WEBVTT - 67: The Fed Takes a Hike. What Should You Do? 0:00:00.240 --> 0:00:03.120 Brought to you by Bank of America Merrill Lynch. Seeing 0:00:03.120 --> 0:00:05.600 what others have seen, but uncovering what others may not. 0:00:06.000 --> 0:00:09.680 Global Research that helps you harness disruption voted top global 0:00:09.720 --> 0:00:13.000 research from five years running. Merrill Lynch, Pierce, Fenner and 0:00:13.080 --> 0:00:17.840 Smith Incorporated. We've been anticipating this interest rate increase for 0:00:18.000 --> 0:00:20.360 a year that was supposed to go four times. In 0:00:20.480 --> 0:00:24.479 the end, I've only gone once probability that this would 0:00:24.480 --> 0:00:27.800 happen today according to markets, and it did. Why do 0:00:27.920 --> 0:00:39.880 we care? Hello, and welcome back to Bloomberg Benchmark Show 0:00:39.920 --> 0:00:43.840 about the Global economy. I'm Scott Landman and economics editor 0:00:43.920 --> 0:00:47.680 with Bloomberg News in Washington, and I'm Daniel Moss, Executive 0:00:47.760 --> 0:00:51.280 editor for Global Economics in New York. We're taping this 0:00:51.440 --> 0:00:54.560 just a couple of hours after the Federal Reserve announced 0:00:54.560 --> 0:00:57.600 that it's raising its main interest rate by a quarter 0:00:57.720 --> 0:01:01.720 percentage point, the first increase since a year ago, and 0:01:01.760 --> 0:01:05.360 it's just the second since rates were cut to almost 0:01:05.560 --> 0:01:10.160 zero during the depths of the global financial crisis. Joining 0:01:10.200 --> 0:01:12.960 us to explain what the Fed did and what it 0:01:13.000 --> 0:01:16.959 means is Steve Matthews, a Bloomberg reporter who covers the 0:01:17.000 --> 0:01:20.000 federalis of Steve. Now, I've known you for more than 0:01:20.040 --> 0:01:22.640 a decade, and when I met you were covering the FED. 0:01:23.000 --> 0:01:25.319 How long have you been at this? I've been doing 0:01:25.360 --> 0:01:28.960 this I guess twelve years now, which is even longer 0:01:29.000 --> 0:01:33.840 than before the financial crisis, and traveling all around the country, 0:01:33.880 --> 0:01:38.080 based in Atlanta where they're the FED. While people think 0:01:38.120 --> 0:01:41.199 of Janet Yellen is representing the FED, and she does. 0:01:41.880 --> 0:01:47.200 It's an organization that's made up of twelve regional banks. 0:01:47.440 --> 0:01:51.720 They're based all over, including one in Atlanta, one in St. 0:01:51.760 --> 0:01:56.840 Louis and Richmond, and I end up coming around covering 0:01:56.880 --> 0:01:59.840 a lot of the original FED executives around that. What 0:01:59.880 --> 0:02:02.000 you saying is that, unlike Scott and I, you have 0:02:02.080 --> 0:02:05.120 the benefit of doing this from outside the New York 0:02:05.200 --> 0:02:09.000 DC bubble. I definitely have an outside perspective. And we 0:02:09.280 --> 0:02:12.520 should note that Steve probably has more frequent flyer miles 0:02:12.560 --> 0:02:16.080 than almost anyone in the bureau, traveling all over the 0:02:16.120 --> 0:02:20.520 country to all sorts of cities and both cities and 0:02:20.880 --> 0:02:24.400 rural areas where a lot of these fedeficials speak week 0:02:24.480 --> 0:02:27.520 after week. Well, given I'm no longer based there, that's 0:02:27.600 --> 0:02:31.560 probably right. So let's get down to it, Steve. We've 0:02:31.600 --> 0:02:35.359 been anticipating this interest rate increase for a year that 0:02:35.480 --> 0:02:37.760 was supposed to go four times in the end, they've 0:02:37.760 --> 0:02:42.160 only gone once. Probability that this would happen today according 0:02:42.200 --> 0:02:46.280 to markets, and it did. Why do we care? I 0:02:46.320 --> 0:02:49.960 think the news today was not so much the one 0:02:50.320 --> 0:02:54.720 increase that happened, the quarter point rate increase, although it 0:02:54.760 --> 0:02:59.720 does effect a variety of business and consumer lending rates. 