The Fed maintains a restrictive bias despite clear signs of labor market weakening. Downward revisions to payrolls, rising corporate layoffs and a large intraday repo operation suggest liquidity strains in the financial system. This situation is relevant because inflationary pressures and financial strains converge, affecting markets, credit and investment decisions.
Recent labor data show worrying signs of deterioration. layoffs recorded by Challenger in October 2025 reached their highest level in years, and cumulative corporate layoffs exceeded one million, 65% more than the previous year. The economy added only 22,000 jobs in August, while June data were revised from positive to -13,000, marking the first monthly decline since 2020.
The unemployment rate has risen to 4.3%, its highest level since 2021, and hourly wage growth eased to 3.7% in August. At the same time, The Conference Board’s Leading Economic Index (LEI) has fallen for seventeen consecutive months, signaling a widespread slowdown.
Deterioration of the labor market and actions by the Federal Reserve
Despite these indicators, the Fed maintains an aggressive tone because inflation remains above its target. However, on October 31, 2025 it conducted a $29.4 billion repo operation, the largest intraday liquidity injection in more than five years, while bank reserves fell to approximately $2.8 trillion, their lowest level in more than four years.
The combination of a cooling labor market and a restrictive Federal Reserve is creating a challenging environment for financial markets. Rising capital costs are putting pressure on asset valuations, while signs of stress in bank liquidity—evident in the recent large-scale repo operation—highlight underlying fragilities in the financial system.
At the same time, persistent inflation leaves the Fed facing a difficult policy dilemma: keeping rates high to contain prices risks further weakening employment and growth. Wage moderation adds another layer of complexity, constraining the recovery in consumption and deepening the potential for a broader economic slowdown in the United States.
The central bank faces a delicate balancing act between fighting inflation and avoiding excessive deterioration of the labor market. The next policy calibration will depend on the evolution of inflation and key labor indicators, especially new employment revisions and inflation data that policymakers will monitor closely.
