The Fed’s Inflation Fight Isn’t Over | Jim Bianco & Samuel Rines (Camp Kotok)

Episode Summary

Executive Summary: The discussion centers on inflation staying stickier than the headline CPI suggests, due to base effects, persistent services pricing, and corporate ability to maintain higher prices. Jim Bianco argues the Fed may need more hikes and that long-term yields can rise toward 5% as neutral rates normalize, while Sam Rines says companies are still passing through high-single-digit pricing and capturing margin, making disinflation hard to transmit to consumers. Both see meaningful implications for bonds, equities, and risk assets.

Main Topics: Headline inflation vs. underlying stickiness (Priority: 5/5): Bianco explains that headline CPI has fallen sharply from its peak, but upcoming base effects from gasoline could reaccelerate the year-over-year figure, making inflation look less disinflationary than the market assumes. Corporate pricing power and margin recovery (Priority: 5/5): Rines argues consumer-facing companies are still raising prices in the high single digits to low double digits, and commodity disinflation is mostly helping margins rather than consumers. Services inflation persistence (Priority: 4/5): The speakers emphasize that services inflation remains sticky because labor is scarce and expensive, and even small add-ons like restaurant extras show continued pricing pressure. Fed policy path and potential additional hikes (Priority: 5/5): Both guests suggest the Fed may not be done tightening; they discuss the possibility of more rate hikes if inflation remains around 3% to 4%. Bond market and long-end yield outlook (Priority: 5/5): Bianco argues the 10-year Treasury could move toward 5% and that fair value is higher than current levels if inflation settles near 3%, while Rines says the long end will be pressured if the Fed stays restrictive. Equity allocation in a higher-rate world (Priority: 4/5): The conversation shifts to how risk-free yields around 5% compete with stocks, especially for long-term investors, and why non-megacap equities and short-duration positioning may be preferable. No-landing economic scenario (Priority: 4/5): The speakers lean toward a no-landing view: the consumer remains resilient, unemployment is low, and spending continues despite higher rates, reducing recession risk in the near term.

Key Arguments: Headline CPI can rebound due to base effects even if underlying inflation is moderating only slowly. Corporate America is still exercising strong pricing power, which keeps inflation sticky and preserves margins. Commodity disinflation is not being passed through meaningfully to consumers; it is accruing to company profits. Services inflation is likely to remain elevated for years because labor costs and tipping/add-on charges are sticky. The Fed may need to hike again if inflation stays near 3% to 4%, and markets may be underestimating that risk. The 10-year Treasury’s fair value could be around 5% if the Fed funds rate normalizes near 3.5% and the term premium is restored. Higher short-term yields create real competition for equities, especially for investors seeking long-term, lower-risk returns. The U.S. economy has absorbed more than 500 basis points of hikes with limited pain so far, suggesting policy may not yet be sufficiently restrictive. Currency markets should be watched first because they lead macro conditions, while bond markets ultimately impose the harshest adjustment. A no-landing economy, with employment and wealth effects intact, supports continued consumer spending and pricing power.

Data Points: Peak CPI inflation (year-over-year): 9% - Bianco notes inflation peaked about a year earlier at this level. CPI inflation by June (year-over-year): 3% - Used to show headline inflation has fallen sharply from peak. Expected July CPI monthly change: 0.4% - Bianco says this would replace a 0.0% base effect from last year and lift year-over-year inflation. Prior July monthly CPI base effect: 0.0% - Referenced as last year's unusually low comparison month due to gasoline prices. Prior August monthly CPI base effect: 0.2% - Bianco says last year’s August comparison was also low. Current inflation regime discussed: ~3% to 4% - Both speakers use this range as the likely sticky inflation zone. Consumer company pricing increases: High single digits to low double digits - Rines describes ongoing pricing by firms like P&G, Coke, Pepsi, McDonald’s. Long-run inflation assumption: 3% - Used in the fair-value estimate for the 10-year Treasury. Neutral funds rate assumption: 3.5% - Derived as 50 bps above long-run inflation per John Williams. Normalized term premium: 150 bps - Bianco uses this to estimate fair value for the 10-year Treasury. Fair value for the 10-year Treasury: 5% - Calculated from 3.5% funds rate plus 150 bps term premium. 10-year Treasury recent level: 4.21% - Bianco notes the yield was near the prior cycle peak in early August. Prior cycle peak for 10-year Treasury: 4.24% - October 2022 peak referenced as a benchmark. Fed funds rate range: 5.25% to 5.50% - Current policy range at the time of the interview. Possible future Fed funds rate: 5.75% to 6.00% - Bianco says two more hikes could get the Fed into this area. Average hourly earnings growth: 4.4% year-over-year - Used to support the view that consumers still have income growth. Unemployment rate: 3.5% - Referenced as evidence of labor-market resilience. Long-term stock market average return: About 9% per year - Mentioned in the discussion of equity vs. cash-like alternatives. Fed hikes already delivered: More than 500 basis points - Bianco says the economy has absorbed this with limited pain. Potential additional Fed hikes discussed: 2, 3, or even 4 - Rines suggests continued tightening is possible if inflation stays sticky. Potential 10-year Treasury range: 5% to 5.5% or 6% - Discussed as plausible if the Fed remains hawkish or signals tolerance for higher inflation.

Pivotal Quotes: "There seems to be a big base effect in inflation... Your year-over-year from 3.4 will jump to 3.4 from 3%." — Jim Bianco: Explaining why headline CPI can reaccelerate even if monthly inflation is not exploding. "You’re beginning to see the disinflation on the commodity front really show up on the margins." — Samuel Rines: Describing how corporate profits are benefiting while consumer prices remain elevated. "There is an alternative now in a money market fund." — Jim Bianco: Making the case that higher risk-free yields now compete directly with equities.

Implications: Investors should expect sticky inflation, possible additional Fed hikes, and higher-for-longer yields. That favors short-duration bonds, caution on long bonds, and selective equity exposure, especially outside mega-cap tech, if no recession materializes.