♪ the fed the sides. all eyes on washington ahead of friday's is expected to be the in 2006.st hike lifting a 40 year ban on crude .xports oil at 7.5 year lows. rolling to a 2008 low, but wages are slowing. what happened to the phillips curve? .ood morning

i guy johnson in london with tom keene in new york. big things are happening in the states. something is happening in washington and you are banking the chair. what i learned in dubai is that interest rates matter. that is what i saw from larry summers, which we will hear from, and interest rates are falling in the foreign exchange markets. you mentioned oil. this is what it is all about on this historic a. guy: one fact that we will have to consider inflation. we are getting data crossing the tape. inflation, for the eurozone, you know what? i will come back and get that to you in a moment, my bloomberg terminal will have that momentarily. let's go to vonnie quinn. president xise

jinping is looking for broader support for the internet. worldonference he urged leaders to respect each other sovereignty over the web. he called for greater cooperation in the fight against cyber attacks. united nations expert says that sanctionsiolated involving ballistic missiles, having to do with them launching a medium missile in october. the october launch was the first after iran and six world powers .eached a landmark deal at the debate in las vegas, republican candidates try to convince voters they would keep america safe. talks of terrorism dominated the evening. that donaldd trump's non-muslims would cripple foreign policy. >> this is a tough business. >> you are a tough guy.

you are never going to be president. 3%. met 42%, you are at you started over here, you are moving further. congress appear to have ended the threat of another government shutdown. they reached an agreement on spending and tax plans. it makes permanent billions of cuts and a 40 year ban on oil exports. it also has tax breaks for solar and wind. amazed in london, paris, and dubai -- people abroad are baffled by the republicans. they are not mean-spirited, they are just baffled. debate 5.at is

who is counting? let's get a check on commodities on this important day. equity markets on a two day tear on future. yield going to 2.27. you can see the higher yields in the two-year. 37.02.rude, that bears watching with brent crude down. that guy has another view. that is showing some of the recent volatility. come roundt has trip, that will be the single best chart through today and our special fed coverage this afternoon. brent crude is below 38. what do you have? guy: let's look at what has been happening in france. the pmi,ean data,

unemployment will likely fix up. -- will likely pick up. the manufacturing number was strong. the pound is trading down, near seven-year lows. that you have thought would see rising wages. a bunch of people are talking about this. you are not seeing it happening, and why not? what impact will that have on u.k. rates? we are waiting for the fed. tom: let's go to the bloomberg terminal. it is history in the making. no countdown clock on this terminal clock. here we are. was 1994 when michael mckee was the only one involved that was there. it was chaos as they raised rates. they did it again here.

then up we go, then down we go. vonnie: this is what was talked about yesterday. there are so many people that have never seen one of these, it could be a scramble. tom: it will be amazing how they set the vector, particularly within the press. good us started, please. guy: you kicked it off. we expect they will raise rates today for the first time in a decade. we're joined by the chief asset manager for europe, stephanie flanders. what do we not know that the fed could deliver for us? stephanie: we thought that uncertainty would break out and everything would be clear. when we have this rate rise, there will be uncertainty about the pace after that, what happens to the fed's balance

sheet. we'll have our first taste of that. we will be looking at where the dots are coming through the famous. lot -- dot plot. what the language is like in the press conference. all of that, i think the hope that previously been that we will have the rate rise and will be able to factor in the path for next year, maybe 4 in a year. i don't think it will you like that. i think we have more data dependency. how will the fed predict wear rates will be? stephanie: that is what will put them into data dependency land. we would've thought at the beginning of next year it would be an easier environment to talk about the path of rage rises, even if they were slow. wouldught the oil prices

be falling out year on year, there would be a jump in u.s. inflation, and that would make you feel like you were in a rate rise environment. we haven't seen that. the fed is on the path for a rate rise, and they can't go back. everything that stopped to the september is still around. emerging markets and the oil prices still falling. table that i have seen was manufactured by john norman a few days ago showing the environment of the real economy given a first rate increase. i do not think we understand how unusual this moment is. what is unusual about where this economy is as we first raise the rates? stephanie: it is clearly the most unusual thing to have inflation so low in an environment where rates are

going up. the labor market is a different place. we have a low unemployment rate, but we have a lot of people out of the labor market. you could also say, the hawks gdp, say the strength of the real economy, is beyond what you would normally expect to have a rate rise. you would not normally start from here. on the other hand you wouldn't be here when you had so many years. this is not an environment where you would want to tighten, but this is an environment where you would want rates to be already higher. tom: they're are doing an analysis better around the world then we are fixated in the united states, or worried about a slower real economy versus the mumbo-jumbo about monetary economics. guy: i think that you can ignore the fed today. what are we worried about?

one thing. we'll talk about it later, what is happening with the price of crude. if you want to decide will happen next, that is the game. you can analyze all you want with the fed. tom: west texas intermediate is showing less than one dollar showing how odd the labor market is. robert sinche and our next half hour. michael mckee, scarlet fu, and i will bring you coverage to the afternoon beginning at 1:00 p.m. in new york. that includes chair yellen's press conference. ♪

♪ it is about finance

investment and economics. of globality and all finance is riveted on washington. our coverage begins at 1:00 p.m. michael mckee, scarlet fu, and i will bring it to you. we have a lot to get started. let's get toward business flash. an exciting day. economic growth in china is expected to slow next year according to their government research group. it will slow to 6.6%. on servicesed more and less on infrastructure and export. rolls-royce'sof aerospace division will leave next year. the new ceo has been restructuring. he will split them into five segments. hughesrton and baker

will have a proposed merger by the end of april. they are trying to satisfy government concerns. halliburton will divest assets to win antitrust approval. you.thank let's talk more about oil. the u.s. congress will lift a 40 year ban on crude oil exports. i am not sure -- the house voted trillion dollar spending bill. joining us is will kennedy. happens, and it probably will, what is the effect? the u.s. will remain an oil importer overall, but u.s. oil has been sought after and traded at a discount.

