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Speaker 1: The funny thing is, I think a lot of people

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Speaker 1: are going to see this headline and not really know

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Speaker 1: what it means and why they should care, And I

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Speaker 1: worry that they're going to skip right past it. Don't

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Speaker 1: do that. It's important. This episode is brought to you

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Speaker 1: by nat X, the Binary Options Exchange. Binary options let

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Speaker 1: and spots. Trading involves risk and may not be appropriate

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Speaker 1: for all investors. Hi, and welcome back to Bloomberg Benchmark,

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Speaker 1: a podcast about the global economy. You are listening to

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Speaker 1: this on Thursday, December, but we are recording this on

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Speaker 1: Wednesday the sixteenth, just hours after the FEDS policy meeting.

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Speaker 1: I'm Tory Stiwell, an economics reporter with Bloomberg News in

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Speaker 1: d C. And I'm joined by Akiedo who's in San Francisco,

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Speaker 1: and Dan Moss, who was able to join us by

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Speaker 1: surprise from New York. Hey. Dan, for your baby. Our

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Speaker 1: daughter is still inside her mother. She's having a lie.

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Speaker 1: You know. Joanna and I thought that our daughter would

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Speaker 1: be a fed baby. But we're both kind of relief.

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Speaker 1: Joanna works at Bloomberg as well, so it's a good

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Speaker 1: thing that Bob saw us through the day. Well, it

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Speaker 1: has been an exciting day, so I'm kind of surprised

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Speaker 1: you didn't come today. We've had lots of other stuff going.

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Speaker 1: Still six hours left. Basically, the thing that we have

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Speaker 1: all been waiting for forever to happen has finally happened. Yeah,

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Speaker 1: let's take a listen to this clip of Federal Reserve

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Speaker 1: Chair Janet Yellen just a few hours ago. Earlier today,

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Speaker 1: the Federal Open Mark Committee decided to raise the target

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Speaker 1: range for the federal funds rate by one quarter percentage point,

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Speaker 1: bringing it to one quarter to one half percent. This

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Speaker 1: action marks the end of an extraordinary seven year period

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Speaker 1: during which the federal funds rate was held near zero

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Speaker 1: to support the recovery of the economy from the worst

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Speaker 1: financial crisis in recession since the Great Depression. It also

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Speaker 1: recognizes the considerable progress that has been made towards restoring jobs,

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Speaker 1: raising incomes, and easing the economic hardship of millions of America.

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Speaker 1: So it finally happened. The Federal Reserved raised its benchmark

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Speaker 1: interest rate. It had been near zero for seven years,

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Speaker 1: and it had been a decade since the last increase.

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Speaker 1: Officials took a small step. They increased their target rate

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Speaker 1: by just a quarter of a point. But what a

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Speaker 1: quarter of a point? Right, And by the time our

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Speaker 1: listeners hear this episode, this news is going to be

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Speaker 1: on the front page of many, many newspapers around the

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Speaker 1: country and even around the world. It's maybe even the

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Speaker 1: biggest story in global finance this year. But the funny

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Speaker 1: thing is, I think a lot of people are going

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Speaker 1: to see this headline and not really know what it

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Speaker 1: means and why they should care, And I worry that

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Speaker 1: they're going to skip right past it. Don't do that.

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Speaker 1: It's important. So our mission this week is to tell

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Speaker 1: you what this news means and why you should care,

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Speaker 1: even if you're not a trader on Wall Street. We're

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Speaker 1: going to walk you through the FET's decision with a

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Speaker 1: little bit of background, and then talk to you about

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Speaker 1: what it means for three different players in the U.

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Speaker 1: S economy, the consumer, businesses, and the government, where the

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Speaker 1: FEDS easy money policies have led to more than a

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Speaker 1: little consternation on both sides of the aisle. And since

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Speaker 1: we're a podcast about the global economy, we'll finish by

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Speaker 1: talking about how this will of other nations as well

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Speaker 1: as how they may in turn affect the FED. That's

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Speaker 1: a big mission for twenty minutes, which is less than

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Speaker 1: half the time Chair yell And spent addressing the press

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Speaker 1: this afternoon. So we're bringing in reinforcements. Michelle my deputy

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Speaker 1: head of US Economics at Bank of America Mery Lynch

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Speaker 1: to New York is joining us. Michelle, thank you, What

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Speaker 1: a day you must have had. It was quite the day,

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Speaker 1: but it was a fun day. We finally got to

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Speaker 1: see a reed hike and a little action in terms

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Speaker 1: of policy. Yeah, on a scale of Windleton, how relieved

