The Federal Reserve's significant interest rate cut of 50 basis points continues to reverberate, with U.S. stocks soaring across the board overnight, igniting a "risk-on" mentality.

The Dow and S&P both reached new historical highs, with the Nasdaq surging over 3%, and small-cap stocks achieving a seven-day winning streak.

In contrast, defensive sectors, seen as bond alternatives, performed poorly, with long-bond prices falling.

The key to igniting the market today was a word repeated ten times in Powell's forty-minute press conference—recalibration.

As the "new bond king" Jeffrey Gundlach said in an interview: 'recalibration' is the keyword of the day.

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As the name suggests, "recalibration" typically refers to adjusting a policy or standard to improve accuracy.

According to the market's latest understanding, Powell now interprets this 50 basis point rate cut as a "recalibration," indicating that the Federal Reserve is focused on seeking a new neutral interest rate level, rather than the traditional "emergency measure to save a weak economy."

A significant rate cut coupled with a non-weak economy is arguably the most welcomed scenario for the stock market, and it is reasonable to celebrate with a big surge overnight.

However, there are dissenting voices that question whether the Federal Reserve is using "recalibration" to mask the fact that the significant rate cut is a response to an economic recession.

If the economy continues to deteriorate in the future, will the Federal Reserve choose more radical measures, such as a 75 basis point rate cut, and continue to use "recalibration" as an excuse, wouldn't that be a slap in the face?

On the day of the Federal Reserve's rate cut, the overall reaction of the U.S. stock market was lukewarm, showing a pattern of rising and then falling.

However, 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 the rarely mentioned "recession" as the new favorite of the Federal Reserve, which cannot be said to have greatly improved risk sentiment.

In Powell's press conference, this term was used to describe the Federal Reserve's thinking about the future direction of interest rates.

In his opening remarks, Powell mentioned that the 50 basis point rate cut reflects our confidence in maintaining a strong labor market through appropriate policy "recalibration," while achieving moderate economic growth and a sustainable decline in inflation to 2%.

In response to reporters' questions about whether interest rates will remain at a restrictive level next year, Powell said: We know that it is time to "recalibrate" our policy to a more appropriate level.

He said in response to a question about whether mortgage rates will decrease: It is time to start "recalibrating" the federal funds rate to a more neutral rather than restrictive level.

Regarding how to hint at policy intentions through "recalibration," Deutsche Bank interpreted in its latest report that Powell mainly elaborated on two communication challenges at the press conference: what the 50 basis point rate cut means for the economy, and the Federal Reserve's response mechanism.

On these two issues, Powell provided a description that avoids sending a negative signal to the economy and suppresses the market's expectations for a rapid decline in the neutral interest rate.

There are also analytical views that "recalibration" reflects Powell's hint that the Federal Reserve is expected to further cut interest rates at the remaining two meetings this year, and there may be multiple rate cuts in 2025, even continuing.

It is also based on the above optimistic interpretation that some market participants estimate that the recent rise in the stock market may no longer be limited to large-cap technology stocks, and the "S&P 493" (the 493 stocks in the S&P 500 index after excluding the technology "seven sisters") may rise again.

Chris Shipley, co-chief investment officer of Fort Washington Investment Advisors, said that Powell's "recalibration" of interest rates may push small-cap stocks further up, especially those companies that have the ability to refinance: The most interesting part of the market is small-cap stocks...

They have more debt, and now they may be able to refinance at lower interest rates.

But the question is, is the actual situation as Powell said?

Is it not related to boosting the job market and saving the economy?

Philip Marey, a Federal Reserve observer at Rabobank, expressed a different view on Powell's "recalibration" rhetoric: The argument of "recalibration" and the message that a significant rate cut wants to convey are contradictory.

Powell said that the current state of the U.S. economy is good, and the decision to cut rates this time is to continue to maintain this state.

To convey the message of a strong economy with a 50 basis point rate cut?

Then why not simply cut rates by 75 basis points... Marey first believes that the 50 basis point rate cut is because the deterioration of the labor market will lead to a mild economic recession.

If the economy suddenly deteriorates in the future, the Federal Reserve may have to take more radical actions, such as a 75 basis point rate cut, and can continue to use "recalibration" to explain?

Moreover, although the Federal Reserve denies that monetary policy is lagging behind the economic situation, in fact, this is the meaning of "recalibration," and Powell is just using this milder rhetoric to cover up policy judgment errors, unwilling to admit that it should have cut rates by 25 basis points in July.

It is worth noting that the "new bond king" Jeffrey Gundlach said in August that it should have cut rates in July, the U.S. economy is not as good as it seems, the actual situation of the labor market is very bad, and there is a need for significant rate cuts in the next year, possibly by 150 basis points.

However, Marey also said that if it is indeed as Powell said, the 50 basis point rate cut is not a new rhythm for the future, then he still expects the Federal Reserve to cut rates by 25 basis points at the FOMC meetings in November, December, and January next year.

And the situation after January will depend more on the economic policies of the next U.S. government.

Marey also joked that Powell chose to cut rates by 50 basis points directly, possibly to gain the support of Democratic colleagues in order to achieve re-election, after all, if Trump is elected president, he is likely to step down.

Is "recalibration" really used to pursue a new neutral interest rate as Powell said, not a new rhythm of rate cuts, or is it a new rhetoric for the Federal Reserve to save a weak economy?

If it turns out that Powell's statement is correct, then compared to "Prosperous 1995," he is expected to become the "contemporary Greenspan."

Looking back at the time, under the leadership of then-Chairman Greenspan, the Federal Reserve started a rate-cutting cycle, raising the interest rate from 3% at the beginning of 1994 to 6% in February 1995, successfully guiding the economy to achieve 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 more than 40%.

But if the views of Marey and the "new bond king" are ultimately proven to be correct, then what is about to be staged may be "Embarrassing 2001," and this 50 basis point rate cut may be just the first step for the Federal Reserve to open the door to easing.

In January 2001, the Federal Reserve also started a new round of easing with a 50 basis point rate cut.

At the closed-door meeting at that time, Federal Reserve Chairman Greenspan said that the Federal Reserve would not send a signal of a sudden and significant decline in the federal funds rate, but wanted to convey a more cautious and gradual attitude.

However, with the collapse of the internet bubble causing a severe impact on the economy, in order to avoid a "hard landing" of the economy, the Federal Reserve had to cut rates 10 times in that year, directly reducing the rate from 6% at the beginning of the year to 1.75% at the end of the year.

So how should it be judged?

Dario Perkins, Managing Director of Global Macro at TS Lombard, proposed an indicator.

Perkins believes that compared to the slow rise in unemployment that the market is now concerned about, the rapid decline in new employment may really indicate that the economy is heading towards a recession.