american producers will have the chance to sell margins to people overseas. that will raise the price for american oil. guy: for american oil, but it we are talking about within the oil market. consumer, itge will have a small effect? will: it won't change anything overnight. the global surplus will remain. it will allow u.s. oil to be sold overseas. tom: what actions and the oil market will you see? for balance sheet adjustment, or will that wait for the new year? at the wtiwe look print spread, we can see that lifting. if you look at the march spread, american oil is more expensive than brent, and that is a turnaround.

part of that is a lifting of the band today, and part of it is because shell production is falling. the extra oil we are getting is from the middle east. that is closer to the benchmark. vonnie: it won't affect prices at the pump? getting rid of the discount will not help pump prices because they are not off of print originally anyway? will: that's right. the prices are at the lowest since before the financial crisis. pump prices will continue falling. they will stay below $2 in the u.s. good thinghould be a for the global economy, but we have an offsetting factor. the fed hiking rates, oil dropping. seeds intoalso, it

the real economy in the u.s.. you could they this is the next chapter of a structural shift. the big advantages that americans had in the global economy are being taken away because of the weakness of the rest of the world. is strength of the dollar hitting u.s. competitors, but also the great advantage that u.s. manufacturers had was shale and cheaper oil. when you talk to european companies they would be outraged at the gap. if everyone in the world has cheap energies, the u.s. pretty fractures are dealing with that and the dollar. the world has made things tougher for the u.s., even before the fed entered the fray. .hey must lower the path your party seen a fair amount of tightening in the u.s. stephanie flanders, will

kennedy, thank you. this spread market is down to $.52, that is something we have years.n in we will link foreign exchange in the dollar strength, and all that we see across equities, bonds, and commodities on this important day. robert sinche, and a low interest. stay with us, bloomberg "surveillance." ♪

♪ guy: welcome back.

you are watching "surveillance." .ondon is a little brighter the market picking up a little as well. i am guy johnson in london, tom keene is in new york. .om: i went to dubai laying out the path for central banks. i spoke to professor roubini about the fed and the tools that they have. the labor market , unemployment rates are close to structural, and wage growth inflation could occur. economic growth is close to potential. on the other side it has been suggested inflation is too low. that the appreciation of the

dollar has reduced prices. then there is a lag in energy prices. that is the dilemma. the broad markets suggest it is time to hike, but there is no sign of inflation. tom: long ago and far away at nyu, you studied with jeffrey sachs. you dide any study that in your academic suggesting a central bank can get in front of by definition, is any central bank a reactive institution? >> some could be proactive as opposed to reactive. one of the dilemmas that the fed is facing is symmetry. if they move too fast too soon, the economy could stall because of shock making them go back to zero in commercial market policy

. if they are more cautious and move more slowly, if the economy is strong and inflation to except, you can still have a little faster. it is symmetry, the risk of moving too soon or too late, suggesting you want to be cautious. people are questioning if the fed should raise rates now. some of the complexities on macroeconomics. michael mckee knows that it is about the operational aspects of the fed. he is an expert on some of the many choices the fed has today. : we have complication, confusion, and volatility the fed has to raise five interest rates. funds rate,he fed what they would borrow from each other if they were borrowing. the discount rate, which is tied rate if theyfund

were borrowing. since they are not borrowing they will have the interest on excess reserves rate that is higher than it is now by 25 basis points. will be moved to the top of the range. they will have a reverse repo program at the bottom of the range. they hope it will trade between the two. they will use a term deposit, that is high up money for longer to pay a little bit more than interest. tom: we love the band degrees of freedom. i am sorry, you have given me five choices which is telling me i have too many degrees of freedom. michael: that is the problem. while all of these things work? janet yellen and the fed have to set that straight today. they have to prove it could work . barclays was telling us that there is a not negligible chance

that we get a failure to launch. the fed does not get up interest rates. tom: is this running out of the new york state, one of the early tribes a fine choice set. michael: he will have to make it work. the board, the open market committee, will have to decide. expect a likely document from the new york fed to the market. tom: michael mccain knows more about this than anyone in the media. we will continue this. it is not if they will raise rates, there is so much going on . we will do that at 1:00 p.m. scarlet fu and two other guys, watch for our fed show. ♪

♪ be a presswill conference after the 2:00 p.m. announcement this afternoon. some of washington will be riveted on that.

all of the markets and finance will be riveted on every word that chair yellen says. michael mckee will join me and scarlet fu to give you afternoon coverage on this historic day. this is bloomberg "surveillance." york.om keene in new guy johnson is in london. vonnie: europe has agreed on landmark regulations. from banks toing technology could be fined 4% of their sales if they do not protect their data. there is also a limit on the use of personal data and prosecutions. forcing couples to have the same names after marriage is not unconstitutional. ite plaintiff say that reaches laws under the constitution. some argue that having separate names would lead to the break down of family ties. congressional leaders unveiled

tax reforms that would avert a government shutdown. it makes permanent billions of dollars in tax cuts and livesay 40-year ban on oil exports. there is also a tax cut for solar and wind energy. other republican debate, foreign policy was for it and center. the candidates try to convince voters they could keep america safe. ted cruz called for more attacks on the islamic state. attacksunched 1100 air during the first gulf war. right now obama is launching between 15 and 30. it is photo op foreign policy. we need to be using overwhelming airpower, arming the kurds, and killing aces where they are.

