WEBVTT - CIBC's Tucci: Fed Raising Rates Is About Asset Prices (Audio)

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<v Speaker 1>I'm Charlie Pella. Just getting earnings out of splun Kit

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<v Speaker 1>develops web based applications software. It does say it sees

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<v Speaker 1>moments ago, Autodesk second quarter net revenue coming in at

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<v Speaker 1>a drop there of two tenths of one percent. The

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<v Speaker 1>tenure down four thirty seconds, with the yield of one

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<v Speaker 1>barrel one on West Texas Interemedia Crude. I'm Charlie Pellette.

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<v Speaker 1>That's a Bloomberg Business Flash. This is taking stock with

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<v Speaker 1>Bim Box and Kathleen Hayes on Bloomberg Radio. If central

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<v Speaker 1>banks want rates to rise, why do they keep buying

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<v Speaker 1>up all the debt? I mean, doesn't that just increase

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<v Speaker 1>the price, driving yields even lower. Let's find out. Maybe

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<v Speaker 1>Tom Tucci, head of US Treasury Trading at CIBC World Markets,

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<v Speaker 1>has an answer. Tom Tucci, thanks for being with us.

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<v Speaker 1>So can you explain that? Does that make any sense? Well,

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<v Speaker 1>I think it's the magnitude of what you're talking about

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<v Speaker 1>when you say the central banks are looking at the

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<v Speaker 1>raising interest rates. It's only here in the United States

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<v Speaker 1>that they're talking about that, and they're not talking about

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<v Speaker 1>that about raising them too dramatically. But having said that,

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<v Speaker 1>I mean, if they want rates to actually increase, why

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<v Speaker 1>don't they just sell some of the treasuries that are

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<v Speaker 1>on the balance sheet of the US Federal Reserve because

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<v Speaker 1>that creates a complete dislocation of markets in general. The

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<v Speaker 1>Bank of Japan has been buying assets for over two

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<v Speaker 1>decades with none of those assets ever coming back into

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<v Speaker 1>the market. It will happen the same way in the

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<v Speaker 1>United States. These assets will never be sold back into

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<v Speaker 1>the market, So the Federal Reserve will orchestrator maintain the

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<v Speaker 1>structure of interest rates through the actual overnight rate itself.

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<v Speaker 1>All right, And of course we just spoke to Rob

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<v Speaker 1>Kaplan here on taking stock here in Jackson Hall, Wyoming

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<v Speaker 1>at the Big FED symposium today. Rob, of course President

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<v Speaker 1>Dallas Fed and met it wasn't talking as much about

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<v Speaker 1>bond buying. My uh, Tombody did say, basically, as Steve

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<v Speaker 1>Matthews are Bloomberg News reporter here who helped cover the interview,

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<v Speaker 1>negative rates in the US. Forget about it that Rob

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<v Speaker 1>Kaplan says will distort the banking stem. It just wouldn't

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<v Speaker 1>work here. Does that give you any comfort that at

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<v Speaker 1>least one beneficial saying even if we you know, even

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<v Speaker 1>if we don't have room to cut rates in a recession,

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<v Speaker 1>we're not going to go there, right I think happing

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<v Speaker 1>the biggest thing that's happening right now is all the

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<v Speaker 1>central banks realized that these negative interest rates that we're

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<v Speaker 1>seeing out of the Bank of Japan and the CD

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<v Speaker 1>they're not working. The question is what is their alternative,

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<v Speaker 1>And to date they don't have a solution. They don't

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<v Speaker 1>have a transition mechanism or an alternative to move away

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<v Speaker 1>from that. And they're concerned about moving away from that

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<v Speaker 1>because what it will do to asset prices as a whole.

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<v Speaker 1>So they walk this fine line. The interest rate policy,

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<v Speaker 1>the monetary policy that they've established creates this kind of

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<v Speaker 1>asset inflation that we've been experiencing now for years, and

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<v Speaker 1>by pulling away they would deflate that. And so it's

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<v Speaker 1>a very fine line that they're walking. They've painted themselves

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<v Speaker 1>in the picture. And I would imagine that the symposium

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<v Speaker 1>that we're having here at Jackson Hole, we're going to

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<v Speaker 1>talk about a lot of different al henatives. A lot

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<v Speaker 1>of different ideas are going to be thrown on the table.

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<v Speaker 1>Not that I think that they have one uh cemented,

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<v Speaker 1>but I think a lot of people have to rethink

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<v Speaker 1>of policy, structure, economy outlooks, inflation outlooks. All these things

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<v Speaker 1>have to change, and I think they're trying to adapt

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<v Speaker 1>to that. Well, if all these things have to change, tom,

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<v Speaker 1>I mean, isn't that going to create that very chaotic

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<v Speaker 1>and dislocated situation that you just described a moment ago.

