Federal Reserve Chair Jerome Powell has introduced the latest terminology to describe monetary policy, signaling a “recalibration” at a crucial juncture for the central bank.
During a news conference following Wednesday’s open market committee meeting, Powell employed variations of the term “recalibration” repeatedly to elucidate the rationale behind the Fed’s unusual decision to implement a half percentage point rate cut despite the absence of an apparent economic downturn.
“This recalibration of our policy stance will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation as we begin the process of moving forward to a more neutral stance,” Powell stated.
The immediate market reaction to Powell’s remarks was mixed. However, on Thursday, asset prices surged as investors accepted Powell’s assertion that the substantial move was not driven by significant economic deceleration but was a strategic adjustment. This adjustment aimed to shift the Fed’s focus from inflation to ensuring that a recent weakening in the labor market did not escalate.
In reaction, the Dow Jones Industrial Average and the S&P 500 reached new highs on Thursday after experiencing volatile movements the previous day.
Tom Porcelli, chief U.S. economist at PGIM Fixed Income, commented, “Policy had been calibrated for meaningfully higher inflation. With the inflation rate now drifting close to target, the Fed can remove some of that aggressive tightening that they put into place,” adding that this easing cycle aims to extend economic expansion rather than indicate a recession.
Powell has a history of using distinctive terms to describe Fed policy, some of which have been met with controversy. For instance, his 2018 remarks describing efforts to reduce bond holdings as being on “autopilot” and stating that rate hikes had brought the Fed “a long way” from a neutral interest rate prompted adverse market reactions. Likewise, his characterization of the inflation surge in 2021 as “transitory” resulted in delayed policy actions necessitating aggressive rate increases.
Despite this track record, markets seemed to trust Powell’s latest assessment, even with certain economic vulnerabilities present.
Michael Feroli, chief U.S. economist at JPMorgan Chase, noted, “In other contexts, a larger move may convey greater concern about growth, but Powell repeatedly stressed this was basically a joyous cut as ebbing inflation allows the Fed to act to preserve a strong labor market.” Feroli anticipates a similar rate cut at the November 6-7 meeting unless the labor market reverses its slowing trend.
There was positive news regarding employment as the Labor Department reported a decline in weekly claims for unemployment benefits to 219,000, the lowest level since May.
The Fed’s half percentage point rate cut marks a significant departure from its usual quarter-point adjustments absent an economic crisis or recession. Though Powell did not confirm speculation that the cut was compensating for not making a similar move in July, many on Wall Street viewed it as partial catch-up.
Dan North, senior economist for North America at Allianz Trade, suggested that Powell might have felt the Fed was lagging. He emphasized that the last labor market report could have influenced Powell’s decision.
Powell has expressed concern about the labor market, stating that a potential weakening warranted the recalibration of policy. Seth Carpenter, chief global economist at Morgan Stanley, remarked that Powell’s move and statements indicate a readiness to adjust policy gradually or make substantial changes based on evolving economic data and risks.
Carpenter expects the Fed to return to quarter-point rate cuts for the remainder of the year and into the first half of 2025. Futures market traders, however, predict a more aggressive approach, including another quarter-point cut in November followed by a half-point cut in December, according to CME Group’s FedWatch analysis.
Aditya Bhave, an economist at Bank of America, pointed out a change in the Fed’s post-meeting statement, referencing “maximum employment,” which he interpreted as a signal that the central bank is prepared to stay aggressive if the jobs market continues to weaken. Bhave also suggested that the recalibration could become complex, anticipating that the Fed might front-load rate cuts more than initially projected.
In conclusion, the Fed’s strategy appears to be one of cautious adjustment, emphasizing economic stability and labor market health while being prepared to act decisively based on future developments.