vonnie: he says the u.s. is at war with radical terrorism. >> we must deal frontally with the threat of radical islamists, particularly isis who is the most sophisticated terror group to ever threaten the world or the u.s. you can get more on these and other breaking stories 24 hours a day at the new bloomberg.com. tom: features update. update.es the yield is up 2.7%. sticking with politics, i the air strategy forum in dubai i gideon for ah -- -ranging view he felt most strongly about the obama administration. everyone bashes the obama administration for what it is

doing, because they do not like the results, so they do not think it is improving things on the ground, but very few have more constructive answers. the obama administration has more logic the hind its policy venue with think for all the criticism it gets. >> my favorite article on international relations on the middle east is "delusions of grand strategy." the mail that i get from my listeners is that international relations is great. it is a planning document. their thesis is we have to get away from that. where are we in our planning as a nation. to do majort strategy documents with silly. it did not get you anywhere. worsee the situation making it possible for smaller groups to distort everything. but planninghing

with everything. it is an interesting challenge to figure out how to get a .andle on the world ahead you can not look too far ahead, and you cannot be certain of your predictions. they are trying to scope out certain scenarios and figure out what you will do about them, gives you little purchase on events. the u.s. has a good plan as a whole, but there are elements in the world. look at the middle east. how much do you have to pay attention, try to shape things the way you want? can you afford to let things go? are there peripheral areas that you can back away from? if not, can you shape things the way that you want? tom: gideon rose. francois hollande had to get pragmatic quickly after the paris tragedy. debates last night

showcased idealism versus pragmatism. there's a great article that says the candidates wanted to show their comfort in the role of wartime president last night. it might not be so easy when you are actually in the role. from london the few -- what is the view from london on the u.s.-born exchange? what do they say about the obama track record? guy: he is more cautious than his predecessors. that probably chimes with the way that europeans inc. of it. we have tried a bunch of things. we have gone from one extreme to the other. : it is not clear what the pragmatic option is. we had the intervention strategy in iraq. that is now a costly mess. we had partial intervention in asia.

.- in egypt in syria there was no intervention, and that is also a catastrophe. there's no easy conclusion from the test cases. the europeansink are moving toward the policy that we need to do something now? the teacher really france and germany have taken a more cautious stance. 's post paris are looking at a different operating environment. alwaysie: you're cautious. i think you are always cautious of the idea that something must be done. this is something, so let's do that. that was european nervousness. when you see the debate in the u.k. parliament, which is good on both sides, around what to do it in syria -- there's an overwhelming feeling that if there is a case to make things a

bit better, let's do that, but under no illusion that it is perfect. vonnie: what do you do in a difficult environment? closea. school district down the district on a electronic threat, and new york said it was obviously a hoax. you have to be pragmatic and react to the data. that is what the president is doing on a daily basis. tom: you wonder where the lame-duck comes in. isthe republican debate, it the president trying to shape a legacy and move on. i would notice the scale of migration within europe. there has been a shift in the last five days about where the debate goes next year on migration in europe. going to be one of the major factors that will ultimately shape politics in europe in 2016.

it is real, visible, part and parcel of everyone's lives, particularly in places like germany were every town has had to take refugees. that is making this an ever present story. and we need to do something? we now need to do something. if it makes a difference, time will tell. on: coming up later bloomberg , not in fed, economics, or the plutocracy known as america, samuel in the real estate world. from new york in london, bloomberg "surveillance." ♪

♪ guy: this is bloomberg "surveillance."

i am guy johnson in london. companies in europe are hiring at the fastest pace in more than 40 years. hans nichols joins us from berlin. there are good points and bad points in the data. let's start with the unemployment story going forward. a looks good, particularly in germany. they are expecting more job growth. we have a divergence. normally we tell about how manufacturing is disappointing and services are strong. it is the opposite, even in france. it in thet to look at most rosy way, you can say even though the composite is disappointing at 54, it is still a couple of points higher than it was at this time last year. would i take this as

ammunition for my course? hans: you would look at the cpi figures. a halt, you would say that inflation was revised and corehigher to 0.2% inflation is up to 0.9%. you see the hawks making the oil argument, saying look at core and acknowledge the fact that these low oil prices are giving consumers a little bit of a stimulus. tom: i looked at the pmi numbers . they dovetail what lawrence summers says about secular stagnation. is it a debate within all of europe, and europe enjoying low negative rates, ever lower negative rates? hans: it depends. buts not quite japan-style,

not that much further away. when you look at the latest prediction they are predicting 1.8%, and that is in the largest economy in germany. across the eurozone predictions .re for growth of 1.5% or 1.6% if we call that secular stagnation, i don't know. i don't know what summers' definition is. if you need to dial that back just a little. tom: the german negative yields are what they are, and they just rolled over again. the green circle is where the united states positive rates are. it is absolutely surreal the divergence between germany and the united states. hans: we are seeing that starting to play out in the euro . we have different calls on the euro. you look at the euro at one point 09. goldman calls it to go down to

80. then you have other banks say it will go up to 120. --k at where dollar euro dollar-euro was a year ago. i live are talking to airbus saying that they would like to see it at 120. it is down to 110, which is great for german manufacturers. and tom, you could get a volkswagen zero down and zero interest rates. i know that you would never buy a car, you would only pay cash, you are that kind of guy. tom: i'm not trading in the nash rambler. it has done really well for me. guy: i'm trying to remember what a nash rambler is. stephanie, the secular stagnation, it is a story that has been knocking around for a while. the data in europe is getting better. they're not great, but they're getting better.

