Economics

The Fed has set out on a ‘recalibration’ of policy. Here’s what Powell’s new buzzword means

Published

5 months ago

September 19, 2024

Fed Chair Powell: We know it's time to recalibrate our policy

Federal Reserve Chair Jerome Powell has unveiled his latest buzzword to describe monetary policy, with a “recalibration” of policy at a pivotal moment for the central bank.

At his news conference following Wednesday’s open market committee meeting, Powell used variations of the word no fewer than eight times as he sought to explain why the central bank took the unusual step of a half percentage point rate cut absent an obvious economic weakening.

“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.

Financial markets weren’t quite sure what to make of the chair’s messaging in the meeting’s immediate aftermath.

However, asset prices soared Thursday as investors took Powell at his word that the unusually outsized move wasn’t in response to a substantial slowing of the economy. Rather, it was an opportunity to “recalibrate” Fed policy away from a rigid focus on inflation to a broader effort to make sure a recent weakening of the labor market didn’t get out of hand.

The Dow Jones Industrial Average and S&P 500 jumped to new highs in trading Thursday after swinging violently Wednesday.

“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,” said 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.”

Powell’s buzzwords

Several of Powell’s previous efforts to provide buzzy descriptions of Fed policy or its views on the economy haven’t worked out so well.

In 2018, his characterizations of the efforts to reduce its bond holdings as being on “autopilot,” as well as his assessment that a string of rate hikes the same year had brought the Fed “a long way” from a neutral interest rate spurred blowback from markets.

More famously, his insistence that an inflation surge in 2021 would prove “transitory” ended up causing the Fed to be slow-footed on policy to the point where it had to enact a series of three-quarter percentage point rate hikes to pull down inflation.

But markets expressed confidence in Powell’s latest assessment, despite this track record and some signs of cracks in the economy.

The Fed has underestimated the extent of their 'new language' in cutting, says Narayana Kocherlakota

“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,” Michael Feroli, chief U.S. economist at JPMorgan Chase, said in a client note. “Moreover, if policy is set optimally, it should return the economy to a favorable place over time.”

Still Feroli expects the Fed will have to follow up Wednesday’s action with a similar-sized move at the Nov. 6-7 meeting unless the labor market reverses a slowing pattern that began in April.

There was some good news on the jobs front Thursday, as the Labor Department reported that weekly claims for unemployment benefits slid to 219,000, the lowest since May.

An unusual move lower

The half percentage point — or 50 basis point — cut was remarkable in that it’s the first time the Fed has gone beyond its traditional quarter-point moves absent a looming recession or crisis.

Though Powell did not give credence to the notion that the move was a make-up call for not cutting at the July meeting, speculation on Wall Street was that the central bank indeed was playing catch-up to some degree.

“This is a matter of maybe he felt like they were getting a little bit behind,” said Dan North, senior economist or North America at Allianz Trade. “A 50 basis point cut is pretty unusual. It’s been a long time, and I think it was maybe the last labor market report that gave him pause.”

Indeed, Powell has made no secret of his concerns about the labor market, and stated Wednesday that getting in front of a potential weakening was an important motivator behind the recalibration.

“The Fed still sees the economy as healthy and the labor market as solid, but Powell noted that it is time to recalibrate policy,” wrote Seth Carpenter, chief global economist at Morgan Stanley. “Powell has stressed and proven with this rate cut that the FOMC is willing to move gradually or make bigger moves depending on the incoming data and evolution of risks.”

Fundstrat's Tom Lee: Fed cuts set up strong markets next few months but election uncertainty remains

Carpenter is among the group that expects the Fed now can dial down its accommodation back to quarter-point increments through the rest of this year and into the first half of 2025.

Futures markets traders, though, 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, according to the CME Group’s 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 mention he took to indicate that the central bank is ready to stay aggressive if the jobs picture continues to deteriorate.

That also means the recalibration could get tricky.

“We think the Fed will end up front-loading rate cuts more than it has indicated,” Bhave said in a note. “The labor market is likely to remain tepid, and we think markets will push to do another super-sized cut in 4Q.”

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Economics

Germany’s election will usher in new leadership — but might not change its economy

Published

1 day ago

February 21, 2025

Business Finance News

Production at the VW plant in Emden.

