One word that ignited the global market, Powell said it ten times yesterday!

The power of the Federal Reserve's substantial 50 basis point rate cut continues to ferment, with overnight U.S. stocks rising across the board and "risk appetite" being directly ignited. The Dow, S&P both hit historical highs, with the Nasdaq rising over 3%, and small-cap stocks achieving a seven-day rally. In contrast, defensive sectors, seen as alternatives to bonds, performed poorly, with long-term bond prices falling.

The key that ignited the market today is a word repeated up to ten times in Powell's forty-minute press conference - "recalibration", as "new bond king" Jeffrey Gundlach said in an interview:

'Recalibration' is the keyword for today.

As the name suggests, "recalibration" usually refers to adjusting a policy or standard to improve accuracy. According to the latest market understanding, Powell now interprets this 50 basis point rate cut as a "recalibration," indicating that the Fed is primarily seeking a new neutral interest rate level, rather than the traditional "emergency measures to rescue a weak economy."

A substantial rate cut with no weak economy can be said to be the stock market's most welcome scenario, celebrating with a big rise overnight is only natural.

However, there are opposing voices questioning whether the Fed is using "recalibration" to cover up the fact of a substantial rate cut to address an economic recession. If the economy continues to deteriorate in the future, will the Fed choose more aggressive measures such as a 75 basis point rate cut, and can they continue to use "recalibration" as an excuse then, wouldn't that be a slap in the face?

Affirmative: "Recalibration" Ignites Market Risk Appetite, "S&P 493" May Rise Again

On the day of the Fed rate cut, the overall reaction of U.S. stocks was flat, showing a trend of rising and falling. However, on the day after the rate cut, as investors gained a deeper understanding of Powell's remarks at the press conference, market sentiment changed.

Currently, "recalibration" has replaced "restrictive" and rarely mentioned "recession" as the Fed's new favorite, which has significantly improved risk sentiment. In Powell's press conference, this word was used to describe the Fed's thinking on future interest rate trends.

In his opening remarks, Powell mentioned:

The 50 basis point rate cut reflects our ability to maintain strong confidence in the labor market by appropriately 'recalibrating' policy, while achieving moderate economic growth and sustainable inflation decline to 2%.

When asked by reporters whether interest rates will remain restrictive next year, Powell responded:

We know that it is time to 'recalibrate' our policies to a more appropriate level.

When asked about whether mortgage rates will decrease, he stated:

It is time to start 'recalibrating' the federal funds rate to a more neutral rather than restrictive level.

Regarding how "recalibration" implies policy intent, Deutsche Bank interpreted in its latest report that Powell addressed two communication challenges during the press conference: what a 50 basis point rate cut means for the economy and the Fed's reaction mechanism. On these two issues, Powell provided a description to avoid sending negative signals to the economy and to suppress market expectations of a rapid decline in neutral interest rates.

Some analysts believe that "recalibration" suggests that the Fed is likely to further cut interest rates at the remaining two meetings this year, with the possibility of multiple rate cuts in 2025 and beyond.

Based on this optimistic interpretation, some market participants expect that the recent stock market rally may no longer be limited to large tech stocks, and the "S&P 493" (the 493 stocks in the S&P 500 index excluding the tech "Big Seven Sisters") may rise again.

Chris Shipley, Co-Chief Investment Officer at Fort Washington Investment Advisors, stated that Powell's "recalibration" of interest rates may further drive up small-cap stocks, especially those companies capable of refinancing:

The most interesting part of the market is small-cap stocks... They have more debt and now have the opportunity to refinance at lower rates.

But the question is, is the actual situation as Powell described? Does it have nothing to do with boosting the job market and saving the economy?

Opposition: 50 Basis Point Rate Cut Focuses on Addressing Economic Recession, "Recalibration" is just an Excuse

Philip Marey, a Federal Reserve observer at Rabobank, expressed a different view on Powell's "recalibration":

The argument of 'recalibration' is contradictory to the message that a significant rate cut wants to convey. Powell stated that the current state of the U.S. economy is good, and the rate cut decision this time is to continue maintaining this state.

Using a 50 basis point rate cut to convey a strong economic message to the market? Then why not just cut 75 basis points directly...

Marey first believes that the 50 basis point rate cut is due to the deterioration of the labor market that could lead to a mild economic recession. If the economy suddenly deteriorates in the future, the Fed may have to take more aggressive action, such as cutting rates by 75 basis points. Can they still use "recalibration" to explain it then?

Although the Fed denies that monetary policy lags behind economic conditions, in fact, this is the essence of "recalibration." Powell is just using this more moderate wording to cover up the policy misjudgment and is unwilling to admit that they should have cut rates by 25 basis points in July.

It is worth noting that "New Bond King" Jeffrey Gundlach stated in August that rates should have been cut in July, the U.S. economy doesn't look as good as it seems, and the actual state of the labor market is very bad. In the coming year, a significant rate cut is needed, possibly by 150 basis points.

However, Marey also indicated that if indeed, as Powell said, a 50 basis point rate cut is not the new norm for the future, he still expects the Fed to cut rates by 25 basis points at the upcoming FOMC meetings in November, December, and January next year. The situation after January will depend to a greater extent on the economic policies of the next U.S. government.

Marey also joked that Powell's choice to directly cut rates by 50 basis points may also be to gain support from Democratic colleagues for re-election, as if Trump is re-elected as president, he is likely to step down.

Next, "Prosperity 1995" or "Awkward 2001"? Keep an eye on this data

Is "recalibration" really about pursuing a new neutral interest rate as Powell said, not a new rhythm of rate cuts, or is it a new excuse for the Fed to save a weak economy?

If the facts prove Powell right, then compared to "Prosperity 1995," he is likely to become the "contemporary Greenspan".

Looking back, under the leadership of then-Chairman Greenspan, the Fed initiated a rate cut cycle, raising rates from 3% in early 1994 to 6% in February 1995, successfully guiding the economy to a soft landing, and the U.S. stock market soared. 18 months after the first rate cut on July 6, 1995, the S&P 500 rose by over 40%.

But if Marey and the "New Bond King" turn out to be correct, then what may unfold is "Awkward 2001," where the 50 basis point rate cut may only be the first step in the Fed's open door to easing.

In January 2001, the Fed also aggressively initiated a new round of easing with a 50 basis point rate cut. In a closed-door meeting at the time, Fed Chairman Greenspan stated that the Fed would not signal a sudden sharp drop in the federal funds rate, but rather wanted to convey a more cautious and gradual approach.

However, with the serious impact of the bursting of the internet bubble on the economy, in order to avoid an economic "hard landing," the Fed had to cut rates 10 times that year, directly lowering rates from 6% at the beginning of the year to 1.75% by the end of the year.

So how should we judge? Dario Perkins, Global Macro Director at TS Lombard, has proposed an indicator.

Perkins believes that compared to the slow rise in the unemployment rate currently being watched by the market, a rapid decline in new job additions may truly indicate that the economy is heading towards a recession.