stephanie: it has been a constituency -- it has been a consistency for a while. two yearsd such a bad that anything over 1% seems great. but the larry summers and many americans would say after you had the recession, shouldn't you be aiming higher? the debate is is this as much as you can get? to push growth beyond you need system policy or more structural changes to make this mrs. the growth rate will be higher in the future. you see that in different parts of the periphery where reform has opened opportunities and you see private investment coming in . you need to look at business investment, which you are not seeing across the eurozone. there is more than just the ecb activity.

ecb has been talking about that they see a pickup in fiscal spending. that will be part and parcel of the economic story and year. you wonder if that is the spark. we are pushing on monetary policy. is building more homes in germany and elsewhere going to change things? stephanie: you have a stimulus coming through because of the impact on germany. we were worried about the impact from the volkswagen scandal, so there is some offset. talking about the political dynamics, what concerns me is that you can have the different dynamic where economists talk about the fiscal stimulus that comes from the migration crisis germany,ive growth for meanwhile the political implications could be different and quite negative for markets in the end for someone like chancellor merkel, the closest

to a leader we have had in the eurozone. if they are weekend, we could be concerned. stephanie flanders with guy johnson this morning. we will look at the analysis finance with investment always controversial. we will be joined for an extended conversation in the 7:00 hour. stay with us.

♪ tom: good morning. this is fed a. equities up 13. how futures up 110. and now with our bloomberg business flash. vonnie: product fell to a record low in hong kong. a third-quarter profit that messed estimates. they will try to make up for sales in europe for sales in europe in the -- for sales in asia and the u.s. paying a $24 million fine.

similar agreement by paying more than $99 million. another consolidation in the industry. the price is 4.3 billion dollars for companies with high technology to help businesses process credit and debit transactions. these stories will probably be more interesting tomorrow. guy: there could be more of a focus. thank you. a fed rate hike is all but certain. what is the impact of the end of super cheap money on markets? let's bring in the jp asset management asset strategist for europe, stephanie flanders. are the markets in the correct place? what is the right way to play this? stephanie: we were saying earlier that he will have uncertainty, because you were thinking about the path after

this. that is the most important thing for investors, anyone with the focus, theterm pace of rate rises. it is also closely involved with the dollar discussion. traditionally, you would not expect more dollar strength from here. normally you would have the strength going into the first rise and for the first couple of months, but that would either turn of the cycle. if we have that operating of market expectations, you could imagine the dollar will be stronger than some expect, and you have the euro weakness. a lot of signals coming out of the fed, with other things going on in the world, may be again we out have the fed coming with market expectations rather than the other way around. the former, you turn your back on u.s. assets?

the dollar will get more expensive, so maybe there is a play on that. oil is turning against the u.s. the economic environment is different. are there other sides elsewhere? stephanie: we've had this discussion about that news and good news -- if we like the idea of having a looser policy or not . almost always a rate rise is a side of confidence. if some thing is good in the economy you should expect risk assets. you expect markets to be ok in this environment. we are not in that world, but if the message is that we are thinking we will get rate rises because the economy will be stronger, if you are in that why that isnot see a world that won't do reasonably well for the u.s. tom: what is he a written called

next year? the thunderstruck by single-digit columnists houston house. does j.p. morgan believe in a 4.5% market, or can we do better? stephanie: we are expecting a fairly down the outcome for , modest single figures or in the high single figures. that is because of the factors that are weighing down on profits, particularly if we have another round of oil weakness and continue dollar strength. we were hoping those things would fall out and you would have better headline earnings growth in the u.s. if that will be delayed and if there are other concerns about the global economy, it will not become a banner year. if the world is operating even the historical lines, unit expect it to be a moderate year. the thing that concerns -- the

thing that people are the most concerned about, the consensus, although people expect the path there are nagging worries about the pmi, structuring being leaked on high-yield spreads, a few things to worry about. tom: stephanie flanders, thank you. we begin 14 hours of coverage for the fed. vonnie: it is the most exciting day in seven years. tom: put up the clock, please. we have are fed decision clock. amount of time before i fall over because of jet lag. that is better a clock than anything else you will see. tom: eight hours, four minutes, 31 seconds. . like that that is the fed decision. the clock should go to the press conference. we have to have three or four clocks. was big onhael mckee

this yesterday, we are up half a percent. or a pencil at me because we were not talking enough about the high-yield markets. there is more back story on this important day. another half-hour of ," then we will take a break to get charts ready. after the press conference we guestssmart group of lined up. guy johnson in london, tom keene in new york. ♪

tom: it has been 11 years of .risis and great contraction

this afternoon janet yellen will raise the target rates. can she ignore other nations? can she ignore any in equal america? init wille ignore an o america? it is a most uncivil rebellion. on a 2016ubini currency war. this is "bloomberg surveillance ," live from our world headquarters in new york. i am tom keene with guy johnson in london. it is an historic day. guy: this is the day we have been waiting for. my take on this is, what does tomorrow bring? today we know. what does tomorrow bring? what does the story going forward actually look like? we know what is going to happen today, what the rate rises going to look like, but is it going to work? do i want to

emphasize the decision, but getting to the press conference. we will have the scrutiny of a mario draghi press conference right now. wars" -- i'm kidding. bloomberg first word news with vonnie quinn. earnings,porting fourth-quarter earnings, $.43 a , joy global. night,dy in debate last the candidates on stage in las vegas, all claiming president obama is weak on terrorism but little else. jeb bush: this is a tough business. donald trump: you are a tough guy, jeb. i am at 42 and you are at three.