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Speaker 1: are you that this first hike is finally behind us

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Speaker 1: and we can all stop hyperventilating about it. I would

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Speaker 1: say that's a ten today, But next week I might

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Speaker 1: have a different answer if we start to see some

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Speaker 1: nerves and uncertainty and confusion around what the path of

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Speaker 1: the hiking cycle might look like, and one the second

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Speaker 1: hike might be all right. Well, before we get too

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Speaker 1: far in, let's start with the very basics here. So

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Speaker 1: the FED raised it's benchmark interest rate, the Federal funds rate,

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Speaker 1: and it's the interest rate that banks charge each other

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Speaker 1: when they borrow from each other overnight every single day.

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Speaker 1: To stay compliant with federal regulations, every bank needs a

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Speaker 1: certain amount of cash on hand. And let's say I'm

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Speaker 1: a bank and tory your bank, and let's say on

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Speaker 1: this particular day, my bank needs a million dollars more.

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Speaker 1: So I'll go to you and ask if I could

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Speaker 1: borrow from you just overnight. It's a super super short

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Speaker 1: term loan, and we'll agree on an interest rate together,

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Speaker 1: and I'll pay you back that one million dollars plus

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Speaker 1: that interest that we agreed on the following day. So, uh,

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Speaker 1: the FED doesn't directly control this interest rate, but instead

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Speaker 1: it sets a goal and then it kind of um

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Speaker 1: pokes and prods the markets until they get the actual

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Speaker 1: federal funds rate to the level that they wanted to be.

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Speaker 1: So until today, as a Wednesday, it was between zero

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Speaker 1: and zero point to five. Starting tomorrow Thursday, it's going

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Speaker 1: to be a range between zero point to five and

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Speaker 1: zero point five. Now, on the face of a dozen't

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Speaker 1: sound like very much, but we're talking about the end

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Speaker 1: of an era here. Just those twenty five basis points

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Speaker 1: is something for the history books. Michelle, right, it is

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Speaker 1: because we're coming off of the zero bound, and we're

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Speaker 1: coming off of a period of unprecedented easy policy. The

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Speaker 1: twenty five basis points is still historically a very low

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Speaker 1: interest rate. It's still an accommodative stance of montary policy,

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Speaker 1: but it is relative to the past few years where

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Speaker 1: we were at the zero bound. Why did the FED

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Speaker 1: decide that now was the right time for a hike?

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Speaker 1: You know, it has taken such a long time. We've

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Speaker 1: been near zero since two thousand and eight. Why now, Well,

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Speaker 1: you have to consider that the FED has what's called

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Speaker 1: the dual mandate. They want to achieve full employment, which

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Speaker 1: is measured by the unemployment rate coming in around five

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Speaker 1: percent or so, and they also need to achieve price stability,

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Speaker 1: which means reaching their target of two percent. So they're

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Speaker 1: very closed on the first part of their mandate in

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Speaker 1: uh generating stronger job growth and bringing the unemployment rate lower,

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Speaker 1: but they're not quite yet at the infloyation target of

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Speaker 1: two with core pc inflation currently running about one point. However,

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Speaker 1: said is supposed to be forward looking. Monetary policy works

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Speaker 1: with long lags. On a forward looking basis, if the

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Speaker 1: economy is continued to grow an environment where we're close

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Speaker 1: to full employment, we should be seeing price pressures build

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Speaker 1: in a medium term, which would justify higher interest rates.

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Speaker 1: So our Washington newsroom is quite the creative group of people,

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Speaker 1: and our editor Katerina baked these um cupcakes from scratch

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Speaker 1: and arrange them in the shape of a space shuttle

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Speaker 1: taking off to signify lift off, and they were pretty great. Um.

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Speaker 1: And you know, Michelle and wondering is it right to

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Speaker 1: think of this as a celebratory occasion that the FED

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Speaker 1: has so much confidence in economic recovery that it can

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Speaker 1: now finally do this thing it couldn't do for years.

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Speaker 1: That's quite a creative thing to do. Unfortunately, we didn't

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Speaker 1: have those cupcakes on the trading floor. How long would

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Speaker 1: I have lost it? It's a good point, UM, So

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Speaker 1: I think lift off is probably in an extreme terminology

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Speaker 1: because the FED is going very very slow. Um. Lift

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Speaker 1: off would imply that it's a dramatic adjustment in in policy,

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Speaker 1: and I think the FED worked very hard to suggest otherwise, Yeah,

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Speaker 1: a little detail on those cupcakes. They actually featured like

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Speaker 1: turtles on the cupcakes, really like jet packs because it

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Speaker 1: was like a gradual list off. Brilliant. That completely changed it.