0:02:59.760 --> 0:03:03.760 But the fact that the Fed is now forecasting three 0:03:03.919 --> 0:03:07.960 rate increases next year as opposed to to that is 0:03:08.040 --> 0:03:11.399 significant in that it's the first time the Fed has 0:03:11.480 --> 0:03:16.040 increased the number of increases that it is forecasting. So 0:03:16.440 --> 0:03:18.560 we're having, you know, a little bit of a of 0:03:18.600 --> 0:03:21.480 a pivot in uh in what the Fed is looking 0:03:21.480 --> 0:03:24.080 at doing from where they've been. So does that mean 0:03:24.160 --> 0:03:28.040 that rates are going to go up even more next year? 0:03:28.200 --> 0:03:31.600 And if I, say, wanted to buy a house now 0:03:31.639 --> 0:03:34.560 I already own a house, if I happened to hypothetically 0:03:34.560 --> 0:03:36.360 be in the market for a second house or one 0:03:36.400 --> 0:03:40.520 of our listeners were in the market for that, should they, uh, 0:03:40.640 --> 0:03:44.000 you know, really think about doing that transaction? A s 0:03:44.040 --> 0:03:48.280 a pie. So to get ahead of this coming increase 0:03:48.320 --> 0:03:51.440 in interest rates. Rates do seem to be headed up 0:03:51.520 --> 0:03:55.160 next year? Yes, And there are a couple of different 0:03:55.160 --> 0:03:58.800 ways to think about this. Today's increase was a quarter 0:03:58.840 --> 0:04:01.960 point and when you think about what does it mean, Okay, 0:04:02.000 --> 0:04:05.880 first of all, it means an increase in the prime rate, 0:04:06.120 --> 0:04:09.920 which is for business lending. It also affects some consumer 0:04:10.360 --> 0:04:12.760 lending rates such as credit cards. A lot of credit 0:04:12.800 --> 0:04:17.000 cards are tied to the prime rate. For example, home 0:04:17.040 --> 0:04:19.840 equity loans. A number of home equity loans are tied 0:04:19.920 --> 0:04:23.479 to short term rates, so all of that is affected 0:04:23.560 --> 0:04:28.280 right away. Most home loans are not directly tied to 0:04:28.400 --> 0:04:30.760 short term rates. They're tied more to like the ten 0:04:30.839 --> 0:04:35.400 uere right, but that too went up today. The tenure 0:04:35.400 --> 0:04:39.920 treasury yields went up, so there's a sense that they 0:04:39.960 --> 0:04:45.120 may be headed up, not immediately but over time. And 0:04:45.200 --> 0:04:47.760 it also affects people in terms of not just on 0:04:47.800 --> 0:04:51.880 a borrowing side, but on deposits. You know, for the 0:04:51.960 --> 0:04:55.920 last number of years, retirees and others who have had 0:04:56.360 --> 0:04:59.880 money and banks and money markets have been getting essentially nothing. 0:05:00.680 --> 0:05:04.200 And over time those rates are going to go up. 0:05:04.520 --> 0:05:07.200 You know, you're gonna actually going to get some yield 0:05:07.240 --> 0:05:10.880 on your savings. Are they going to get more than nothing? 0:05:10.920 --> 0:05:14.120 I mean, there's still it's still very low. Isn't it 0:05:14.120 --> 0:05:16.160 still going to be a while before people are getting 0:05:16.520 --> 0:05:19.520 a better return than you know, one percent or less 0:05:19.600 --> 0:05:21.840 on their savings. You know, it will be a little 0:05:21.880 --> 0:05:24.800 bit of a little bit of time. What one person 0:05:24.880 --> 0:05:28.320 said to me was, if you think about this, like 0:05:28.839 --> 0:05:33.960 how oil prices affect gasoline prices. When oil prices are 0:05:34.000 --> 0:05:39.400 going down, you know, the there's some lag. When oil 0:05:39.400 --> 0:05:42.680 prices are going up, it seems to hit the pump immediately. 