jeb.tarted off over here, you are moving over further and further. vonnie: bush was called a total disaster. he was trying to breathe life into a failed campaign. iran is charged with -- the tests came after iran and six world powers reached a deal to stop iran from building new year weapons -- from building nuclear weapons. of toronto was convicted of -- expected totle is end tomorrow with a series of congressional votes. the measure makes billions of dollars of tax cuts permanent and lifts a 40 --year-old ban on exports.

the $1.1 trillion measure is 2200 pages long. to get these on other breaking stories 24 hours a day, go to the new bloomberg.com. you know what you can read after the tom: fed guidelines. -- after the fed guidelines. tom: mr. ackman having an ugly year. he needs to come back here. it's look at equities, bonds, currencies commodities. futures up nicely, dow futures up 89. guy, what do you have, quickly echo guy: i have the phillips curve not working in the u.k. the french government bonds -- we are seeing the service sector affected by the block on the 13th. brent is a little softer. tom: i am going to lose the

terminal now and we will get to it later. headlines, a real markdown. that is not just a little tweak. the 2016igher than call, but they are missing by a long shot this fourth quarter. there are mixed headlines here. it is up 2.4%. that was last night, so we will see. tom: we will see what it does this morning. for our fed coverage this morning, we thought it would be good to bring in two people with a little bit of expertise. they have been through this before. both of them remember 1994 as a time of unique sport. maher is with hsbc. it is believed that we will stay low on rates. we are thrilled to have robert , with mr. flurry of the

out.burgh penguins bob sinche, if you are not playing for the penguins, maybe you will play for the fed. how big is this decision today? what is the nuance? is pretty well telegraphed. unless the fed does something markets are not expecting, and we certainly saw that out of the ecb a few weeks ago. the markets are uncertain because of that. the fed has prepared the markets for this. it is well set up. i would be surprised if we get a surprising outcome. if we get the hsbc call for lower rates? it is an outlier call, and i write? our logic is you raise today, maybe raise against some point early next year. the next piece of soft data does not just mean -- call.ake the hsbc

what is that mean for the markets? bob: it will put us in a situation where the central banks are moving toward the easing side, probably add some liquidity, and in the short run be a little bit better for risk appetite. but i think if the fed goes that route, it suggests that there is underlyingad in the economy until any short-term benefit is way down by the economic implications going forward. one of the chances of a significant amount of volatility surrounding this decision? daragh: it should go without causing too much of a ripple, but the markets are still short on the euro. what is the risk-reward? because that is where the action is.

if she delivers a dovish melzer h -- if she delivers a dovish message, i think that will help. it will be tough to change over the course of next year. vonnie: to both of you, we are going to see 2, 3, or four interest rate increases next year, likely. daragh: we have two interest rate hikes next year. what is the conversation? the conversation will be, will they deliver those two hikes? equivalently, might you have to stop every g 10 central-bank that started post crisis? tom: there is the terminal chart? bob sinche has this tattooed on his left arm. this is paul volcker up here. you go. gh's point, 1, 2, 3, 4, 5, 6 and 1994.

and then one through nine. the what is calling for that, right? bob: we are starting at zero. it is hard to argue that close to zero is a normal level of rates. the terminal rate may be lower than it has been in the past. but i think the fed needs to get back to some sense of normalcy in the level of rates, and get the financial system functioning more normally. that is what this is about. for me this is not about a tightening. this is starting to reestablish normal functioning of the money markets and the financial system. you need to get interest rates off zero to do that. tom: the bad part of that is commodities. sinkeadline comes across, sink drops the lowest level since 2009.

there is a backdrop of commodities as well. and that feeds into the inflation story, which makes you wonder how high the fed will be pushing things. data dependent and gradual at the same time? bob: it is an issue of whether ,e are going to have to tighten because inflation pressures are beginning to build. that would require policy response to be more aggressive. beginning to we normalize, normalizing the financial system, normalizing the rates to get returns for savers. i think it is the latter. getting the financial system on a better, more sound footing for the level of interest rates. in that context, i prefer the word "normalization" to the word "tightening." roubiniing up, nouriel and his comments on this historic day and the system that

wraps up with chair yellen. we will give you perspective with our esteemed guests on the fed. stay with us. ♪

vonnie: this is "bloomberg surveillance." pharmaceuticals are down, cutting its forecast for the fourth quarter and for the full year 2016. 2.20ve seen debt of about 5 billion during that time as well. and on prosecution agreement with the justice department, the banks will pit when he $4 million -- a $24 million fine.

the services come and he says they need to satisfy government concerns. halliburton says it will sell assets to avoid antitrust issues. and competition is hurting espn. profits single biggest generator. espn plans to reinvent its franchise for mobile viewing and online sharing prayer lord help us all. that means we can watch games mobiley. at: what was going yesterday the strategy for him in dubai exchange, a litmus paper. we have two esteemed guest to speak on it. first, here is economist nouriel roubini on our nascent currency war. roubini: there is actually the beginning of potentially currency wars in a world in which there is not enough domestic demand from

private debt. you want to grow more by having experts, which implies weaker currency, easing of monetary policies. but it is a zero-sum game. bee was a balance has to stronger, some would say balance has to be weaker. so we are in a war where everybody is trying to jumpstart growth. how does the united states respond to the realities and the knocked down effects of a currency war? riel: the zero policy rate is going to be the fed because -- theweek i'm a growth weak economic growth. i think that is going to force the fed to actually start hiking slower, and much less than

otherwise it would have done. if you are going to hike too much, that is going to weaken growth. inflation is going to be lower and the fed will reverse itself. even if it starts hiking this week, it will have to go extremely slow, extremely gradual. at theuriel roubini strategy for them yesterday. bob sinche, i look at all of this debate, and it reeks of flows. it is not about really just rates at beverages transatlantic. internationalfor finance was at the for a. they may clear money was finally out of emerging markets right now. is that part of the currency war? bob: that is the obligation of the diversions of policies. -- that is the implication of the diversions of policies. now we are beginning to normalize that a little bit.

