The Fed is adjusting its policy with a new buzzword from Powell.

• Jerome Powell, the Fed Chair, has introduced a new term to describe monetary policy, referring to a "recalibration" of policy at a crucial juncture for the central bank.
• On Thursday, asset prices surged as investors believed Powell's statement that the significant increase was not due to a significant economic downturn but rather an attempt to strengthen the job market.
• "Tom Porcelli, an economist at PGIM, believes that the easing cycle is not about the economy going into recession, but rather about extending the economic expansion. He thinks it's a powerful idea."

Jerome Powell, the Federal Reserve Chair, has introduced a new term to describe monetary policy, referring to a "recalibration" of policy at a crucial juncture for the central bank.

In his news conference after the open market committee meeting on Wednesday, Powell used the word "no fewer than eight times" to explain why the central bank made the unusual decision of a half percentage point rate cut without any clear economic slowdown.

Powell stated that adjusting our policy stance will maintain the economy and labor market's strength, allowing for continued progress on inflation as we move towards a more neutral stance.

The chair's messaging in the meeting left financial markets uncertain about their next move.

On Thursday, asset prices surged as investors believed that Powell's statement about the outsized move not being due to a significant slowing of the economy was true. Instead, it was an opportunity for the Fed to adjust its policy from a strict focus on inflation to a broader effort to prevent the recent weakening of the labor market from worsening.

On Thursday, the Dow Jones Industrial Average and S&P 500 reached new heights in trading following their volatile movements the previous day.

According to Tom Porcelli, chief U.S. economist at PGIM Fixed Inflation, the Fed can now remove some of the aggressive tightening they put in place as the inflation rate is drifting close to the target.

"He added, "It's a really powerful idea. It's something we had been hoping that he would do.""

Powell's buzzwords

Powell's past attempts to give lively explanations of Fed policy or its stance on the economy have not been successful.

In 2018, his characterizations of the Fed's efforts to reduce its bond holdings as being on "autopilot" and his assessment that a string of rate hikes had brought the Fed "a long way" from a neutral interest rate sparked criticism from markets.

In 2021, his prediction that inflation would be temporary led the Fed to delay policy action, resulting in the need for three-quarter percentage point rate hikes to control inflation.

Despite Powell's track record and some signs of cracks in the economy, markets expressed confidence in his latest assessment.

"While a larger move may signal greater concern about growth in other contexts, Powell emphasized that this was a joyous cut as ebbing inflation allows the Fed to preserve a strong labor market. Additionally, if policy is set optimally, it should lead to a favorable economic outcome over time, according to Michael Feroli, chief U.S. economist at JPMorgan Chase."

Unless the labor market reverses its slowing pattern that began in April, Still Feroli anticipates that the Fed will need to make a similar-sized move at the Nov. 6-7 meeting following Wednesday's action.

On Thursday, there was positive news regarding employment as the Labor Department announced that the number of weekly unemployment claims had decreased to 219,000, which is the lowest figure since May.

An unusual move lower

The Fed's decision to cut interest rates by half a percentage point was noteworthy because it marks the first time the central bank has made such a move without a looming recession or crisis.

Speculation on Wall Street was that the central bank was playing catch-up to some degree, despite Powell's lack of credence in the idea that the move was a make-up call for not cutting at the July meeting.

"Dan North, senior economist at Allianz Trade, stated that the 50 basis point cut was unusual and may have been caused by the economist feeling that they were falling behind. He added that it had been a long time since the last labor market report had given him pause."

Powell has openly expressed his concerns about the labor market and stated on Wednesday that he believes getting ahead of a potential weakening was a key factor in his decision to recalibrate.

"Seth Carpenter, chief global economist at Morgan Stanley, wrote that the Fed still views the economy as healthy and the labor market as strong, but Powell believes it is time to adjust policy. Powell has demonstrated through the rate cut that the FOMC is capable of making smaller or larger adjustments based on incoming data and changing risks."

The Fed is expected to reduce its accommodation by quarter-point increments through the end of this year and into the first half of 2025, according to a group of carpenters.

According to the CME Group's FedWatch gauge, futures markets traders are pricing in a more aggressive pace that would entail a quarter-point cut in November but back to a half-point move in December.

Aditya Bhave, an economist at Bank of America, observed a shift in the Fed's post-meeting statement that mentioned "maximum employment," which he interpreted as a sign that the central bank is prepared to remain aggressive if the employment situation continues to worsen.

That also means the recalibration could get tricky.

"Bhave stated in a note that he believes the Fed will make more rate cuts than it has suggested, as the labor market is expected to remain sluggish and markets may push for another super-sized cut in the fourth quarter."