0:05:43.360 --> 0:05:47.880 And when rates are going down, it seems like it 0:05:47.880 --> 0:05:51.600 affects depositors right away. Now that rates are going up, 0:05:51.720 --> 0:05:55.119 even just ever so gradually, there's gonna be a lag 0:05:55.240 --> 0:05:57.960 before you're going to see it in deposit rates. Steve, 0:05:58.080 --> 0:06:00.800 let me play devil's advocate. You said a few minutes ago. 0:06:00.880 --> 0:06:03.240 It was a quote a little bit of a pivot, 0:06:03.880 --> 0:06:07.359 isn't the emphasis there on a little bit? Fed's benchmark 0:06:07.480 --> 0:06:11.960 rate is still below one. Historically speaking, this is nothing 0:06:12.040 --> 0:06:15.799 compared with where we've been in past economic cycles. Aren't 0:06:15.839 --> 0:06:20.480 we just getting a little too excited here? Historically? You 0:06:20.520 --> 0:06:23.320 are correct? I mean we're still below one percent. I mean, 0:06:23.360 --> 0:06:26.360 if you would have told people, uh, ten years ago, 0:06:26.440 --> 0:06:29.719 you're gonna have rates below one percent, nobody would believe 0:06:29.760 --> 0:06:33.320 that was possible even and here we are still below 0:06:33.360 --> 0:06:36.960 one percent over you know, a number of years. So 0:06:37.080 --> 0:06:40.719 while things have started to turn up, we're still in 0:06:40.800 --> 0:06:44.599 that kind of new normal environment with really low rates. 0:06:45.160 --> 0:06:48.480 And you know, Janet Yelling today was saying, you know, 0:06:48.520 --> 0:06:50.960 the increases are going to be gradual. That was in 0:06:51.000 --> 0:06:54.200 the statement as well. So there's a sense that, yes, 0:06:54.440 --> 0:06:58.039 things have started to turn, but you know, it's like 0:06:58.080 --> 0:07:02.360 an ocean tanker, it's it's turn ever so slowly. And 0:07:02.440 --> 0:07:05.800 let's come back to those projections you talked about this 0:07:05.880 --> 0:07:09.440 time last year. The projections in the FED statement, what 0:07:09.520 --> 0:07:15.160 the geeks called the dots, projected four increases this year. Well, gosh, 0:07:15.200 --> 0:07:18.120 it's almost December thirty one and we've just had one. 0:07:18.720 --> 0:07:21.680 How seriously should we take the fact that there's a 0:07:21.680 --> 0:07:26.320 projection of three next year rather than just two. You know, 0:07:26.400 --> 0:07:30.680 when the four came out last year, markets reacted to that, 0:07:30.760 --> 0:07:33.600 and in fact, there was a very negative reaction on 0:07:33.720 --> 0:07:37.480 markets because people kind of freaked out, uh and said, 0:07:37.600 --> 0:07:40.920 my my, gosh, what's what's happening here. So really they 0:07:40.920 --> 0:07:43.040 shouldn't have freaked out at all, and they shouldn't have 0:07:43.080 --> 0:07:46.320 freaked out because you know, the markets were right, The 0:07:46.360 --> 0:07:50.400 markets were We're skeptical that there would be much of 0:07:50.440 --> 0:07:53.320 a of a change at all, and there wasn't that. 0:07:53.400 --> 0:07:58.280 We've had one rate increase. So now markets though, are 0:07:58.440 --> 0:08:02.840 a lot more at expecting you know, several increases next 0:08:02.920 --> 0:08:06.600 year than the Fed. So there's more of an alignment 0:08:06.640 --> 0:08:09.640 with where markets are. Uh So, there's a reason to 0:08:09.720 --> 0:08:14.160 believe that that these have credibility for next year. What 0:08:14.280 --> 0:08:18.800 about the Trump factor? Our president elect has talked about 0:08:19.240 --> 0:08:25.120 cutting taxes for individuals and corporations, talked about doing up 0:08:25.160 --> 0:08:29.320 to one trillion dollars in infrastructure investment over the next decade. 