Federal Reserve Chair Jerome Powell has introduced a new buzzword to describe the central bank’s latest approach to monetary policy: “recalibration.” As the Fed navigates a pivotal economic moment, Powell used this term repeatedly during his post-meeting press conference to explain an unusual half-percentage point interest rate cut. This move wasn’t a reaction to a severe economic downturn, as one might expect, but rather part of an effort to address the labor market and sustain economic expansion.
A Pivotal Moment for the Fed
On Wednesday, Powell emphasized that this “recalibration of our policy stance” was necessary to maintain the economy’s strength and keep the labor market robust. The Fed’s shift in focus marked a significant step away from its recent aggressive inflation-fighting measures, which had included substantial rate hikes in response to skyrocketing inflation in 2021.
While financial markets initially seemed unsure of Powell’s messaging, Thursday brought optimism as major stock indices, like the Dow Jones Industrial Average and S&P 500, surged. Investors interpreted the Fed’s actions not as a signal of economic weakness but as a proactive move to sustain growth.
Extending Economic Expansion, Not Responding to Recession
Economists like PGIM’s Tom Porcelli hailed Powell’s narrative as a smart shift, framing the rate cut as a way to extend the ongoing economic expansion rather than react to a looming recession. According to Porcelli, Powell’s recalibration highlights the Fed’s confidence in the broader economy, focusing on preventing the labor market’s slowdown from becoming more severe.
This is an important distinction: by moving away from strict inflation control, the Fed now aims to balance multiple aspects of the economy, ensuring that any softening in job growth doesn’t derail the broader recovery. While inflation remains a concern, Powell made clear that with rates near target levels, the Fed has the flexibility to ease some of its earlier tightening measures.
Powell’s Track Record with Buzzwords
Powell’s use of buzzwords hasn’t always landed well with markets. In 2018, his reference to bond reductions being on “autopilot” and his statement that interest rates were “a long way” from neutral caused significant market volatility. His infamous description of the 2021 inflation surge as “transitory” also backfired, forcing the Fed to act aggressively with three-quarter percentage point rate hikes after inflation proved more persistent than anticipated.
However, this time around, the markets seem more aligned with Powell’s thinking. Michael Feroli, chief U.S. economist at JPMorgan Chase, noted that Powell stressed the recent rate cut as a positive step, one that positions the economy for future stability rather than signaling concern over immediate economic threats. According to Feroli, if policy is set optimally, it should guide the economy back to a favorable trajectory over time.
The Unusual Size of the Rate Cut
The Fed’s half-point rate cut stands out for its size. Typically, the central bank adjusts rates in quarter-point increments unless facing an imminent recession or crisis. Some, like Dan North from Allianz Trade, believe the Fed may have felt it was falling behind and needed to make a more dramatic adjustment in response to signs of labor market softening.
Powell, however, downplayed any catch-up notion, focusing instead on the importance of getting ahead of a potential weakening in the job market. In his view, recalibration now allows the Fed to address potential risks while maintaining overall economic health.
Future Rate Movements: Caution or Aggression?
Looking ahead, opinions are divided on how the Fed will proceed. Economists like Seth Carpenter of Morgan Stanley expect the Fed to revert to smaller, quarter-point rate cuts for the remainder of 2024 and into 2025. Meanwhile, futures markets suggest traders are bracing for more aggressive moves, potentially including another half-point cut by the end of the year.
Despite these past missteps, markets have shown confidence in Powell’s recent assessments. Economists, like Michael Feroli from JPMorgan Chase, noted that Powell stressed the Fed’s recent rate cut was intended to maintain a strong labor market rather than signal concern about economic growth. While the Fed has traditionally made smaller, quarter-point cuts, this larger half-point cut is unusual, suggesting the Fed is recalibrating policy to stay ahead of potential labor market weaknesses.
Bank of America’s Aditya Bhave highlighted a subtle shift in the Fed’s language that now references “maximum employment,” signaling a willingness to stay aggressive if job market data worsens. This recalibration, while seemingly straightforward, could become trickier as economic conditions evolve.
As the Fed navigates these challenges, Powell’s recalibration buzzword encapsulates a broader strategic shift—one that prioritizes maintaining economic strength and flexibility in a complex and uncertain environment.But markets expressed confidence in Powell’s latest assessment, despite this track record and some signs of cracks in the economy.
“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,” Michael Feroli, chief U.S. economist at JPMorgan Chase, said in a client note. “Moreover, if policy is set optimally, it should return the economy to a favorable place over time.”
Still Feroli expects the Fed will have to follow up Wednesday’s action with a similar-sized move at the Nov. 6-7 meeting unless the labor market reverses a slowing pattern that began in April.
There was some good news on the jobs front Thursday, as the Labor Department reported that weekly claims for unemployment benefits slid to 219,000, the lowest since May.
An unusual move lower
The half percentage point — or 50 basis point — cut was remarkable in that it’s the first time the Fed has gone beyond its traditional quarter-point moves absent a looming recession or crisis.
Though Powell did not give credence to the notion that the move was a makeup call for not cutting at the July meeting, speculation on Wall Street was that the central bank indeed was playing catch-up to some degree.
“This is a matter of maybe he felt like they were getting a little bit behind,” said Dan North, senior economist for North America at Allianz Trade. “A 50 basis point cut is pretty unusual. It’s been a long time, and I think it was maybe the last labor market report that gave him pause.”
