James Carville, the iconic political strategist credited as the key architect of former President Bill Clinton's first election victory, once claimed he'd like to reincarnate not as a famous athlete, or indeed the Pope, but as 'the bond market'.
"You can intimidate everybody,” he said.
Bond traders are doing their best to push back against the Federal Reserve this week, for sure, in the wake of the surprising-hawkish signaling that followed its highly-anticipated rate hike.
Fed Chair Powell told reporters in Washington that not only are there more rate hikes to come, but when the central bank finally reaches its so-called 'terminal rate', it's likely to stay there until at least the end of next year.
"Our focus right now is really on moving our policy stance to one that's restrictive enough to assure a return of inflation to 2% goal over time," Powell said during his question-and-answer session with the media Wednesday. "And we think that we'll have to maintain a restrictive stance of policy for some time."
Fresh inflation forecasts suggest the Fed's preferred gauge, the core PCE Price Index, will likely ease to 3.5% -- still firmly ahead of its 2% target -- as the economy flatlines and unemployment surges to 4.6%.
But there won't be a recession.
"It won't feel like a boom," Powell said. "It will feel like very slow growth."
No one's talking about booms today: November retails sales were the weakest in eleven months, even with a pullback in gas prices and a surge in Black Friday spending. Industrial output was softer-than-expected, global oil prices are hovering near the lowest levels of the year and Fed surveys of regional activity for the month of November came in well below Street forecasts.
"I don't think anyone knows whether we'll have a recession or not," Powell said Wednesday. "And if we do, whether it's going to be a deep one or not."
Bond markets aren't so sure: the gap between 2-year and 10-year Treasury note yields, one of the market's most-watched recession indicators, remains firmly inverted, with the former trading at 4.240%, some 80 basis points north of the latter, which are pegged at 3.443%.
That inversion suggests two things: firstly, that traders, while mindful of the Fed's hawkishness, aren't buying into its projections of a Fed Funds rate that will hit 5.1% by the spring.
But it also indicates that they *are* keen on buying more longer-term bonds as a defense against weaker growth prospects.
"Real GDP will likely be flat in the fourth quarter, with holiday sales disappointing, industrial production down, and housing activity much weaker than early this year," said Bill Adams, chief economist for Comerica Bank in Dallas, which forecasts a "mild recession" over the first half of next year. "Real GDP probably grew 1.9% for the full year of 2022, but is likely to be down slightly (-0.2%) in 2023."
Powell also told reporters in Washington that Fed projections don't include any kind of rate cut in 2023, warning that 'historical experience cautions strongly against prematurely loosening policy."
Not too many investors appear to agree.
The CME Group's FedWatch, which tracks movements in Fed Funds futures trading, suggests the Fed will likely pause its rate hike cycle after a final increase March, to a range of between 4.75% and 5%, and could even begin cutting by the latter part of the year, as inflation slows and the economy tips into recession.
Right now, the bond market bullies haven't broken the Fed's spirit.
But they've definitely drawn a line in the sand.
