Dow surges to record as investors celebrate Fed's 'recalibration' rate cut

By William Watts

Recalibration sounds a lot better than recession.

U.S. stocks roared higher Thursday, with the Dow Jones Industrial Average DJIA topping the 42,000 milestone for the first time and the S&P 500 SPX also surging to a record close, a day after Federal Reserve Chair Jerome Powell repeatedly used variations on the word "recalibrate" to describe the decision to deliver an extra-large, 50-basis-point interest-rate cut to kick off a new easing cycle.

"We know that it is time to recalibrate our policy to something that is more appropriate given the progress on inflation and on employment moving to a more sustainable level, so the balance of risks are now even," Powell told reporters Wednesday in explaining the Fed's decision. Stocks fell back to end modestly lower Wednesday after all the hoopla, but bounced hard on Thursday.

Recalibration was seized on by analysts and commentators in the wake of the Fed decision, with the shift toward a more neutral stance getting the credit for a global equity rally on Thursday.

L. Thomas Block, Washington policy strategist at Fundstrat Research, said it "seemed to be the word of the day" for Powell.

See: Powell's recalibration on rates may bring 1995-like boost to stocks: strategist

While bears appeared to find motivation following the end of Powell's Wednesday news conference, the policy pivot described by the Fed chair emboldened bulls, said Jose Torres, senior economist at Interactive Brokers, in a note.

"Since the global financial crisis, the central bank has undoubtedly been a trusted companion for bullish investors, with the institution's messaging serving to quell volatility in the name of financial stability while generating further upside for asset prices, namely homes, stocks and bonds," he wrote.

Powell's "tone and words yesterday emphasized that the decision reflected a recalibration of their assessment of conditions," said Jim Baird, chief investment officer at Plante Moran Financial Advisors, in emailed comments. The reassessment was also reflected in the Fed's updated economic projections, with inflation falling faster than expected and unemployment rising more than was baked into their previous forecast in June.

"Whether or not the central bank will get the timing right and stick the landing remains to be seen, but the message that policymakers and the glide path for interest rates isn't already locked in was an important one for markets," Baird said.

Nicholas Colas, co-founder of DataTrek Research, said recalibration was Powell's "word of the day" as he laid out a credible argument that appeared to convince investors that the larger-than-usual cut was consistent with a midcycle adjustment, rather than the onset of a recession.

"Powell's messaging of 'slow and steady' rate reductions may be disappointing to some, but it does remove the worry that a 50-basis-point cut is only consistent with a rapidly weakening U.S. economy," Colas wrote. "This was likely his one goal for [Wednesday's] press conference and, in our view, he succeeded."

-William Watts

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09-19-24 1620ET

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