0:08:29.800 --> 0:08:35.480 These are things that will potentially stimulate the economy, boost growth, 0:08:35.960 --> 0:08:39.520 uh and cause inflation to go up. How much is 0:08:39.559 --> 0:08:43.760 that going to affect what the Fed does? Its fascinating 0:08:43.800 --> 0:08:47.040 to hear Janet Yellen in the press conference today kind 0:08:47.080 --> 0:08:49.840 of do a dance because you know, we all know 0:08:50.040 --> 0:08:53.520 that Janet Yellen is at political point a. She was 0:08:53.800 --> 0:09:00.640 appointed by Democrats. She has been talked negatively by about Trump. 0:09:01.360 --> 0:09:04.760 Uh So, you know, there's a little bit of a 0:09:05.800 --> 0:09:10.000 of anxiety there between the two of them, and she 0:09:10.200 --> 0:09:13.040 definitely kind of did a dance talking about, you know, 0:09:13.080 --> 0:09:16.240 how the Fed would react to fiscal stimulus. We're gonna 0:09:16.280 --> 0:09:19.040 talk about yelling and Trump in just a minute. For now, 0:09:19.120 --> 0:09:31.040 a word from our sponsor, brought to you by Bank 0:09:31.080 --> 0:09:34.080 of America, Merrill Lynch. Seeing what others have seen, but 0:09:34.200 --> 0:09:37.120 uncovering what others may not. Global Research that helps you 0:09:37.120 --> 0:09:41.240 harness disruption voted top global research from five years running. 0:09:41.559 --> 0:09:53.800 Meryll Lynch, Pierce, Spenner and Smith Incorporated. And we're back 0:09:54.240 --> 0:09:58.000 Steve Focus. Through the press conference that followed today's decision, 0:09:58.240 --> 0:10:04.400 it felt like questions one too, three, five, seven, We're 0:10:04.440 --> 0:10:09.079 really all about trying to tease the chair out on 0:10:09.160 --> 0:10:11.920 what the president elects policies might make. How did that go? 0:10:13.920 --> 0:10:18.600 Janet Yellen was definitely doing a dance. I mean, she 0:10:18.760 --> 0:10:22.640 was trying not to say things that would be directly 0:10:22.760 --> 0:10:27.320 insulting towards the new administration, even though it was clear 0:10:27.440 --> 0:10:30.840 that she didn't agree with all of the policies. She 0:10:30.920 --> 0:10:35.400 went on and on about how if there is fiscal policy, uh, 0:10:35.480 --> 0:10:42.640 it should be directed towards increasing productivity such as education programs, training, 0:10:42.840 --> 0:10:47.400 things that will improve the workforce, or for example, UH, 0:10:47.640 --> 0:10:51.960 bring about additional startups, which is not exactly where the 0:10:52.000 --> 0:10:56.600 Trump administration is, which is essentially at cutting taxes in 0:10:56.600 --> 0:11:00.800 a broadway, uh, and doing infrastructure spending things that would 0:11:00.800 --> 0:11:05.040 just kind of create faster growth. And the concern is 0:11:05.080 --> 0:11:09.199 if we have faster growth right now with the unemployment 0:11:09.280 --> 0:11:13.120 rate at four point six percent, that you could have 0:11:13.240 --> 0:11:17.720 an economy overheating, and you could have too much inflation. 0:11:18.520 --> 0:11:21.640 And there were all of these kinds of concerns, and 0:11:22.040 --> 0:11:26.160 she basically was saying, let's wait and see and and 0:11:26.200 --> 0:11:28.760 see what they what they're going to do before we 0:11:28.800 --> 0:11:31.840 make our assessment of what it's going to mean for policy. 