i think that is an outgrowth of what is happening out of u.s. policy. but again, the u.s. needs to run monetary policy for the benefit of the u.s. economy, what they think is the best. if currency is too strong in the emerging market, they complain about it. if it is too week, they complain about it. it is countries adopting appropriate policies. the shanghai banking corporation of hong kong in london -- have they made it his vision on wednesday -- on where the headquarters is? >> pending. tom: when i look at the currency wars, i see quadratic emerging-market currencies. on a long chart, they are very curvy. that is not good for turkey, south africa, russia, and on and on. what does that signal to chair yellen? daragh: i suspect emerging markets will hope, in the wall -- that, that the said

the fed -- that hopefully will be done. now we can worry about politics and weak growth and all that other thing. but at least the fed emerging-market rate debate will be in the past. guy: you talk about the fact that the u.s. exists in isolation, but at the moment we are looking at u.s. companies paying more for oil relative to where they were previously versus the rest of the world. the rate is going up from the fed. the dollar is rising. you are seeing the chinese selling assets, and effectively that is a reverse qe that is happening. there is a lot going on in the intonational arena leaking the u.s. economy. bob: i do not know if it is leaking into the u.s. economy yet. i do not think china is selling that much in assets. there is capital flow going out

of china into the other developed markets. we are talking about levels. i cannot imagine a fed rate that under 25 basis points to under 50 basis points will upset the economy. a capital flows out of emerging markets, many of them are reflective of the fact that they are commodity producers and commodity prices are coming down. we are in a down cycle of commodity prices after about 20 years of an up cycle. if all the governments and all the central banks in these economies would manage policy correctly, then markets would adjust overtime. i think that is what we are looking for now, is the beginning of that adjustment process. do not forget this is also year-end. i think that is part of why we see this volatility in markets. how subtle can some of this currency stuff being? i am watching what is happening with the euro rate versus the

pound. but every time the pound gets a little strong, governor carney comes out and make some adjustment. daragh: i would not use the word subtle. you are being kind fairbank. we have been in a currency -- i would -- you are being kind there. we have been in a currency war. this is nothing new. i think you are right, carney -- i would notly say talking down sterling, but he is not trying to disavow the market. is playing the game that everyone else is playing in central-bank land. and bob sincheer with us today. this is the spirit i heard in dubai. thereluctant hikers --

reluctant hikers. i love that phrase. we will try to capture it this afternoon beginning at 1 p.m.. we are thrilled to bring you richard clarida of columbia university. as we discussed the nation's monetary economics. stay with us. "bloomberg surveillance." ♪

guy: welcome back.

i'm guy johnson in london with tom keene in new york. this is "bloomberg surveillance" on bloomberg tv and on bloomberg.com. that is london. i would argue today that it is definitely washington. we await the fed decision. that's take you to your "morning must-read." sunni versus shia, the oil story all mixing into the frame right now as everybody tries to figure out what is going to happen with crude next. probably one of the most critical decisions, one of the most critical numbers of 2016. what will be the average oil price? tom: it really is. the terminal value goes down --

robert sinche has a lot to do with this over the years, particularly with his tenure at bank of america. how do you full commodities into the calculus janet yellen faces yak of you cannot ignore them, right? bob: this has been a real positive for global spending, and i think people have a tendency to ignore that. we worry about domestic demand in the eurozone not growing. real retail sales have been 2.5%.g at 2%, that is pretty strong growth for an economy that has gdp growth of less than 1%. consumers are really seeing the benefits, but the benefits are spread out amongst the global economies. vonnie: do they continue to spend that dividend? when the price goes down immediately, there might be a bit of euphoria. does that affect -- does that effect go away?

bob: they can rebuild some savings, and in overtime when they see the declines are sustained, they adjust their spending habits. they have been reluctant to do that in the past, because the price of oil would come down, then bounce back up to $20 or $30 a barrel. then i think these benefits will accrue to consumers. the savings rate has already gone up. we will see this filtering through into spending. we have seen that in a global phenomenon. tom: bob sinche with us, and daragh maher. now that you are living here, do you change the pronunciation? daragh: i take any pronunciation i get. ♪

beauty of washington. our focus is a brilliant sunrise in washington, the most attuned toay, all

the fed decision. just important -- just as important as the press conference with chair yellen. here is a "first word news" with vonnie quinn. was frontreign policy and center during the presidential debate in las vegas. ted cruz called for more attacks on islamic state. ted cruz: the first persian gulf war, we launched roughly 1100 era tax a day, carpet bomb to them. right now president obama is launching 30 air attacks a day. the kurds,be arming using air power, fighting and killing isis where they are. donald trump called for shutting down parts of the internet in areas controlled by islamic state. the obama administration says anyone needing medical coverage has until tomorrow night at midnight to sign up.