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Speaker 1: In my opinion, that the right assessment, which is we

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Speaker 1: are lifting off this earbound but we're going very very slowly.

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Speaker 1: Um to your point about what is it signal regarding

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Speaker 1: the economy, I think it is true that its signals

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Speaker 1: that they FED has become more convinced about the sustainability

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Speaker 1: of their recovery. They believe that the economy has made

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Speaker 1: significant improvement and should be on a further upward trend,

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Speaker 1: and as a results, interest rates no longer need to

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Speaker 1: be at this emergency policy level. When the era of

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Speaker 1: modern central banking began, and if you want to take

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Speaker 1: as a reference point, we could say the period when

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Speaker 1: the FED began announcing its changes and putting out written

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Speaker 1: text to accompany it, the early nineties saw a series

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Speaker 1: of aggressive interest rate moves, and then at the start

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Speaker 1: of the two thousands there were moves that were less aggressive,

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Speaker 1: but compared with what people anticipate now, they were pretty aggressive.

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Speaker 1: So why the ghost slow now if they're so confident

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Speaker 1: you're right. And that's an extremely important in point, which

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Speaker 1: is that not only is the cycle different because we're

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Speaker 1: at the zero bound and we haven't been in the past,

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Speaker 1: it's different because the FET is saying they are going

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Speaker 1: extremely slow relatives to prior cycles. So what's the concern?

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Speaker 1: I think one of the concerns is that, um, there's

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Speaker 1: not symmetric risks around policy. And what I mean by

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Speaker 1: that is if the set is wrong and economy and

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Speaker 1: is flowing, there's not that much room to cut from here. Yeah,

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Speaker 1: what can they actually do if that happens? I mean,

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Speaker 1: you have two options. One is to further expand the balance,

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Speaker 1: to engage in more quantitative easing, buying treasuries, buying mortgage

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Speaker 1: backed securities. The other option, as other SYR banks have done,

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Speaker 1: is to bring interest rates negative, which they seem very

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Speaker 1: hesitant to do. So neither of those options are desirable clearly,

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Speaker 1: and and and the FET is very hopeful that they

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Speaker 1: won't have to consider that any time in the future. So,

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Speaker 1: if you have asymmetric risks and you're much more worried

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Speaker 1: about being wrong and have gone too fast and being

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Speaker 1: wrong by having gone too slow, you're gonna air on

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Speaker 1: the side of being cautious. Well, this is all awesome

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Speaker 1: background to be armed with as we enter the second

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Speaker 1: half of our show, which is breaking down how all

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Speaker 1: this jargon, a lot of a jargon that we just

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Speaker 1: talked about matters for different players in the U S

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Speaker 1: economies and making this a little more bite size, we're

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Speaker 1: So let's turn to how this is going to impact

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Speaker 1: the various players in our economy, starting with the consumer,

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Speaker 1: which after all, accounts for about seventy of gross domestic product. Michelle,

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Speaker 1: that's steal your estimate. That's right. Consumer spending is about

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Speaker 1: seventy of Gdpezza, pretty you're looking at the share of

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Speaker 1: the economy is a prey slow moving adjustment. Okay, so

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Speaker 1: we're really into the guts of it. Then, how does

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Speaker 1: targeting this one fairly obscure rate that banks used to

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Speaker 1: lend to each other overnight effect what I and our

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Speaker 1: listeners do day to day? Some important question. It doesn't

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Speaker 1: directly influence borring costs, are not immediately I should say, Um,

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Speaker 1: it only influences a consumer household borring costs if the

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Speaker 1: short term rate that the FET is increasing actually translates

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Speaker 1: to higher rates across the curve and influences these longer

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Speaker 1: term rates that consumers are going to be much more

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Speaker 1: sensitive to. And what we saw today after the set

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Speaker 1: hike is let's call flattening out of the curve. Where

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Speaker 1: you did see some pick up in short term interest rates,

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Speaker 1: the long end didn't really move very much. Um. And

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Speaker 1: that's a risk going forward, is that even as a hikes,

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Speaker 1: they don't do very much in terms of of adjusting

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Speaker 1: UM barring costs for for the average consumer, Does this

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Speaker 1: mean that touring and tuck when they want to buy

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Speaker 1: their first home and settle down automatically now have to

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Speaker 1: pay fifty basis points more. It doesn't good news tour

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Speaker 1: you can um No, it doesn't necessarily mean that, you know,

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Speaker 1: you do want to assume that in the environment where

