Speaker 1: Brought to you by Bank of America Merrill Lynch. Seeing
Speaker 1: what others have seen, but uncovering what others may not.
Speaker 1: Global Research that helps you harness disruption voted top global
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Speaker 1: Smith Incorporated. We've been anticipating this interest rate increase for
Speaker 1: a year that was supposed to go four times. In
Speaker 1: the end, I've only gone once probability that this would
Speaker 1: happen today according to markets, and it did. Why do
Speaker 1: we care? Hello, and welcome back to Bloomberg Benchmark Show
Speaker 1: about the Global economy. I'm Scott Landman and economics editor
Speaker 1: with Bloomberg News in Washington, and I'm Daniel Moss, Executive
Speaker 1: editor for Global Economics in New York. We're taping this
Speaker 1: just a couple of hours after the Federal Reserve announced
Speaker 1: that it's raising its main interest rate by a quarter
Speaker 1: percentage point, the first increase since a year ago, and
Speaker 1: it's just the second since rates were cut to almost
Speaker 1: zero during the depths of the global financial crisis. Joining
Speaker 1: us to explain what the Fed did and what it
Speaker 1: means is Steve Matthews, a Bloomberg reporter who covers the
Speaker 1: federalis of Steve. Now, I've known you for more than
Speaker 1: a decade, and when I met you were covering the FED.
Speaker 1: How long have you been at this? I've been doing
Speaker 1: this I guess twelve years now, which is even longer
Speaker 1: than before the financial crisis, and traveling all around the country,
Speaker 1: based in Atlanta where they're the FED. While people think
Speaker 1: of Janet Yellen is representing the FED, and she does.
Speaker 1: It's an organization that's made up of twelve regional banks.
Speaker 1: They're based all over, including one in Atlanta, one in St.
Speaker 1: Louis and Richmond, and I end up coming around covering
Speaker 1: a lot of the original FED executives around that. What
Speaker 1: you saying is that, unlike Scott and I, you have
Speaker 1: the benefit of doing this from outside the New York
Speaker 1: DC bubble. I definitely have an outside perspective. And we
Speaker 1: should note that Steve probably has more frequent flyer miles
Speaker 1: than almost anyone in the bureau, traveling all over the
Speaker 1: country to all sorts of cities and both cities and
Speaker 1: rural areas where a lot of these fedeficials speak week
Speaker 1: after week. Well, given I'm no longer based there, that's
Speaker 1: probably right. So let's get down to it, Steve. We've
Speaker 1: been anticipating this interest rate increase for a year that
Speaker 1: was supposed to go four times in the end, they've
Speaker 1: only gone once. Probability that this would happen today according
Speaker 1: to markets, and it did. Why do we care? I
Speaker 1: think the news today was not so much the one
Speaker 1: increase that happened, the quarter point rate increase, although it
Speaker 1: does effect a variety of business and consumer lending rates.
Speaker 1: But the fact that the Fed is now forecasting three
Speaker 1: rate increases next year as opposed to to that is
Speaker 1: significant in that it's the first time the Fed has
Speaker 1: increased the number of increases that it is forecasting. So
Speaker 1: we're having, you know, a little bit of a of
Speaker 1: a pivot in uh in what the Fed is looking
Speaker 1: at doing from where they've been. So does that mean
Speaker 1: that rates are going to go up even more next year?
