Federal Reserve Chair Jerome Powell has introduced a new term to describe monetary policy, calling it a “recalibration” of policy at a crucial moment for the central bank. During a news conference after Wednesday’s open market committee meeting, Powell used the term multiple times to explain the Fed’s decision to implement a half percentage point rate cut without clear signs of economic weakness. Powell stated that this adjustment in policy would support the economy, labor market strength, and progress on inflation.
Following the meeting, financial markets were uncertain about Powell’s message. However, asset prices surged on Thursday as investors interpreted Powell’s remarks as a move to adjust Fed policy beyond a narrow focus on inflation to ensure the labor market’s recent softening did not worsen. The Dow Jones Industrial Average and S&P 500 reached new highs in trading on Thursday after experiencing significant fluctuations on Wednesday.
Tom Porcelli, chief U.S. economist at PGIM Fixed Income, explained that the Fed’s policy had been geared towards higher inflation, but with inflation nearing the target, the Fed could ease some of the previously implemented tightening measures. He emphasized that the current easing cycle was not a response to a recession but aimed at extending the economic expansion.
Despite Powell’s past attempts to describe Fed policy or economic views with catchy phrases, which were met with mixed results, markets expressed confidence in his latest assessment. Powell’s reassurance that the rate cut was a positive step to maintain a strong labor market resonated with investors, even amidst some economic uncertainties.
Michael Feroli, chief U.S. economist at JPMorgan Chase, highlighted that Powell’s emphasis on the rate cut being driven by declining inflation signaled a positive move to support the labor market. He anticipated that the Fed might need to implement a similar-sized rate cut at the upcoming meeting in November if the labor market’s slowdown persisted.
The Labor Department’s report on Thursday showing a decrease in weekly unemployment benefit claims to the lowest level since May provided some positive news on the job front. The half percentage point rate cut was notable as it deviated from the Fed’s usual quarter-point adjustments, typically reserved for times of recession or crisis.
While Powell did not confirm speculations that the rate cut was a response to not cutting rates in July, there was a belief on Wall Street that the Fed was catching up to some extent. Powell’s focus on addressing potential labor market weaknesses underscored the importance of the recalibration in monetary policy.
Seth Carpenter, chief global economist at Morgan Stanley, noted that Powell’s rate cut demonstrated the Fed’s willingness to adjust policy based on evolving data and risks. He suggested that the Fed could gradually reduce accommodation through quarter-point increments for the remainder of the year and into the first half of 2025.
Traders in futures markets anticipated a more aggressive rate cut pace, with expectations of a quarter-point cut in November followed by a half-point cut in December. Bank of America economist Aditya Bhave observed a shift in the Fed’s statement post-meeting, indicating a readiness to maintain an aggressive stance if the job market deteriorates further. This suggests that the recalibration of policy may involve more significant adjustments than initially indicated.