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Speaker 1: the feed is hiking interest rates, there is a risk

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Speaker 1: that your barring costs will head higher in the medium

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Speaker 1: term because if that is tightening policy, but it's not

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Speaker 1: necessarily a one for one or or and the timing

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Speaker 1: is not necessarily clear either. Um So I think you

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Speaker 1: know our view from from our from our strategists on

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Speaker 1: interest rates, um, we expect only a thirty basis point

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Speaker 1: increase in ten year Treasury rates over the course of

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Speaker 1: next year. And that's a pretty good proxy for what

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Speaker 1: you might see for mortgage rates as well. So you're

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Speaker 1: saying mortgage rates aren't going to go up that much

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Speaker 1: because I know over at the National Association of Realtors UH,

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Speaker 1: the chief economists over there sees the thirty year mortgage

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Speaker 1: rate going up to like four and a half. I

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Speaker 1: think by the end of next year. There's a lot

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Speaker 1: of uncertain answer and and and obviously it's possible at

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Speaker 1: the long end of the curvent that moving ending more,

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Speaker 1: especially if we have inflation UM. But our review is

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Speaker 1: that it's going to be a slow cycle and it's

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Speaker 1: going to be a slow adjustment in in in law

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Speaker 1: long data treasuries, which means UM mostly something similar in

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Speaker 1: mortgage rates. But you bring up a really good point,

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Speaker 1: which is that there are there a number of consumer

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Speaker 1: products that are tied to library or short term rates,

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Speaker 1: one of which is for mortgages. If you have an

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Speaker 1: adjustable rate, mortgage library will be heading higher and that

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Speaker 1: could influence how your mortgage rate resets UM. Similarly, certain

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Speaker 1: corporate loans are going to be much more short term UM,

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Speaker 1: and that that could be that could be heading higher. Right.

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Speaker 1: You know, Michelle, I used to be a Federal Reserve

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Speaker 1: reporter until about a year ago, and my job was

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Speaker 1: to travel to all these different parts of the country

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Speaker 1: and cover these speeches that Federal Reserve officials gave. And

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Speaker 1: after basically every single speech, at least one person would

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Speaker 1: raise their hand and be like, you know, I'm a

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Speaker 1: senior citizen, I'm or you know, my mother is a

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Speaker 1: senior citizen or something, and you having zero interest rates

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Speaker 1: is really messing with my retirement. So is life gonna

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Speaker 1: get better for them? Presumably it will depending on how

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Speaker 1: they're invested. Um. So there's a few thoughts around that wanted.

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Speaker 1: The signaling that goes along with a hiking cycle, the

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Speaker 1: set is hiking in the variament with the economy is improving,

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Speaker 1: which means that for overall, for for all types of

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Speaker 1: of investors or players in the economy, their financial situations

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Speaker 1: should be improving if they have exposure to financial asthics

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Speaker 1: and and and and income creation. Um. The second factor

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Speaker 1: is if you're a more risk averse investor and you're

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Speaker 1: sitting in cash or in short term savings accounts, um,

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Speaker 1: your interest rate will be modestly higher. But a lot

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Speaker 1: of people do have a greater diversification. They're gonna have

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Speaker 1: exposure to what's happening in equities or or credit markets,

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Speaker 1: and and they're it's not entirely clear what happens when

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Speaker 1: the FETs start taking and trust rates. Well, let's turn

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Speaker 1: to uh, let's turn to businesses now. UM, we already

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Speaker 1: touched on them briefly. When we're talking about these corporate loans,

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Speaker 1: but interest rates matter for them because they borrow money

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Speaker 1: to buy capital things like equipment, heavy machinery, all that

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Speaker 1: kind of stuff that helped them make the goods and

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Speaker 1: services that they do. But it's the interest rate that

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Speaker 1: they have to pay goes up by even a little bit,

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Speaker 1: will will that kind of derail corporate investment. It's been

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Speaker 1: picking up lately, but I think the theme throughout the

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Speaker 1: recovery is that it hasn't been quite what people would

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Speaker 1: like to see. CAT has been a great overall disappointing UM,

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Speaker 1: given how cheap boring costs have been and and UM

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Speaker 1: and and presently the opportunities for expansion a number of industries,

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Speaker 1: and now that barring costs are heading higher, I think

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Speaker 1: there is a key question or concern as to how

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Speaker 1: that will influence UM future investment and and and companies

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Speaker 1: and businesses UM. But I'm not sure how interest rate

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Speaker 1: sensitive it is. Obviously, what interest rates things as low

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Speaker 1: as it was for most of recovery, you didn't see

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Speaker 1: this big pick up in in in borrowing and investments.

