The savings rate began this year at 4.4% and is now below 3%, a level Dominic Konstam says has never been sustained.
The market wants reassurance that the Federal Reserve will not overdo it. Konstam's argument is the reverse: the thing that would hurt the long end is the committee suggesting it is nearly finished, because an elevated underlying inflation rate needs a full tightening cycle rather than one or two insurance moves.
"Well, I think it takes 10-year notes on the way to 5.25% and 5.5%."
Konstam writes rates research at Mizuho and was at Credit Suisse with Bloomberg Intelligence's Ira Jersey years ago. He reads Kevin Warsh's Jackson Hole line about underlying inflation as the most important thing the chairman has said.
The full segment is covered here so you can skip it.
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👤 Guest: Dominic Konstam, rates strategist at Mizuho, previously at Credit Suisse
🎙️ Hosts: Tom Keene and Paul Sweeney, who anchor Bloomberg Surveillance
🧩 Other segments: George Noble, Managing Partner of Noble Capital Advisors; Marina Zavolock, Chief European Equity Strategist at Morgan Stanley; and Sinjin Bowron of Beach Point Capital
📰 Published: 15 September 2026 on the Bloomberg Surveillance feed
🟣 Apple Podcasts | 🔗 Episode page | ⏱️ length not available
Key Takeaways
A one-and-done message would push the 10-year to 5.25% and then 5.5%, on his estimate
What the back end wants is either silence on the path or a commitment to see the cycle through
Warsh has changed the Fed's model of inflation, not just its forecast
Under Powell underlying inflation was low and the readings were shocks; Warsh treats the shocks as already embedded in the trend
This is a proper tightening cycle of three hikes, possibly four, not insurance cuts in reverse
The consumer has already spent its buffer, which is why he thinks 100 basis points would be enough to slow the economy
The savings rate went from 4.4% to under 3% to absorb the oil price
He says the dual mandate really is in conflict, and bringing inflation down means deepening a negative demand shock
Bessent's buyback program did not work because the Treasury bought at a discount rather than through the market
1. Warsh Changed the Model
Keene opened by asking why the chairman cannot simply do one hike and wait for more data, given Konstam's published view that three increases are possible.
His answer is that the framework moved, not the data. Warsh has shifted the Fed's gears in how it looks at inflation, highlighting the view "that underlying inflation is higher than they" want it to be.
Under the previous chair the reading was the opposite. "And prior to Warsh, Powell would have had a view that underlying inflation was actually relatively low and was just dealing with a lot of shocks that are going through the system."
Keene put the distinction in his own terms: Warsh as conventional with trend analysis and committed to a higher inflation rate, against Powell and Christopher Waller reading the same data as a shock moment.
The problem with waiting is the mechanism, not the politics. Patience works, he said. "But the trouble with patience is if it goes on sort of too long and you keep waiting, waiting, then basically those shocks get embedded into the trend is kind of the issue." Warsh's view, he said, is that this has already happened.
So he takes the Fed at its word. "And the idea is, yes, I mean, this isn't like one or two insurance hikes. This is a series of hikes. Three is a reasonable, could be four." The market, he said, will price a proper tightening cycle.
2. Unanimity Matters
Sweeney asked how important it is for the committee to present a unified stance.
Konstam said very, and expects it. "I think Warsh will bring along the kind of Powell Fed sort of holdout", producing a near-unanimous move if they hike.
What unanimity buys is credibility on the timetable — a signal of commitment to bringing inflation down in a fairly timely way.
His advice on sequencing is to front-load it. Get it over and done with by early next year, slow the economy, and set up for reacceleration and growth in 2028. "That's the way I would think the politics should work."
The midterms are the complication he names. An October hike is awkward, and people say Warsh is quite political.
On dissent he sees the risk and discounts it. "My guess is a Warsh will be very persuasive and bring them along." If Waller digs in and argues for waiting, the result would be "a bit of a mixed message from the Fed" that markets will not take well.
3. Why the Buybacks Failed
Sweeney turned to the Treasury Secretary, who said several weeks ago he wanted long-term rates down, and asked what happened.
The strategy made sense given the alternative. With Warsh apparently committed to raising rates, the long end was going to struggle to stabilize in an elevated inflation world, so Bessent set out to lean against it — cutting supply, increasing buybacks, signalling an aggressive buyback program.
The execution is where Konstam says it failed. The number was large, and "They didn't really buy through the market."
The Treasury bought bonds at a discount instead, which does not move the price.
His prescription is mechanical. "So if you want to really stabilize rates, we'd argue they'd probably have to be a bit more aggressive in their buybacks and basically buy through the market, buy prices higher than the mid, basically."