were treateders for minor injuries after southwest airlines -- after a southwest airlines jet rolled off a runway. the boeing 737 got stuck yesterday while taxiing to a gate. all 138 people aboard were safely evacuated. a powerful storm jobs up to two feet of snow in colorado. denver'snches fell at airport, affecting 500 flights. tom: guess what i learned last night. you can be on one of these fancy airplanes in the fancy see, -- in the fancy seat, and you have a camera when you land so that you can watch what the plane does in a 30 mile an hour crosswind. like you see in the caribbean, coming inside raise. -- coming in sideways. this is fun. there, know that going

my luggage came out first? would you believe that? vonnie: let's get back to fed coverage. maher are and daragh with us the entire hour. we will get to this in a moment. a few words probably about them. but let's talk about the blowup in high yield we have talked about commodities. gh, you say lower rates next year. does that apply to high-yield? has to shiftebate with two hikes next year. it goes to the narrative of there is dislocation beyond the fed. we talked about commodity prices. you mentioned the high-yield market. week, i said what will the conversation be? in that wall of

worry, and high-yield is one of them i guess. bob: i think that the problems we have seen are in the high-yield market where people went to the extremes, and particularly those who were exposed to the energy sector. those were some bad decisions. in general, although liquidity toward year-end is a bit strange, the markets continue to function. capital is still flowing. there were complaints six months ago that high-yield spreads were too low, and now they are widening out again, and that is going to be a problem. these are markets that are adjusting to the fact that global liquidity is not going to be as abundant as it has been. we need to get more normal pricing in the financial system, and that starts with a thin -- with the fed funds rates and goes to other markets. it is not a pleasant process, but we are establishing more normal pricing for financial assets. that is healthy for the global

economy and the u.s. economy as we go forward. guy: you back out energy and you are rest with -- you are left with the rest of the high-yield market. what will the average default rate look like next year, and where do we go from there? by --ou have to perhaps you have to perhaps back out of the energy sector because that is where the adjustment process is significant. other than that, conditions are relatively stable. profits are not necessarily increasing the way they were. part of that is the dollar effect. recession we get it a a -- unless we get a recession, profits go higher -- tom will tell me nominal gdp growth is less than 5%. that is a concern for the high-yield market in terms of revenue growth, but i do not see the budding crisis that is coming on in a broader way. tom: what is the why thickets hsbcsbc -- that gets the

-- why is that that's why is the -- daragh: i mentioned uncertainty. we have the high-yield situation as well. if you would like an entity specific story. globallying to be in a low rate environment. low for longer. most central banks are doing nothing. the fed is the exception and it is going to be doing very little. liquidity is being normalized. it is going to be an ongoing story. tom: it goes to changing correlations as we go into the new year. there are only 12 people working today. vonnie: exactly. with the holidays, it seems. it is strange. let me ask both of you -- are traders ready for what is going to happen? i mean, mechanically, do they know how they will be trading tomorrow? of thethink the traders bond markets are well prepared for what is going to happen. the tougher one might be the money markets because that is

where the adjustment process has to take place. it is unusual to get the level of rates up while you have so much less a quiddity in the system -- so much less liquidity in the system. they will be required to get that funds rate up. in the past when the fed says the fund rate was going to be x, it was x. do you have a confidence that the short-term paper market can manipulate and be malleable with what the bank of england does or the fed does? bob: i think it can't. this is going into year-end and we will -- i think it can. this is going into year-end. the have a good handle on process and how to adjust rates higher. it is a learning curve in terms of different procedures, but i think they have studied this, they have prepared for this, communicated a lot with the markets. there will not be a great

dislocation. tom: the heart of the matter, we'll have that in our coverage, with short-term market reaction as well. we will have coverage all through the morning on bloomberg radio and bloomberg television. at 1:00 p.m., scarlet fu has demanded i attend. michael mckee will be there as perspective on the fed decision and janet yellen's press conference. stay with us. "bloomberg surveillance." ♪

guy: welcome back. this is "bloomberg surveillance ." i'm guy johnson in london, with tom keene in new york. it could be new york, but today

it is definitely washington. we await the fed decision. let's get to vonnie quinn for the "numbered business flash." -- for the "bloomberg business flash." the company helps businesss process transactions. shares of product -- shares of prada missed estimates. kohl's employees are facing a 179-hour marathon. the retail chain's doors will be open nonstop from 7:00 tomorrow morning until 6:00 p.m. on christmas eve, the 24th. the copy hopes some shoppers come late night after seeing the "star wars" movie. i could see that. tom: it is out and getting rave reviews. vonnie: if they are selling star

wars costumes, i could understand. the jar-jar whatever it is is not in their bank. -- is not in there. the single best chart, it is a two-year yield. it signals a fed meeting this year. look at the red circle. way outside two standard deviations. seenly bob sinche, we have some reaffirmation of where we are going. what happens off the right side of that chart, though? i cannot get to the next step of a two-year yield. bob: not much happens in the short run because i think janet yellen has a clear understanding of what she ought to be saying today, and she probably will meet market expectations. my guess is that we stabilize out there just under 1%, and the

markets really will begin to react to data because i think go withis going to stated dependency going forward. the two-year call, yield, the 10-year yield comes down because steve major says that. does that signal recession, or continued sluggishness? daragh: it reflects sluggishness in the economy. this is not a gang buster economy. we are doing fine. above and beyond that, we are not so sure. as bob said, this is a data-dependent environment. we think a lot of the data remains uninspiring, and that will continue to support the long end of the bond curve. guy: what will happen between the u.s. treasury and the bund? how does that work post meeting?

