#FederalReserve #Recalibration #EconomicGrowth
Fed's New Policy Direction: Understanding 'Recalibration'
Federal Reserve Chair Jerome Powell has introduced a new term to describe the central bank's monetary policy: "recalibration." This shift in policy language comes at a critical moment, as the Fed aims to balance inflation control with labor market support.
Market Reaction and Economic Context
On Thursday, asset values surged as investors interpreted Powell's message. The half-percentage point rate cut, unusual for the Fed without an impending recession or crisis, was seen as a proactive measure to bolster the labor market rather than a reaction to economic downturn. Tom Porcelli, an economist at PGIM, noted, "This allows Powell to promote the idea that this easing cycle is not indicative of a recession but rather a means to extend economic growth."
Powell's Remarks and Policy Implications
Powell used the term "recalibration" multiple times during a press conference following the open market meeting. He emphasized that this policy adjustment will help sustain the economy's vigor and the labor market while facilitating further advancements in inflation. The goal is to transition towards a more neutral monetary policy stance.
Financial markets initially showed uncertainty but rallied on Thursday as investors accepted Powell's assertion. The Dow Jones Average and S&P 500 reached new heights, reflecting market confidence in the Fed's new direction. Porcelli added, "Policy had been adjusted for significantly higher inflation. With inflation approaching the target, the Fed can ease some stringent measures previously implemented."
Historical Context and Previous Buzzwords
Powell's past attempts to characterize Fed policies with catchy phrases have had mixed results. In 2018, he described the reduction of bond holdings as being on 'autopilot,' which drew criticism. His 2021 assertion that inflation spikes would be 'transitory' led to a sluggish policy response, necessitating subsequent rate hikes to combat rising inflation.
Current Market Confidence and Future Outlook
Despite historical criticisms, markets exhibited confidence in Powell's current evaluation. David Feroli, chief U.S. economist at JPMorgan Chase, commented, "In other scenarios, a more significant move might signal heightened concerns about growth, but Powell emphasized that this was essentially a positive cut, as declining inflation enables the Fed to act to uphold a robust labor market."
Feroli anticipates that the Fed may need to follow up with another similarly sized adjustment unless the market reverses its recent slowing trend that began in April.
Positive Job Market Developments
The Labor Department reported a decline in weekly unemployment benefit claims to 219,000, the lowest level since May, providing optimistic news regarding employment.
Unusual Rate Cut and Market Speculation
The half-percentage point rate reduction was notable, marking the first time the Fed has opted for such a substantial cut without an impending recession or crisis. Dan North, senior economist for North America at Allianz Trade, suggested that the Fed might have been attempting to catch up with economic trends. Powell has expressed concerns about the labor market and indicated that addressing potential weaknesses was a key reason for the rate cut.
Conclusion
The Fed's "recalibration" of policy signals a strategic shift towards balancing inflation control and labor market support. As markets respond positively to this new direction, it remains to be seen how this policy will unfold and impact the broader economy.
Original Article: The Fed has set out on a 'recalibration' of policy. Here's what Powell's new buzzword means
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