Speaker 1: And if I, say, wanted to buy a house now
Speaker 1: I already own a house, if I happened to hypothetically
Speaker 1: be in the market for a second house or one
Speaker 1: of our listeners were in the market for that, should they, uh,
Speaker 1: you know, really think about doing that transaction? A s
Speaker 1: a pie. So to get ahead of this coming increase
Speaker 1: in interest rates. Rates do seem to be headed up
Speaker 1: next year? Yes, And there are a couple of different
Speaker 1: ways to think about this. Today's increase was a quarter
Speaker 1: point and when you think about what does it mean, Okay,
Speaker 1: first of all, it means an increase in the prime rate,
Speaker 1: which is for business lending. It also affects some consumer
Speaker 1: lending rates such as credit cards. A lot of credit
Speaker 1: cards are tied to the prime rate. For example, home
Speaker 1: equity loans. A number of home equity loans are tied
Speaker 1: to short term rates, so all of that is affected
Speaker 1: right away. Most home loans are not directly tied to
Speaker 1: short term rates. They're tied more to like the ten
Speaker 1: uere right, but that too went up today. The tenure
Speaker 1: treasury yields went up, so there's a sense that they
Speaker 1: may be headed up, not immediately but over time. And
Speaker 1: it also affects people in terms of not just on
Speaker 1: a borrowing side, but on deposits. You know, for the
Speaker 1: last number of years, retirees and others who have had
Speaker 1: money and banks and money markets have been getting essentially nothing.
Speaker 1: And over time those rates are going to go up.
Speaker 1: You know, you're gonna actually going to get some yield
Speaker 1: on your savings. Are they going to get more than nothing?
Speaker 1: I mean, there's still it's still very low. Isn't it
Speaker 1: still going to be a while before people are getting
Speaker 1: a better return than you know, one percent or less
Speaker 1: on their savings. You know, it will be a little
Speaker 1: bit of a little bit of time. What one person
Speaker 1: said to me was, if you think about this, like
Speaker 1: how oil prices affect gasoline prices. When oil prices are
Speaker 1: going down, you know, the there's some lag. When oil
Speaker 1: prices are going up, it seems to hit the pump immediately.
Speaker 1: And when rates are going down, it seems like it
Speaker 1: affects depositors right away. Now that rates are going up,
Speaker 1: even just ever so gradually, there's gonna be a lag
Speaker 1: before you're going to see it in deposit rates. Steve,
Speaker 1: let me play devil's advocate. You said a few minutes ago.
Speaker 1: It was a quote a little bit of a pivot,
Speaker 1: isn't the emphasis there on a little bit? Fed's benchmark
Speaker 1: rate is still below one. Historically speaking, this is nothing
Speaker 1: compared with where we've been in past economic cycles. Aren't
Speaker 1: we just getting a little too excited here? Historically? You
Speaker 1: are correct? I mean we're still below one percent. I mean,
Speaker 1: if you would have told people, uh, ten years ago,
Speaker 1: you're gonna have rates below one percent, nobody would believe
Speaker 1: that was possible even and here we are still below
Speaker 1: one percent over you know, a number of years. So
Speaker 1: while things have started to turn up, we're still in
Speaker 1: that kind of new normal environment with really low rates.
Speaker 1: And you know, Janet Yelling today was saying, you know,
Speaker 1: the increases are going to be gradual. That was in
Speaker 1: the statement as well. So there's a sense that, yes,
Speaker 1: things have started to turn, but you know, it's like
Speaker 1: an ocean tanker, it's it's turn ever so slowly. And
Speaker 1: let's come back to those projections you talked about this
Speaker 1: time last year. The projections in the FED statement, what
Speaker 1: the geeks called the dots, projected four increases this year. Well, gosh,
Speaker 1: it's almost December thirty one and we've just had one.
Speaker 1: How seriously should we take the fact that there's a
Speaker 1: projection of three next year rather than just two. You know,
Speaker 1: when the four came out last year, markets reacted to that,
Speaker 1: and in fact, there was a very negative reaction on
Speaker 1: markets because people kind of freaked out, uh and said,
Speaker 1: my my, gosh, what's what's happening here. So really they
Speaker 1: shouldn't have freaked out at all, and they shouldn't have
Speaker 1: freaked out because you know, the markets were right, The
Speaker 1: markets were We're skeptical that there would be much of
Speaker 1: a of a change at all, and there wasn't that.
Speaker 1: We've had one rate increase. So now markets though, are
Speaker 1: a lot more at expecting you know, several increases next
Speaker 1: year than the Fed. So there's more of an alignment
Speaker 1: with where markets are. Uh So, there's a reason to
Speaker 1: believe that that these have credibility for next year. What
Speaker 1: about the Trump factor? Our president elect has talked about
Speaker 1: cutting taxes for individuals and corporations, talked about doing up
Speaker 1: to one trillion dollars in infrastructure investment over the next decade.
