Jim Bianco & Joseph Wang on November Fed Meeting: Much Higher For Much Longer!

Episode Summary

Executive Summary: The discussion centered on the Fed’s hawkish November 2022 meeting, where Powell signaled rates likely need to go higher and stay restrictive longer, despite a possible slower pace of hikes. Jim Bianco and Joseph Wang argued the market was focused on the terminal rate, not December’s hike size, while also warning about weak liquidity, bond-market losses, and rising odds of financial stress as tightening continues.

Main Topics: Fed pivot expectations were rejected (Priority: 5/5): The extra sentence on cumulative tightening briefly sparked hopes of a dovish turn, but Powell firmly denied any pause or pivot and emphasized higher ultimate rates. Terminal rate is now the key market focus (Priority: 5/5): Bianco argued markets care less about 50 vs. 75 bp hikes and more about where the Fed ultimately stops, with futures pricing a terminal rate around 5%-5.25%. Labor market strength supports continued tightening (Priority: 4/5): Participants noted strong payrolls, low unemployment, and persistent wage growth as reasons Powell feels no urgency to stop hiking. Yield curve inversion and recession signals (Priority: 4/5): The conversation examined Powell’s preferred forward yield curve measure, which was near inversion, and compared it with traditional recession indicators. Bond market losses and liquidity fragility (Priority: 5/5): Wang and Bianco warned that historic bond losses, poor liquidity, and high issuance could eventually trigger forced selling or a market accident. Treasury buyback uncertainty (Priority: 4/5): Wang said Treasury’s proposed buyback program may not arrive until 2023, leaving liquidity stress unresolved in the near term. Inflation expectations remain too optimistic (Priority: 4/5): Bianco argued forecasters still assume inflation will return to 2% in about a year or two, which he sees as a persistent disconnect from reality.

Key Arguments: Powell’s message was that the destination matters more than the pace; the Fed is likely headed higher than markets expected. The market initially misread the phrase 'cumulative tightening' as dovish, but Powell reversed that interpretation in the press conference. Strong labor data and wage growth mean the Fed can focus almost entirely on inflation rather than full employment. The conventional 'long and variable lags' may be overstated in a financialized economy because markets price tightening immediately. Yield curve inversions still matter, but Powell’s preferred forward curve was only near inversion, not fully inverted yet. The bond market is under severe stress: large losses, poor liquidity, and high issuance increase the risk of a future break. Treasury’s buyback program could help liquidity, but delay means vulnerabilities remain elevated. Most forecasters still assume inflation will revert to 2%, which both guests view as too optimistic and part of the market’s recurring mistake.

Data Points: Fed funds target range after meeting: 3.75% to 4.00% - Fed raised rates by 75 bps at the November 2 FOMC meeting. Market-implied terminal rate: ~5.0% to 5.25% - Bianco said Fed funds futures were pricing the peak level of rates. Expected remaining hikes: ~150 basis points - If futures pricing held, the market expected roughly another 150 bps of tightening. September dot plot terminal rate: 4.6% - Referenced as the prior Fed projection, which Powell implied would now be higher. Average hourly earnings YoY: ~5% - Powell cited wage growth as too high to be consistent with 2% inflation. ADP jobs report: 239,000 - Same-day labor data reinforced the view that the labor market remained strong. Estimated monthly payroll growth needed for population growth: 50,000 to 75,000 - Bianco said current hiring is far above the level needed just to keep up with population growth. Real GDP growth YTD: ~0% - Powell noted essentially no real GDP growth year-to-date despite ongoing job creation. Treasury buyback timing: Earliest likely in 2023 / possibly February refunding - Wang said no buyback decision appeared imminent. Bond market losses ranking: 4th worst year since 1700; worst since 1920 - Bianco cited Bank of America’s historical analysis of government bond market returns. UN/soft landing probability: Still possible but narrower - Powell said a soft landing is still possible, but less likely than before. Yield curve comparison: Powell’s 18-month forward 3-month spread near zero - The Fed’s preferred recession signal was close to inversion.

Pivotal Quotes: "It’s no longer about the journey, it’s about the destination." — Jim Bianco: Explaining that markets care more about the terminal rate than whether the next hike is 50 or 75 bps. "To think, to pause would be very premature." — Jay Powell: Powell’s forceful rejection of any near-term pause in hikes. "We’re probably getting to a point where there’s going to be more dissent within the FOMC." — Joseph Wang: On rising internal Fed disagreement as the economy weakens and unemployment eventually rises.

Implications: Markets should expect more Fed hawkishness, persistent bond-market pressure, and a higher risk of liquidity shocks. The next phase is about terminal rates, internal Fed dissent, and whether inflation/labor data finally weaken enough to slow tightening.