Fed Cuts Rates by Quarter Point, Signals End to Balance Sheet Runoff
The central bank's second rate cut of the year was coupled with a December end to its portfolio reduction, a dovish pivot aimed at supporting a moderating economy.
The Federal Reserve reduced its benchmark interest rate by a quarter-percentage point on Wednesday for the second time this year and signaled a definitive end to the runoff of its massive balance sheet, providing further support for an economy showing signs of cooling.
The Federal Open Market Committee (FOMC) lowered the federal funds rate to a target range of 3.75% to 4.00%, a move that was widely anticipated by financial markets. In a complementary dovish step, the Fed also announced it would conclude the reduction of its bond portfolio, a process known as quantitative tightening, in December. The news prompted a modest but broad rally in U.S. equities, with the S&P 500 advancing 0.31% and the tech-heavy Nasdaq Composite gaining 0.44% in afternoon trading.
In its official statement, the committee noted that economic activity has been expanding at a moderate pace, but that job gains have slowed in recent months. The decision aims to preempt a more significant downturn and sustain the economic expansion.
"The Committee will continue to assess additional information and its implications for monetary policy," the central bank's post-meeting statement read, reinforcing a data-dependent approach to future decisions. The move to end the balance sheet runoff is significant, as it halts the process of removing liquidity from the financial system, effectively easing monetary conditions further.
The market's reaction reflected an environment where the Fed's move was largely priced in. The bond market responded with a slight easing of yields, as the 10-year Treasury note hovered around 4.18%, down from levels seen in previous weeks. This indicates that investors are becoming more confident that the Fed's tightening cycle is firmly in the past.
Analysts are now parsing the central bank's language and Chair Jerome Powell's subsequent press conference for clues about the future path of monetary policy. While this second consecutive rate cut confirms a clear policy pivot, the key question remains whether more cuts are on the horizon. Some economists, including those at Goldman Sachs, are forecasting additional reductions in early 2026 if inflation continues to trend downward toward the Fed's 2% target.
As one Bloomberg report noted, the focus has squarely shifted from the size of this cut to the forward guidance offered by policymakers. The market is now looking for confirmation that the central bank is prepared to act further if economic indicators, particularly in the labor market, continue to soften.
For now, the Fed's actions provide a welcome tailwind for equities and risk assets, confirming that the central bank is responsive to evolving economic conditions. Investors will be closely watching upcoming inflation and employment data to gauge the likelihood and timing of the next policy adjustment.