Speaker 1: These are things that will potentially stimulate the economy, boost growth,
Speaker 1: uh and cause inflation to go up. How much is
Speaker 1: that going to affect what the Fed does? Its fascinating
Speaker 1: to hear Janet Yellen in the press conference today kind
Speaker 1: of do a dance because you know, we all know
Speaker 1: that Janet Yellen is at political point a. She was
Speaker 1: appointed by Democrats. She has been talked negatively by about Trump.
Speaker 1: Uh So, you know, there's a little bit of a
Speaker 1: of anxiety there between the two of them, and she
Speaker 1: definitely kind of did a dance talking about, you know,
Speaker 1: how the Fed would react to fiscal stimulus. We're gonna
Speaker 1: talk about yelling and Trump in just a minute. For now,
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Speaker 1: of America, Merrill Lynch. Seeing what others have seen, but
Speaker 1: uncovering what others may not. Global Research that helps you
Speaker 1: harness disruption voted top global research from five years running.
Speaker 1: Meryll Lynch, Pierce, Spenner and Smith Incorporated. And we're back
Speaker 1: Steve Focus. Through the press conference that followed today's decision,
Speaker 1: it felt like questions one too, three, five, seven, We're
Speaker 1: really all about trying to tease the chair out on
Speaker 1: what the president elects policies might make. How did that go?
Speaker 1: Janet Yellen was definitely doing a dance. I mean, she
Speaker 1: was trying not to say things that would be directly
Speaker 1: insulting towards the new administration, even though it was clear
Speaker 1: that she didn't agree with all of the policies. She
Speaker 1: went on and on about how if there is fiscal policy, uh,
Speaker 1: it should be directed towards increasing productivity such as education programs, training,
Speaker 1: things that will improve the workforce, or for example, UH,
Speaker 1: bring about additional startups, which is not exactly where the
Speaker 1: Trump administration is, which is essentially at cutting taxes in
Speaker 1: a broadway, uh, and doing infrastructure spending things that would
Speaker 1: just kind of create faster growth. And the concern is
Speaker 1: if we have faster growth right now with the unemployment
Speaker 1: rate at four point six percent, that you could have
Speaker 1: an economy overheating, and you could have too much inflation.
Speaker 1: And there were all of these kinds of concerns, and
Speaker 1: she basically was saying, let's wait and see and and
Speaker 1: see what they what they're going to do before we
Speaker 1: make our assessment of what it's going to mean for policy.
Speaker 1: But there was a lot of apprehension there. Steve Janet
Speaker 1: Yellen gave a fairly sunny picture of the economy today.
Speaker 1: She talked about how things were close to full employment.
Speaker 1: Donald Trump has really presented a very different picture. He's
Speaker 1: talked about how the unemployment rate close to five percent
Speaker 1: is phony or fictional. Uh. You know, he wants to
Speaker 1: get people back to work. A lot of the country
Speaker 1: is hurting. You've actually been to many of these places
Speaker 1: in you know, states across the South, Midwest, Northwest, places
Speaker 1: that are more economically distressed than uh, you know, the
Speaker 1: New York Washington bubble that Dan mentioned. Can you talk
Speaker 1: about how, uh you know the economy, what the economy
Speaker 1: is like in many of those places, and what the
Speaker 1: opinion is towards the FED that you've seen. Well, there's
Speaker 1: no question that there are big areas of the country
Speaker 1: that are not doing all that well. I mean West Virginia,
Speaker 1: New Mexico. Uh, you know, parts of Alabama, you know,
Speaker 1: parts of Georgia, Mendalton, Georgia, Rome, Georgia. I mean places
Speaker 1: that were you know, manufacturing towns or coal country in
Speaker 1: West Virginia. And you know, there has been such a
Speaker 1: transformation of the economy, uh that many of these areas
Speaker 1: have been kind of left behind. But the FEDS view
Speaker 1: is that while that's the case, there's not a lot
Speaker 1: that monetary policy that can do. I mean that these
Speaker 1: are areas or you really need fiscal policy, you need investment,
Speaker 1: you need education, you know, or energy policies, things that
Speaker 1: address the specific regional problems. Uh. And uh, you know,
Speaker 1: it'll be interesting to see to what extent these areas
Speaker 1: are are helped. And of course Trump himself has talked
Speaker 1: about trade and and trade has had a devastating effect
Speaker 1: in in certain places like the Carolinas, where you've seen
Speaker 1: a big decline in the textile industry for for example.
