stressed that future policy decisions will depend on the incoming data and how developments affect its of maximum employment and price stability.

The market has responded positively to the Fed’s announcement, with Treasury yields declining and showing early signs of strength. Investors are interpreting the rate cuts and the balance sheet pause as signals of a more accommodative stance, which is expected to support risk assets in the near term.

Looking ahead, the Fed has indicated that it will provide further guidance during its upcoming policy meetings. With the next meeting scheduled for mid-2026, market participants will be closely watching for additional clues about the path of monetary policy and the central bank’s assessment of economic conditions.