Sina Schuldt | Picture Alliance | Getty Images

The struggling German economy has been a major talking point among critics of Chancellor Olaf Scholz’ government during the latest election campaign — but analysts warn a new leadership might not turn these tides.

As voters prepare to head to the polls, it is now all but certain that Germany will soon have a new chancellor. The Christian Democratic Union’s Friedrich Merz is the firm favorite.

Merz has not shied away from blasting Scholz’s economic policies and from linking them to the lackluster state of Europe’s largest economy. He argues that a government under his leadership would give the economy the boost it needs.

Experts speaking to CNBC were less sure.

“There is a high risk that Germany will get a refurbished economic model after the elections, but not a brand new model that makes the competition jealous,” Carsten Brzeski, global head of macro at ING, told CNBC.

The CDU/CSU economic agenda

The CDU, which on a federal level ties up with regional sister party the Christian Social Union, is running on a “typical economic conservative program,” Brzeski said.

It includes income and corporate tax cuts, fewer subsidies and less bureaucracy, changes to social benefits, deregulation, support for innovation, start-ups and artificial intelligence and boosting investment among other policies, according to CDU/CSU campaigners.

“The weak parts of the positions are that the CDU/CSU is not very precise on how it wants to increase investments in infrastructure, digitalization and education. The intention is there, but the details are not,” Brzeski said, noting that the union appears to be aiming to revive Germany’s economic model without fully overhauling it.

“It is still a reform program which pretends that change can happen without pain,” he said.

Geraldine Dany-Knedlik, head of forecasting at research institute DIW Berlin, noted that the CDU is also looking to reach gross domestic product growth of around 2% again through its fiscal and economic program called “Agenda 2030.”

But reaching such levels of economic expansion in Germany “seems unrealistic,” not just temporarily, but also in the long run, she told CNBC.

Germany’s GDP declined in both 2023 and 2024. Recent quarterly growth readings have also been teetering on the verge of a technical recession, which has so far been narrowly avoided. The German economy shrank by 0.2% in the fourth quarter, compared with the previous three-month stretch, according to the latest reading.

Europe’s largest economy faces pressure in key industries like the auto sector, issues with infrastructure like the country’s rail network and a housebuilding crisis.

Dany-Knedlik also flagged the so-called debt brake, a long-standing fiscal rule that is enshrined in Germany’s constitution, which limits the size of the structural budget deficit and how much debt the government can take on.

Whether or not the clause should be overhauled has been a big part of the fiscal debate ahead of the election. While the CDU ideally does not want to change the debt brake, Merz has said that he may be open to some reform.

“To increase growth prospects substantially without increasing debt also seems rather unlikely,” DIW’s Dany-Knedlik said, adding that, if public investments were to rise within the limits of the debt brake, significant tax increases would be unavoidable.

“Taking into account that a 2 Percent growth target is to be reached within a 4 year legislation period, the Agenda 2030 in combination with conservatives attitude towards the debt break to me reads more of a wish list than a straight forward economic growth program,” she said.

Change in German government will deliver economic success, says CEO of German employers association

Franziska Palmas, senior Europe economist at Capital Economics, sees some benefits to the plans of the CDU-CSU union, saying they would likely “be positive” for the economy, but warning that the resulting boost would be small.

“Tax cuts would support consumer spending and private investment, but weak sentiment means consumers may save a significant share of their additional after-tax income and firms may be reluctant to invest,” she told CNBC.

Palmas nevertheless pointed out that not everyone would come away a winner from the new policies. Income tax cuts would benefit middle- and higher-income households more than those with a lower income, who would also be affected by potential reductions of social benefits.

Coalition talks ahead

Following the Sunday election, the CDU/CSU will almost certainly be left to find a coalition partner to form a majority government, with the Social Democratic Party or the Green party emerging as the likeliest candidates.

The parties will need to broker a coalition agreement outlining their joint goals, including on the economy — which could prove to be a difficult undertaking, Capital Economics’ Palmas said.

“The CDU and the SPD and Greens have significantly different economic policy positions,” she said, pointing to discrepancies over taxes and regulation. While the CDU/CSU want to reduce both items, the SPD and Greens seek to raise taxes and oppose deregulation in at least some areas, Palmas explained.

The group is nevertheless likely to hold the power in any potential negotiations as it will likely have their choice between partnering with the SPD or Greens.

“Accordingly, we suspect that the coalition agreement will include most of the CDU’s main economic proposals,” she said.