Chairman of the Federal Reserve Jerome Powell unveiled its latest buzzword to describe monetary policy, with a “recalibration” of policy at a pivotal moment for the central bank.
To his press conference After Wednesday’s Open Market Committee meeting, Powell used variations of the word no fewer than eight times as he sought to explain why the Fed took the unusual step of cutting rates by half a percentage point in the absence of any obvious economic weakening.
“This adjustment to our monetary policy will help maintain the strength of the economy and the labor market, and will continue to allow for further progress on inflation as we begin the process of adopting a more neutral stance,” Powell said.
Financial markets were unsure what to make of the president’s message immediately after the meeting.
However, Asset prices soared on Thursday Investors took Powell at his word when he said the unusually disproportionate move was not a response to a substantial slowdown in the economy. Rather, it was an opportunity to “recalibrate” Fed policy, shifting from a rigid focus on inflation to a broader effort to ensure the recent weakening in the labor market doesn’t spiral out of control.
The Dow Jones Industrial Average and S&P 500 hit new highs in the exchanges on Thursday after swinging violently on Wednesday.
“Monetary policy had been calibrated for significantly higher inflation. With inflation now moving closer to target, the Fed can remove some of the aggressive tightening it has put in place,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income.
“It really allows him to make the point that this easing cycle doesn’t mean we’re in a recession, it’s about extending the economic expansion,” he added. “I think that’s a really powerful idea. It’s something we were hoping he would do.”
Powell’s Buzzwords
Several of Powell’s previous efforts to provide light-hearted descriptions of Fed policy or his views on the economy have not worked as well.
In 2018, its characterizations of efforts to reduce its bond holdings as being on “autopilot”, as well as his assessment that a series of rate hikes that same year had brought the Fed “We are far” from a neutral interest rate caused a negative reaction in the markets.
Even more famously, his insistence that a The rise in inflation in 2021 would prove to be “transitory” This eventually led the Fed to slow its policy to the point that it had to carry out a series of three-quarter percentage point rate increases to bring down inflation.
But markets expressed confidence in Powell’s latest assessment, despite that record and some signs of cracks in the economy.
“In other contexts, a larger decline might reflect greater concern about growth, but Powell has repeatedly stressed that this is essentially a welcome decline because lower inflation allows the Fed to act to preserve a strong labor market,” Michael Feroli, chief U.S. economist at JPMorgan Chase, said in a note to clients. “Moreover, if policy is set optimally, it should return the economy to a supportive level over time.”
Feroli, however, expects the Fed to have to follow up Wednesday’s action with a similarly sized move at its Nov. 6-7 meeting unless the labor market reverses a slowdown that began in April.
There was some good news on the jobs front Thursday, as the Labor Department reported that weekly jobless claims fell to 219,000, the lowest level since May.
An unusual downward movement
The half-percentage-point, or 50 basis-point, cut is remarkable because it is the first time the Fed has gone beyond its traditional quarter-point moves absent a looming recession or crisis.
While Powell did not give credence to the idea that the move was compensation for not cutting rates at the July meeting, speculation on Wall Street indicated that the central bank was indeed playing catch-up to some extent.
“He may have felt like they were falling behind a little bit,” said Dan North, senior North America economist at Allianz Trade. “A 50 basis point cut is pretty unusual. It’s been a long time coming, and I think it was maybe the latest labor market report that gave him pause.”
Indeed, Powell has made no secret of his concerns about the labor market, saying Wednesday that anticipation of a potential weakening was a major motivator behind the recalibration.
“The Fed still sees the economy as healthy and the labor market as strong, but Powell has signaled that it is time to readjust policy,” wrote Seth Carpenter, global chief economist at Morgan Stanley. “Powell has underscored and proven with this rate cut that the FOMC is prepared to move incrementally or make more significant changes based on incoming data and evolving risks.”
Carpenter is among the group that expects the Fed could now cut monetary policy in quarter-point increments through the end of the year and into the first half of 2025.
Futures traders, however, anticipate a more aggressive pace that would result in a quarter-point decline in November but a return to half a point in December, according to the CME Group. FedWatch gauge.
Bank of America economist Aditya Bhave noted a change in the Fed’s post-meeting statement that included a reference to seeking “maximum employment,” a reference he interpreted as indicating the central bank is prepared to remain aggressive if the employment situation continues to deteriorate.
This also means that recalibration could become tricky.
“We think the Fed will eventually accelerate rate cuts more than expected,” Bhave said in a note. “The labor market is likely to remain tepid, and we think markets will push for another large interest rate cut in the fourth quarter.”