0:11:32.160 --> 0:11:36.760 But there was a lot of apprehension there. Steve Janet 0:11:36.840 --> 0:11:40.120 Yellen gave a fairly sunny picture of the economy today. 0:11:40.480 --> 0:11:43.200 She talked about how things were close to full employment. 0:11:43.800 --> 0:11:48.160 Donald Trump has really presented a very different picture. He's 0:11:48.200 --> 0:11:51.520 talked about how the unemployment rate close to five percent 0:11:51.760 --> 0:11:55.120 is phony or fictional. Uh. You know, he wants to 0:11:55.120 --> 0:11:57.880 get people back to work. A lot of the country 0:11:57.960 --> 0:12:02.520 is hurting. You've actually been to many of these places 0:12:03.080 --> 0:12:08.200 in you know, states across the South, Midwest, Northwest, places 0:12:08.240 --> 0:12:12.000 that are more economically distressed than uh, you know, the 0:12:12.080 --> 0:12:15.520 New York Washington bubble that Dan mentioned. Can you talk 0:12:15.559 --> 0:12:19.280 about how, uh you know the economy, what the economy 0:12:19.360 --> 0:12:21.720 is like in many of those places, and what the 0:12:21.800 --> 0:12:26.000 opinion is towards the FED that you've seen. Well, there's 0:12:26.040 --> 0:12:29.640 no question that there are big areas of the country 0:12:29.640 --> 0:12:32.719 that are not doing all that well. I mean West Virginia, 0:12:32.920 --> 0:12:37.240 New Mexico. Uh, you know, parts of Alabama, you know, 0:12:37.480 --> 0:12:44.000 parts of Georgia, Mendalton, Georgia, Rome, Georgia. I mean places 0:12:44.040 --> 0:12:50.160 that were you know, manufacturing towns or coal country in 0:12:50.200 --> 0:12:53.480 West Virginia. And you know, there has been such a 0:12:53.559 --> 0:12:57.600 transformation of the economy, uh that many of these areas 0:12:57.640 --> 0:13:01.560 have been kind of left behind. But the FEDS view 0:13:02.120 --> 0:13:06.400 is that while that's the case, there's not a lot 0:13:06.559 --> 0:13:10.160 that monetary policy that can do. I mean that these 0:13:10.240 --> 0:13:15.280 are areas or you really need fiscal policy, you need investment, 0:13:15.400 --> 0:13:20.680 you need education, you know, or energy policies, things that 0:13:20.760 --> 0:13:26.360 address the specific regional problems. Uh. And uh, you know, 0:13:26.640 --> 0:13:30.840 it'll be interesting to see to what extent these areas 0:13:31.120 --> 0:13:34.480 are are helped. And of course Trump himself has talked 0:13:34.520 --> 0:13:39.000 about trade and and trade has had a devastating effect 0:13:39.559 --> 0:13:45.000 in in certain places like the Carolinas, where you've seen 0:13:45.040 --> 0:13:48.720 a big decline in the textile industry for for example. 0:13:49.120 --> 0:13:53.320 And lest we not get too focused on one particular narrative, 0:13:53.400 --> 0:13:57.040 there are parts of the country that are doing very well. 0:13:57.720 --> 0:14:00.440 Bureau of Labor Statistics, I know some people might say 0:14:00.440 --> 0:14:04.040 this as a conspiracy, did release figas saying that last 0:14:04.080 --> 0:14:07.840 year was one of the best years for average wage 0:14:07.920 --> 0:14:10.280 growth that we've seen in some time. And isn't the 0:14:10.320 --> 0:14:14.560 Fed's job to set policy for the entire US economy? 