definition of transitory. it could go on. second, i wonder if the committee knows how quickly labor increases or market tightness translates into higher prices. also theou is forecast. my question, what would you be willing to do if you don't see progress towards 2% inflation. we've missed the target for three years. willing to do?be second, would you allow inflation to bounce around between 2% and 3% the way that you have allowed it to move under 2% for the last several years? thanks. chair yellen: let me say that with respect to oil prices, i have been surprised by the further downward movement in oil prices. but we do not need to see oil prices rebound to higher levels in order for the impact on inflation to wash out. so, all that they need to do is

stabilize. i will be that there is a limit below which oil prices are likely to rise. we look at market expectations, market forctations are stabilization. and then some gradual upward movement. i certainly grant that we have had a series of shocks, pushing them down. but we are not looking for them to revert back to the higher levels that they were at. merely to stabilize. would point out, you ask me, would we tolerate overshoots? for a number of years between 2004 and 2008 we had a series of increases in oil prices that for a series of years raised inflation above. again, we didn't have a 2% and -- 2% objective then. we judge those increases to be transitory as well.

looking through them, we do monitor inflation expectations very carefully. if we saw in a meaningful way that inflation expectations were either moving up in a way that made them seem unanchored or .own, that would be of concern we have called attention to some slight downward movements and some survey measures. we are watching that. but i still judge that inflation expectations are reasonably well anchored. so, yes, we have tolerated inflation shortfalls that we thought would disappear over the median term. just as we did overshoots of inflation that we also judged to be transitory. but we do need to monitor inflation very carefully. because if energy prices and the dollar were to stabilize import prices, our expectation is that

both headline and core inflation would move up. and if we fail to see that occurring in the manner that we expect, of course we would need to take further action to reconsider the outlook and put in place appropriate policy. >> [inaudible] know, if the you economy were disappointing, our actions would not be based purely on inflation. we would put employment into account. i cannot give you a simple answer. we would pursue a more accommodative policy. we do -- we certainly are committed to more of the median term. >> appelbaum, "new york times." financial markets as you begin to increase risk, you did talk about that today. is that appointed to agree with?

how will you judge whether financial markets are excepting in transmitting these changes? chair yellen: there are a number of different examples through which monetary policy has transcended suspending decisions . the behavior of longer-term interest rates, short-term interest rates. the value of asset prices. the exchange rate also. these are transmission channels. we, we will be focused on short-term financial volatility. but were there unanticipated changes in financial conditions that were persistent and we judged to affect the outlook, we would of course have to take those into account. financialant developments, but what we are looking at here is the longer-term economic outlook.

are we seeing persistent changes in financial market missions -- conditions that would have a significant bearing on the outlook that we would need to take into account in formulating appropriate policy? but it's not, short-term volatility in the markets. >> [inaudible] chair yellen: well, you know we -- this is not an unanticipated policy move. we have been trying to explain what our policy strategy is. it's not as though i'm expecting to see a marked immediate reaction in financial markets expectations about fed policy. they have been built into the structure of financial market prices. but we will obviously track carefully the behavior of short

and longer-term interest rates. the dollar and asset prices. if they move in persistent and significant ways that are out of line with the expectations that we have, of course we will take those into account. >> thank you. rebecca jarvis, abc news. historically most economic expansions fade after this long. how confident are you that our economy won't slip back into recession in the near term? chair yellen: that me start by saying that i feel confident about the fundamentals driving the u.s. economy. the health of u.s. households and domestic spending. there are pressures on some sectors of the economy. inticularly manufacturing the energy sector reflecting global developments and developments in commodity

markets and energy markets. but the underlying health of the u.s. economy i consider to be quite sound. thatnk it's a myth expansions die of old age. i don't think that they die of old age. so, the fact that this has in quite a long expansion doesn't lead me to believe that it's one that has -- that it's days are numbered. the economy does get hit by shocks. there are both positive shocks and negative shocks. so, there is a significant odd probability in any year that the economy will suffer some shock that we don't know about that will put it into recession. so, i'm not sure exactly how high that is in any year. maybe at least on the order of 10%. yes, there is some probability

that that could happen and we would appropriately respond, but it isn't something that's been youed to happen, because had a long expansion and i don't see anything in the underlying strength of the economy that would lead me to be concerned about that outcome. an outcomevent of like that, in the most negative scenarios, are there other policy measures outside of interest rates? outside of traditional quantitative easing that you inside the fed have discussed around another environment like what we saw in the great recession? have you talk about anything that would be more direct to the economy? chair yellen: during the years in which the economy was recovering from the great recession and we put further policy measures in place, we studied our policy options quite

carefully. as you know, communications policy can affect market expectations about the path of interest rates. they played an important role. that's something that we did in conjunction with asset purchases . we wrote our overnight interest rate effectively to zero. we have seen some foreign central banks, the ecb and others that have taken their overnight rate into negative territory. is something that i don't contemplate we will need to do this, but it is something that we could study. of course, we have balance sheet policies and there might be a range of direct policies that we could use as well. this is something that we have thought about, our range of options.