daragh: i do not think that particularly changes. an anchor to the u.s. rather than the other way around. that would be a constraint on rising u.s. yields. i do not think the fed decision today will upset that relationship. it is another factor that argues against the bearish on story that some people are trying to create post fed. in the interview yesterday with tom, larry summers said that we need to -- when do we get their bank? when do we get there? daragh: they talk about this real equilibrium rate. an overstatement, but that is part of the motivation today, that when we face the next downturn in the economy, please let us have something to use to help matters. tom: i look at all this, and

here we are. it is seven years on. ushink, bob, you were with on an august week in 2007. what i have not seen from you two is cathartic moves. we have drifted lower in oil. do we need a cathartic move to clear the markets, to give central bankers the freedom to do what they need to do? where is the passion? see --me people would some people would say that there has been a cathartic move last week, and that markets are still not dealing with tight liquidity. i think that is a critical point. when you get really big dislocations in markets is when liquidity gets very tight. we are talking about the fed potential he raising the funds 3/8 of a percentage point. the ecb injecting liquidity, the bank of japan injecting

liquidity. importantly, the pboc in china wanting more flexible it on their currency, so they do not have to take liquidity out of the markets. so i do not think we will get these big dislocations in markets as long as central banks really are providing liquidity. we really have not tightened policy yet, and i do not think what the fed is going to do today is going to tighten policy. off extremelyus easy policy. i do not think we will get those kind of moves unless they are driven by other markets. a lot of what we saw in the high-yield market is dislocations in the energy sector, which is a supply issue. it is not a demand issue, it is not a tight liquidity issue. pumping a lot more oil and natural gas, and that is not a terrible thing for the global economy. guy: will we ever get to the point in this cycle where we think rates will go above inflation? i.e., we end up with

rates above 2%? daragh: i do not want to be silly, but it will be data dependent. if global trade picks up, if you get wage growth accelerating within this market that we have in the u.s., the u.k., and elsewhere, that changes the inflation dynamic. then it is appropriate to have a nominal rate above your deflator. lucky at thes current moment, but things can change. vonnie: i think you just called the fed silly. let me ask you, what have we fedned this time from the rate at zero? bob: the fed and all central banks around the world have realized how much flexibility they can inject into markets, how much flex ability they have in conducting policy.

if you ask the the -- if you ask the ecb or the bundesbank if they could adopt policies like this, they would say there is not a chance in the world this could happen. i think all central banks around the world would love to have the opportunity to get rates back to a more normal level, get the system functioning more normally. they would love to get even a zero real fed funds rate, and if you look at underlying inflation, the core cpi is at 2%. certainly a zero real fed funds rate, which historically is low, we get the funds rate back to between 1.5% and 2% over the next 12 to 18 months. tom: let's bring in that chart. andrt sinche with us, daragh maher. throughout the day, discussions on what chair yellen will do. fu,1:00 p.m., scarlet

michael mckee, and myself with esteemed guests, including richard clarida. we want to talk about how the market is affected by this important fed decision. stay with us. ♪

tom: good morning, everyone. how about a forex report on this important day? robert sinche has looked for a stronger yen. one of the surprises for 2016. the yuan continues to weaken. stasis.ruble, attention, we need to move to "bloomberg ." david westin, it is a big day. david: and welcome back from dubai, tom. --will have been inherently we will have brendan greeley live. we will continue to cover the oil saga. and the big news is we have pam -- weere for much of -- have dan bell here.

he will talk about oil and much more. always interesting to see what he has to say. daragh maher is with us from hsbc. and carl riccadonna is too young to remember when rate rises went up. what is the single thing that you are looking at. what is the thing you will focus on not in the decision but in the press conference? carl: the major communication challenge here -- because there is a broad consensus saying the time is right to go, and we have heard any range of reasons. stanley fischer is saying central banks are begging the fed to get it over with. there is a broad consensus around moving today. there is not a broad consensus for future rate increases. we have to hear what the future path is going to look like, and janet yellen and the fed will make great efforts to offset or neutralize the impact of today's signaling ae by

lower cumulative pass over the next one to two years. tom: let's bring up the charts so robert sinche and daragh e of what we aw do. thenve the 0%, the 2%, and the basic global disinflation that we have seen. how do we get back to 2%? or is there a new level that is not at 2% inflation? carl: i do not think there is a new level. the economy has been sluggish in the hangover from the financial crisis, and economists are looking at recent history and saying that is the template for the future. that is not the case. we had consumer deleveraging, banks afraid to lend. once we get beyond this, the outlook can look very different. one last point, the game changer for next year is wage inflation. we are crossing through neutral unemployment, and that means we will see wage pressure. that has impact for consumer

spending, business investment, they were forced participation -- labor force participation, and productivity. tom: the money question is, is that 2% certitude that you studied at brown, i studied, vonnie quinn studied, will that nudge down that inflation bogey that they are trying to get to? bob: we suddenly had this magic 2% number out there, as if it is a magic number. i am not sure if it should be 2%, 1%, 10%. i do not think there is a reason we had to get to 2%. it has taken on way to bank much importance. we want to make sure that we do not have persistent decline in prices and any deflation expectations because that affects people's spending behavior. we have not seen that be the case. real consumer spending has picked up, a benefit of lower energy prices in particular. i do think the equilibrium level of interest rates may come down

a little bit because potential growth around the world has come down. but what we are talking about is thingf a percent or some like that. we have gotten fixated too much on this 2% inflation number as a magic elixir for everything. guy: daragh maher, if you were coming down from mars, a different planet, which would be the first bank to raise rates, england or the fed? daragh: the bank of england. why will the fed move today? because they are telling us they are going to move today. coming from planet mars, i would say absolutely that is the way to play it. bank of england on paper could go as quickly as the fed, but they are not going to, simply. bob: let's keep in mind that u.k. rates are higher than u.s. rates. tom: so we're just trying to get

back to -- bob: this is normalization. we are trying to get rates back to a more normal level. the bank of england never got to zero. vonnie: i'm dying to see what the new type of statement will be. tom: slack? bob: there will be measured pace. do not expect what we saw in the last cycle. tom: what we saw with greenspan. this is exciting. daragh maher, thank you. bob sinche, thank you. guy johnson, i know you will be watching in euro evening. guest from deutsche bank. stay with us. ♪

stephanie: welcome, welcome, welcome.