4. The Consumer Has No Buffer
Keene asked what the most efficacious way is for the Fed to bring a nominal GDP he called banana-republic-like back to something normal.
Konstam's first move was to reattribute the nominal growth. A lot of it is oil, including a large contribution from strong state and local government spending, which he checked with the Bureau of Economic Analysis: it comes down to the deflators they use.
High nominal GDP is not the thing to fix. "Ironically, it kind of is vaguely helpful in terms of debt GDP to have an elevated nominal GDP."
The real concern is real GDP and the household that carries it. "The real concern, I think, is the real GDP, and that if the Fed's hiking to slow the economy and bring inflation down, the consumer is kind of teetering a little bit here because they've cut their savings rate so much to accommodate the oil price rise."
The savings-rate arithmetic is the core of the call. "The problem is the savings rate started at 4.4% this year. It's currently below 3%. It's never really been this low on a sustained basis."
Which is why he thinks the required tightening is modest in size. "100 basis point tightening, for example, in our estimates would definitely do that" — slow the consumer significantly.
He also says the price data already show weakening demand. Of the 200 components of the personal consumption expenditures index that Warsh highlights, a number show below-trend pricing and below-trend demand: "That's a negative demand shock."
Keene asked the obvious follow-up — then why raise rates. "Because we're impatient to wait through supply shocks."
And Konstam sided against the chairman on the mandate. Warsh says the dual mandate is in conflict, and "Well, I'm afraid I think the dual mandate is in conflict." Bringing underlying inflation down makes the negative demand shock worse and the economy slower, which is why risk assets are on the back foot for the next few months.
5. What Breaks the Back End
Sweeney asked directly what a one-and-done message would do.
"Well, I think it takes 10-year notes on the way to 5.25% and 5.5%. I think the market would take it very badly."
The two acceptable messages are silence or commitment. Say nothing about how much further they will go, or say plainly that this is a tightening process to be seen through until inflation comes down. "That's kind of what the market wants, to stabilize the back end."
On the task forces the chairman has set up, his read is tactical. They were established, he thought initially, to buy the Fed time past the midterms so it did not have to make difficult decisions — "That seems to have sort of, fallen foul basically of the market."
He puts the probability of no hike in single digits. "I mean, the market obviously thinks there's at least 90% they will." If they do not, deferring to the committees would be the reason.
His closing advice to the chairman is to commit. The Jackson Hole line that underlying inflation is too high was "a very, very profound thing" the market was slow to understand, and if Warsh believes it, "I think he has to go all in and basically say they're going to raise rates until the job is done."
The problem is not only American. Debt ratios have deteriorated everywhere since the pandemic with no proper fiscal tightening, so "term premium are high everywhere" and central banks are being pushed to tighten in place of governments. The European Central Bank has been more forceful, the United Kingdom is catching up in pricing, and he expects the Bank of Japan to tighten aggressively in the end.
Keene's own market read alongside it covered German-French spreads he called jaw-dropping, a 10-year Japanese yield well outside a two-standard-deviation move, and the Philippine peso.
Bonus Insights
Keene refused to circulate the research note on air. He praised what he called the Konstam parchment and then said the program protects the copyright of all its guests.
The task-force joke was on both of them. Keene said he expected Konstam to be picked for one, and that Ira Jersey got it instead — the two of them having been at Credit Suisse together years ago. Konstam's answer: it was him or Ira.
The segment ended on a retirement tribute. Keene asked whether Mizuho is a quieter and more stable place since Steve Ricchiuto retired. Konstam allowed that it is definitely quieter and would not say more stable, and Keene gave Ricchiuto a shout-out for decades of work parsing gross national product.
Konstam's bottom line is that the market's fear of the Fed overdoing it is the wrong fear: the danger to the long end is a committee that hints it is nearly finished, because underlying inflation now needs a three-to-four-hike cycle carried through, and the consumer — with a savings rate already under 3% — will slow on about 100 basis points of it.
Products, Companies & Tools Mentioned
Mizuho (Konstam's firm and the source of the three-to-four hike call and the 5.25% to 5.5% 10-year estimate)
The Federal Reserve (Warsh's Jackson Hole framing of underlying inflation, the task forces, and the dissent risk from Waller)
The US Treasury (The buyback program Konstam says failed because it bought at a discount rather than through the market)
The Bureau of Economic Analysis (He went to them directly on the deflators driving state and local spending in nominal GDP)
The European Central Bank and the Bank of Japan (More forceful and further behind respectively, in a world where term premium is high everywhere)
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