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<v Speaker 1>I think it's how it's managed. If you think about it.

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<v Speaker 1>From the first part of our conversation, you talked about

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<v Speaker 1>raising interest rates. I don't think it's the FEDS intentions

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<v Speaker 1>the significantly raised interest rates. If you look at their

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<v Speaker 1>forward forecasts, which haven't been very correct, but their outlook

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<v Speaker 1>has been more consistent of late, they've reduced their expectations

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<v Speaker 1>for where they think the neutral terminal FED funds rate is,

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<v Speaker 1>so that's pretty well established. I think everybody agrees that

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<v Speaker 1>they don't expect rates to move up to what we've

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<v Speaker 1>seen historically in the past, where rates have had to

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<v Speaker 1>move significantly higher because we currently don't have an inflationary

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<v Speaker 1>type environment. So when we talk about why are they

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<v Speaker 1>raising rates, I personally don't think it has anything to

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<v Speaker 1>do with anything other than asset prices. We don't have

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<v Speaker 1>an inflationary picture. The economy as a whole, as far

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<v Speaker 1>as GDPs calculated, certainly isn't overheating. We do have a

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<v Speaker 1>stronger employment picture. But if you listen to a lot

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<v Speaker 1>of the FED members, including the Chairman themselves, they still

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<v Speaker 1>think there's some slack there, and I do believe that

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<v Speaker 1>the makeup of them of employment is different than what

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<v Speaker 1>it was even three or four years ago. So it's

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<v Speaker 1>how they communicate the message about what it is that

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<v Speaker 1>they're doing with interest rate policy and how they're going

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<v Speaker 1>to restructure that in order for the market to understand,

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<v Speaker 1>and we don't get that type of volatility or that

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<v Speaker 1>asset selling that might happen if we were going into

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<v Speaker 1>an extreme interest rate rising environment. Tom Today we had

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<v Speaker 1>Rob Kaplan say he's patient on raising rates. Oh, patient, patient, patients,

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<v Speaker 1>Steve Matthews said, implicitly, he seems to be one who's

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<v Speaker 1>not necessary pushing for September at all, right for the

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<v Speaker 1>rate high we had Jacob Frankel, who is the former

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<v Speaker 1>head of the Bank of Israel and he's the chairman

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<v Speaker 1>of JP and work in Chase International. They've got a move,

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<v Speaker 1>he said, and he thinks they're helping to distort investment decision.

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<v Speaker 1>It may not be the inflation problem, it's getting back

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<v Speaker 1>to a more normal kind of financial markets in relationship

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<v Speaker 1>with investing, which is so lacking in this country right now.

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<v Speaker 1>What do you expect you from Janet Yellen tomorrow? That's

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<v Speaker 1>the big speech tomorrow morning, right, and you know, I

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<v Speaker 1>think that what's happening here is you have seen several

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<v Speaker 1>of the FED members, particularly some of the ones that

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<v Speaker 1>you would consider in the inner circle. And what I

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<v Speaker 1>mean by that as Fisher and Dudley have come across

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<v Speaker 1>a little bit more hawkish in the last week, and

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<v Speaker 1>I personally think it's a direct result of where the

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<v Speaker 1>stock market has been asset prices in general. Bill Dudley

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<v Speaker 1>even mentioned the fact that he was surprised at how

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<v Speaker 1>low the yield was on the turn your note, So

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<v Speaker 1>I think it's in response to that. The problem the

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<v Speaker 1>dislocation in the marketplaces right now are if you remember

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<v Speaker 1>two years ago when the Feds are to their tapering

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<v Speaker 1>and the potential for tightening, the markets swung and a

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<v Speaker 1>complete uh parish direction, and that we were expecting significantly

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<v Speaker 1>higher interest rates. Well we've spent two years trimming that down,

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<v Speaker 1>even the Fed, as I said earlier, trimming down their

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<v Speaker 1>forecast where they think that neutral funds rate is. And

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<v Speaker 1>what you have now is a situation where the Fed

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<v Speaker 1>loss their credibility. They've talked tough many times and never

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<v Speaker 1>followed through with any action. So I think Jenny Yellen

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<v Speaker 1>is going to help smooth out that credibility tomorrow. God

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<v Speaker 1>leave it there. With Tom Tucci from CNBC World Markets,

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<v Speaker 1>I'm Kathleen Hayes along with Pim Fox. Day one of

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<v Speaker 1>our Jackson Hole coverage. This is Bloomberg coming up. Bloomberg

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