Speaker 1: And lest we not get too focused on one particular narrative,
Speaker 1: there are parts of the country that are doing very well.
Speaker 1: Bureau of Labor Statistics, I know some people might say
Speaker 1: this as a conspiracy, did release figas saying that last
Speaker 1: year was one of the best years for average wage
Speaker 1: growth that we've seen in some time. And isn't the
Speaker 1: Fed's job to set policy for the entire US economy?
Speaker 1: You know, that's exactly right. Uh, there are parts of
Speaker 1: the country that are doing well. Uh. Last year was
Speaker 1: a good year for most people. Uh. And the Fed
Speaker 1: is very much directed at the entire economy, the entire
Speaker 1: labor market. Uh. So you know that they can't solve
Speaker 1: the problems of of everyone in Janet Yellen is is
Speaker 1: pretty clear about that. What about the rest of the world, Steve,
Speaker 1: There's been a lot of talking interest, at least in
Speaker 1: the financial markets, and about how the dollar has has
Speaker 1: become even stronger in recent weeks following the election. Uh.
Speaker 1: You know, higher interest rates in the US do tend
Speaker 1: to boost the value of the dollar. How does that
Speaker 1: affect countries around the world and potentially play into these
Speaker 1: trade issues that you were talking about. You know, that's
Speaker 1: really curious because of course Trump wants to encourage trade,
Speaker 1: and one way you would encourage trade is, you know,
Speaker 1: reduce restriction so that US products can be shipped to
Speaker 1: other countries. But in other ways a weaker dollar. And
Speaker 1: instead of a weaker dollar, we've gotten a much stronger dollar.
Speaker 1: And in fact, the dollar was stronger today. Uh, interest
Speaker 1: rates were higher. When when US interest rates move higher,
Speaker 1: that often strengths and strengthens a dollar. Uh. So you
Speaker 1: know that that's going to be a curious problem over
Speaker 1: the next year, to the extent that we get a
Speaker 1: stronger dollar higher interest rates. Uh, that's gonna work against
Speaker 1: the whole idea of of revitalizing trade. But it would
Speaker 1: reflect the relative dynamism of the US economy campaign aid
Speaker 1: with the Eurozone compared with Japan. Yeah. Absolutely, And in fact,
Speaker 1: the US has been doing essentially better than the rest
Speaker 1: of the world by by a good measure, and that's
Speaker 1: why the dollar has been strengthening alright, Steve, we'll leave
Speaker 1: it there. Thank you very much for being with us today.
Speaker 1: Thank you a pleasure, and we'll look forward to your
Speaker 1: coverage of the new era for the Fed and Donald
Speaker 1: Trump in the next year. Benchmark will be back next
Speaker 1: week and until then, you can find us on the
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Speaker 1: the newly redesigned Bloomberg app, where you can also find
Speaker 1: all of our other excellent podcasts from Bloomberg. You can
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Speaker 1: you thought. You can talk to us and follow us
Speaker 1: on Twitter at Scotland at Steve Matthews twelve and I
Speaker 1: have a new handle, Moss Echo. Thanks for joining. Brought
Speaker 1: to you by Bank of America Merrill Lynch. Seeing what
Speaker 1: others have seen, but uncovering what others may not. Global
Speaker 1: Research that helps you Harness disruption voted top global research
Speaker 1: from five years running. Merrill Lynch, Pierce, Fenner and Smith
Speaker 1: Incorporated