Key Points:
- Fed Chair Jerome Powell introduced “recalibration” as his new term for adjusting monetary policy at a critical time for the central bank.
- Investors reacted positively, interpreting the move as a step to bolster the labor market, not as a sign of economic weakening.
- Economists believe Powell is aiming to extend the economic expansion, not respond to a recession.
Federal Reserve Chair Jerome Powell has introduced his latest buzzword, “recalibration,” to describe the Fed’s current approach to monetary policy. During his recent press conference following the Federal Open Market Committee meeting, Powell used the term multiple times to explain why the Fed implemented an unusual half-point rate cut, despite no obvious signs of severe economic slowdown.
“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 a more neutral stance,” Powell said.
Positive Market Response
Financial markets initially hesitated but quickly rallied on Thursday, with asset prices surging after investors took Powell at his word that the outsized move wasn’t a reaction to an economic downturn. Instead, it was a strategic adjustment to protect the labor market from potential risks.
“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,” explained Tom Porcelli, chief U.S. economist at PGIM Fixed Income.
“It really allows him to push this narrative that this easing cycle is not about us being in recession, it is about extending the economic expansion,” he added. “I think it’s a really powerful idea. It’s something we had been hoping that he would do.”
The Dow Jones and S&P 500 hit new highs on Thursday after volatile swings on Wednesday, further solidifying confidence in Powell’s approach.
Powell’s Track Record with Buzzwords
Powell’s use of buzzwords in the past hasn’t always had the desired effect. In 2018, his mention of bond reductions being on “autopilot” and his assertion that the Fed had moved “a long way” from a neutral rate received backlash from markets. Even more notably, his characterization of inflation as “transitory” in 2021 led to delayed actions, forcing the Fed to adopt more aggressive rate hikes later on to control inflation.
Despite this history, markets seemed to embrace Powell’s latest terminology, even though signs of economic cracks remain. JPMorgan Chase economist Michael Feroli noted in a client report, “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.”
Future Actions and Labor Market Focus
Although Powell downplayed concerns about a recession, the Fed’s focus on the labor market signals ongoing caution. Seth Carpenter, chief global economist at Morgan Stanley, wrote, “The Fed still sees the economy as healthy and the labor market as solid, but Powell noted that it is time to recalibrate policy.” Carpenter expects the Fed will revert to smaller, quarter-point rate cuts through the remainder of 2024 and into 2025.
However, futures markets suggest a more aggressive trajectory, with traders predicting another quarter-point cut in November, followed by a return to a half-point cut in December.
Aditya Bhave, an economist at Bank of America, observed a notable change in the Fed’s post-meeting statement, referencing “maximum employment.” Bhave interpreted this as a sign that the central bank is prepared to remain assertive if the labor market weakens further.
“We think the Fed will end up front-loading rate cuts more than it has indicated,” Bhave said. “The labor market is likely to remain tepid, and we think markets will push to do another super-sized cut in 4Q.”
While Powell’s recalibration is intended to balance economic growth with inflation control, it may lead to additional challenges as the Fed navigates an uncertain labor market and investor expectations.