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Speaker 1: And if you look at large company their balance sheet

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Speaker 1: is is actually pretty cash heavy, so presumably they still

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Speaker 1: have plenty of capacity to invest if they see economic

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Speaker 1: conditions that weren't that great. And let's turn to the

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Speaker 1: third stakeholder with government. Um So. In a previous episode,

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Speaker 1: we talked about the very now, very big dep burden

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Speaker 1: that the US government shoulders um and we talked about

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Speaker 1: how it was fine for now because interest rates were

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Speaker 1: so low. But do you think this is gonna become

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Speaker 1: a more worrying thing as interest rates start to go up?

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Speaker 1: I think it really depends on how quickly interest rates rise.

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Speaker 1: Remember that the set is saying it's going to be slow,

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Speaker 1: some more shallow cycle. We don't bring interest rates as

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Speaker 1: high as we had in prior cycles. Um So, real

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Speaker 1: that the history bar and cost should still be pretty

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Speaker 1: cheap for for for the government. We've we've also had

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Speaker 1: a little bit of political back and forth about this.

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Speaker 1: You know, some people saying that interest rates have been

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Speaker 1: too long, too low for too long, excuse me, and

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Speaker 1: the Fed is kind of playing with fire here, and

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Speaker 1: then also those that say that by hiking the Fed,

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Speaker 1: you know, it is hurting working class Americans. Um is

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Speaker 1: this move gonna Is this Fed move gonna influence that debate?

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Speaker 1: It all gonna turn it up a little bit in mind.

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Speaker 1: I mean, I really think that it depends on how

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Speaker 1: the FED communicates when the next move is and what

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Speaker 1: the path is right now, selling extremely cautious, um, noting

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Speaker 1: that they want to keep support for the economy. Um,

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Speaker 1: they're not looking too cool and overhead economy or fight inflation. Um.

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Speaker 1: So you know, twenty five basis points by itself really

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Speaker 1: shouldn't change the equation right much for most people in

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Speaker 1: the economy. I think the question is how quickly will

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Speaker 1: the FED actually engineer hiking cycle. And my expectation is

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Speaker 1: that they're going to be very cautious and and and

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Speaker 1: very careful and how they do that. We're going to

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Speaker 1: wrap up here in a second in the show. We'll

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Speaker 1: let you go. Um, but let's zoom out here for

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Speaker 1: a little bit. Our financial markets around the world are,

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Speaker 1: in this modern nation, so interconnected, but not every central

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Speaker 1: bank is raising interest rates right now. You know, you

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Speaker 1: have the European Central Bank just lowering its deposit rate

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Speaker 1: to mind is zero point three percent. There's renewed pressure

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Speaker 1: on the Bank of Japan to expand its own bomb

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Speaker 1: purchasing program. Um. So the FETT is going one way

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Speaker 1: and you have a very big chunk of the rest

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Speaker 1: of the world running a different direction. You certainly do UM,

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Speaker 1: which I think creates a bit more discomfort with what

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Speaker 1: the FET is trying to engineer, because if the FET

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Speaker 1: is hiking while other central banks and our major trading

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Speaker 1: partners are easing, it means that you're going to have

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Speaker 1: a further appreciation in the US dollar UM and that's

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Speaker 1: another form of tightening in terms of financial conditions. So

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Speaker 1: it does mean that the FATS policy, even though they're

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Speaker 1: saying it's very slow, it's gradual, it's a careful policy.

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Speaker 1: There are these other consequences that come from a faster

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Speaker 1: appreciation of the dollar um and I think if it

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Speaker 1: has to account for that, right, So there's really a

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Speaker 1: lot in stake here. Yeah, an institution holds this much

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Speaker 1: power over basically the fate of the world, and you

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Speaker 1: could probably make the argument that the FIT has more

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Speaker 1: control or the economy than the president or Congress, And

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Speaker 1: you know, it's just a it's just people sitting in

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Speaker 1: a room every six weeks making this very human decision

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Speaker 1: about interests, right, So it's a it's great to have

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Speaker 1: that perspective. Yeah, I'm glad it's not us making this decision.

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Speaker 1: Sometimes it's good to have Congress not involved. Agreed. Oh, Michelle,

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Speaker 1: thank you so much for joining us. It's been really

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Speaker 1: great having you on. It is my pleasure. Have a

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Speaker 1: have a great evening, go and spend some of those

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Speaker 1: debased dollars. Well. Thanks again for listening to Bloomberg Benchmark.

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