0:14:14.760 --> 0:14:17.520 You know, that's exactly right. Uh, there are parts of 0:14:17.520 --> 0:14:20.680 the country that are doing well. Uh. Last year was 0:14:20.720 --> 0:14:24.160 a good year for most people. Uh. And the Fed 0:14:24.400 --> 0:14:29.040 is very much directed at the entire economy, the entire 0:14:29.160 --> 0:14:33.880 labor market. Uh. So you know that they can't solve 0:14:33.960 --> 0:14:37.160 the problems of of everyone in Janet Yellen is is 0:14:37.200 --> 0:14:40.560 pretty clear about that. What about the rest of the world, Steve, 0:14:41.360 --> 0:14:44.560 There's been a lot of talking interest, at least in 0:14:44.600 --> 0:14:49.160 the financial markets, and about how the dollar has has 0:14:49.200 --> 0:14:53.080 become even stronger in recent weeks following the election. Uh. 0:14:53.120 --> 0:14:55.680 You know, higher interest rates in the US do tend 0:14:56.040 --> 0:14:58.800 to boost the value of the dollar. How does that 0:14:58.880 --> 0:15:02.600 affect countries around the world and potentially play into these 0:15:02.640 --> 0:15:05.400 trade issues that you were talking about. You know, that's 0:15:05.440 --> 0:15:11.840 really curious because of course Trump wants to encourage trade, 0:15:12.640 --> 0:15:15.040 and one way you would encourage trade is, you know, 0:15:15.160 --> 0:15:20.960 reduce restriction so that US products can be shipped to 0:15:21.080 --> 0:15:25.000 other countries. But in other ways a weaker dollar. And 0:15:25.080 --> 0:15:28.160 instead of a weaker dollar, we've gotten a much stronger dollar. 0:15:28.240 --> 0:15:31.400 And in fact, the dollar was stronger today. Uh, interest 0:15:31.520 --> 0:15:35.360 rates were higher. When when US interest rates move higher, 0:15:35.920 --> 0:15:40.160 that often strengths and strengthens a dollar. Uh. So you 0:15:40.200 --> 0:15:43.520 know that that's going to be a curious problem over 0:15:43.600 --> 0:15:46.360 the next year, to the extent that we get a 0:15:46.440 --> 0:15:51.480 stronger dollar higher interest rates. Uh, that's gonna work against 0:15:51.560 --> 0:15:56.120 the whole idea of of revitalizing trade. But it would 0:15:56.200 --> 0:16:00.200 reflect the relative dynamism of the US economy campaign aid 0:16:00.200 --> 0:16:05.200 with the Eurozone compared with Japan. Yeah. Absolutely, And in fact, 0:16:05.880 --> 0:16:08.960 the US has been doing essentially better than the rest 0:16:08.960 --> 0:16:11.720 of the world by by a good measure, and that's 0:16:11.760 --> 0:16:15.600 why the dollar has been strengthening alright, Steve, we'll leave 0:16:15.640 --> 0:16:18.760 it there. Thank you very much for being with us today. 0:16:18.760 --> 0:16:21.720 Thank you a pleasure, and we'll look forward to your 0:16:21.760 --> 0:16:25.400 coverage of the new era for the Fed and Donald 0:16:25.400 --> 0:16:28.600 Trump in the next year. Benchmark will be back next 0:16:28.600 --> 0:16:30.320 week and until then, you can find us on the 0:16:30.360 --> 0:16:34.080 Bloomberg terminal and Bloomberg dot com, as well as on 0:16:34.240 --> 0:16:37.240 the newly redesigned Bloomberg app, where you can also find 0:16:37.320 --> 0:16:40.520 all of our other excellent podcasts from Bloomberg. You can 0:16:40.560 --> 0:16:44.400 also look on iTunes, pocket Casts, and Stitcher. While you're there, 0:16:44.440 --> 0:16:46.400 please take a minute to rate and review the show 0:16:46.440 --> 0:16:48.920 so more listeners can find us. Let us know what 0:16:48.960 --> 0:16:51.320 you thought. You can talk to us and follow us 0:16:51.360 --> 0:16:56.640 on Twitter at Scotland at Steve Matthews twelve and I 0:16:56.760 --> 0:17:19.040 have a new handle, Moss Echo. Thanks for joining. Brought 0:17:19.040 --> 0:17:21.800 to you by Bank of America Merrill Lynch. Seeing what 0:17:21.840 --> 0:17:24.919 others have seen, but uncovering what others may not. Global 0:17:24.960 --> 0:17:28.639 Research that helps you Harness disruption voted top global research 0:17:28.720 --> 0:17:31.920 from five years running. Merrill Lynch, Pierce, Fenner and Smith 0:17:32.000 --> 0:17:32.680 Incorporated