Joseph Wang & Nick Timiraos: What You Need To Know For The November Fed Meeting

Episode Summary

Executive Summary: The conversation previewed the November FOMC meeting, focusing on whether the Fed will signal a slower pace of hikes without signaling a true “pivot.” Nick Timiraos and Joseph Wang argued that the key watchpoint is Powell’s opening language and whether the terminal rate remains above 5%, while also stressing that strong consumers, resilient labor markets, and ongoing balance-sheet runoff complicate the inflation fight.

Main Topics: What would count as a real Fed pivot (Priority: 5/5): The guests argued that a pivot would be visible immediately in Powell’s opening statement and press conference tone, not hidden in minutes. A shift from relentless inflation emphasis to deliberation about slowing hikes would be the signal. 75 bps to 50 bps: pace vs terminal rate (Priority: 5/5): They distinguished between slowing the size of hikes and lowering the ultimate policy peak. Both emphasized that a move to 50 basis points does not necessarily imply a lower terminal rate; it could simply reflect proximity to the destination. Why the consumer is still strong (Priority: 5/5): Joseph Wang and Nick Timiraos highlighted excess savings, strong wages, and continued borrowing as reasons demand remains resilient, making disinflation slower and forcing the Fed to see labor-market weakness before easing up. Quantitative tightening and Fed balance-sheet policy (Priority: 4/5): They discussed whether QT would continue on autopilot, when reserve drain might become problematic, and whether tools like Treasury buybacks, SLR tweaks, or changes to administered rates could preserve runoff without destabilizing markets. Treasury market plumbing and liquidity stress (Priority: 4/5): The guests described weak Treasury market liquidity, heavy issuance, and QT as overlapping sources of strain. They noted that the market may need higher yields or official-sector interventions to absorb supply. Inflation target credibility and expectations (Priority: 4/5): They rejected raising the Fed’s 2% target, warning that changing the target opportunistically would risk unanchoring expectations and damaging the Fed’s credibility. Political pressure and historical analogies (Priority: 3/5): The discussion drew comparisons to Volcker and Burns, emphasizing that Powell faces mounting political pressure as hikes raise unemployment risks, but that Powell likely fears the legacy of being seen as too soft on inflation.

Key Arguments: A real Fed pivot will be signaled in Powell’s first sentence, not buried in meeting minutes; the key change is rhetorical emphasis, not hidden nuance. A slower hiking pace is not the same as a lower terminal rate; the market may misread 75-to-50 bps as dovish when the Fed could still end above 5%. The Fed may not need to settle December’s decision immediately because it still has important data ahead, including inflation and labor readings. Strong consumer balance sheets, excess savings, and robust wage growth support spending and make inflation more persistent. Household debt service remains unusually low because many borrowers locked in long-duration fixed-rate debt before the tightening cycle. QT is likely to remain secondary to the fed funds rate, but reserve scarcity and Treasury market plumbing may eventually force adjustments. Raising the inflation target now would likely undermine credibility and inflation expectations; the Fed will keep publicly reaffirming 2%. The Fed may prefer to front-load hikes now to avoid having to restart later under worse political and economic conditions.

Data Points: Expected November hike: 75 basis points - The market widely expected the Fed to raise rates by 75 bps at the November 2 meeting. Prior hikes this cycle: 475 basis points - Nick referenced that the Fed had already delivered four 75 bps hikes, totaling 475 bps. Terminal rate market pricing: Around 5% in spring 2023 - The conversation described the market as pricing a peak funds rate near 5%. Potential terminal rate view: Above 5% - Joseph said the Fed could slow hikes yet still ultimately end above 5%, possibly 5.5%-6%. Wage growth: 6.5% - Joseph cited the Atlanta wage tracker, saying wage growth remained far above a 2% inflation-consistent pace. Household excess savings: $1.7 trillion - Nick cited a Fed note showing excess savings through June had fallen from $2.3T to $1.7T. Excess savings decline: 25% - Nick said households had decumulated roughly a quarter of their pandemic-era excess savings. Top 50% excess savings: About $1.3 trillion - Nick noted most excess savings were held by the wealthier half of households. Bottom 50% excess savings: About $350 billion - Nick cited the lower-income half still holding meaningful savings. Per-household buffer for bottom 50%: About $5,500 - Nick gave a back-of-the-envelope estimate of excess savings per household for the lower half. Fed balance sheet peak/current: $8.9T peak, about $8.7T current - Nick described the balance sheet as only modestly lower than its peak. QT cap: $95 billion per month - The conversation referenced the Fed’s monthly runoff cap. Mortgage-backed securities on Fed balance sheet: $2.5 trillion+ - Nick and Joseph noted QT still has a large MBS overhang to work through. Household debt service ratio: Near multi-decade lows - Nick highlighted that debt service remains very low despite higher rates. Treasury issuance this year: About $1.5 trillion - Joseph said net Treasury issuance expected this year was extremely large. Pre-pandemic comparable Treasury issuance: About $500 billion - Joseph contrasted current issuance with pre-pandemic levels. Core PCE short-run annualized inflation: High fours to around 5% - Nick discussed recent 3- and 6-month annualized core PCE measures as still too high.

Pivotal Quotes: "The pivot is when he no longer leads off by saying, This is the only thing we're focusing on, and we're just so focused on getting inflation down." — Nick Timiraos: Explaining what would count as a genuine change in Fed communication. "I think what's more important for the market is how high we ultimately go. And we could slow down the pace of hikes, go to 50, and then go to 25, but eventually, end up at a terminal rate that's above 5%." — Joseph Wang: Distinguishing slower hikes from the ultimate policy peak. "They want the policy rate to be the primary tool." — Nick Timiraos: On why QT is intended to remain in the background behind rate policy.

Implications: Listeners should expect a communication pivot before a policy pivot. Slower hikes may come without easing financial conditions much if the terminal rate stays high, while QT and Treasury-market stress remain key risks for 2023.