>> sam flemming. sam flemming, financial times. about the balance sheet that you are adopting today, you wanted to keep it until normalization was well underway. can you explain why you anticipate that to be appropriate? terms of it mean in what's appropriate? what is your idea around having larger balance sheets than historically the long-term? yellen: in the normalization principles that are in effect, the committee wantd that we eventually to operate with a much smaller balance sheet than we have at present. that we would reduce the size of essentiallysheet to whatever size we needed to manage monetary policy, in an effective and efficient way. since lot has changed

pre-financial crisis in terms of the financial system. we are engaging in a project at this time to consider what our long run operating framework should look like. i can't tell you exactly what size of balance sheet we will determine is the best to operate in an efficient and effective manner. it might be somewhat larger than the very tiny quantity of .eserves that we had precrisis we have not determined that. we have also said that we expect to reduce the size of our balance sheet over time by ceasing diminishing or ceasing entirely reused assets. beyond that we haven't given additional guidance, other than to say that the timing of reduction's and reinvestment will depend on economic and financial conditions.

i suppose that the additional , weance that we are giving want to see, as i mentioned, there are a number of considerations and the committee has made no further decisions about this. as we have discussed the factors relevant to the decision, one factor that we have talked about is the desirability of having some scope to respond to an adverse shock to the economy by lowering the federal funds rate. so, it would be nice to have a in terms of having raise the federal funds rate to a certain extent, to give us some meaningful scope to respond. now, i don't have in mind here any particular level of the federal funds rate. it would depend on the entire economic outlook and how robust

the economy is. but that is an important consideration for the committee. that this is not something that we expect to be turning to to cease reinvestment very quickly. >> peter barnes, fox business, ma'am. on financial market conditions, is there a problem developing in the high-yield sector of the bond market, the junk bond sector? as you know last week a mutual , 3rdhalted redemptions avenue management, so that it would not have to in the sharp selloff of these kinds of bonds. are you concerned at all? in the meeting did you discuss any systemic risk because of the conditions in the junk bond market? individual institutions sold trillions heavily because of low rates. did the fed's low interest-rate

policy help to sow the seeds for this development? thank you. chair yellen: risk spreads have been partly moving from last year with funds over recent months, 3rd avenue focused credit funds were a rather unusual open-ended mutual fund with very concentrated positions , they were especially risky in illiquid bonds. this had been facing very significant redemption pressures . my understanding is that the sec is in touch with 3rd avenue. as you should probably know, the sec has imposed some reforms to address what is a structural problem of liquidity mismatch in open-ended mutual funds.

so, we continue to believe that financial conditions are supportive of economic growth. we will be, have been, and will continue to track developments in financial markets very carefully. that i think we have a far more resilient financial system now then we had prior to and highlyal crisis capital banks that are well situated to support corporate lending. i would also point out that many corporations during these years have reduced their interest payments and extended their debt profiles. , but wethat should help will be evaluating this carefully.

>> do you mind? >> earlier you said that those extensions don't die of old age. that it is central banks that kill them off instead. i wonder how worried you are about the possibility that the fed will have to turn around after hiking rates erie other central banks have had to do just that. how damaging do you think that might be to the fed's credibility? yellen: when you say that central banks often kill them, i think the usual reason is that and they havetrue tightened policy and allowed inflation to get out of control. at that point they had to tighten policy very abruptly and substantially. it has caused the downturn.

the downturn has turned to lower inflation. if you don't mind me flipping the question on you, i would some kind of dynamic at some future date. it is important to begin early and gradually. is true that central rates have raised rates and later turned around. not in every case that we've selected a policy mistake. .conomies are subject to shocks sometimes when they have raised rates it hasn't been the wrong conditions have changed in a way that they have had to revert policy to respond to shocks. i'm not denying that there are central banksre

have moved too early. andave considered the risk we will avoided carefully in making today's decision. as the committee has set, you are watching economic developments closely. with -- religious policy in totever way is necessary support the obtainment of our objectives. >> hi, jim from "the l a times." you said it's important not to overload the significance, but as you know a lot of attention has been paid to it. what, if anything, might be different in the next few weeks or a few months because of this interest rate hike? chair yellen: the first thing that americans should realize is todayhe red's vision

reflects our confidence in the u.s. economy. while things may be uneven , we see anons economy that is on the path of sustainable improvement. in thinking about their labor market prospects and their financial prospects going takerd, i hope they will this decision is one that confidence fomc's that conditions will continue to strengthen and job market prospects will be good. it will be reflected in some changes in borrowing rates.

longer-term interest rates, loans that are linked to longer-term interest rates are unlikely to move -- to move very much. for example some corporate loans are linked to the prime rate, which is likely to move up with the funds rate and those interest rates will adjust. there are credit card rates that have moved up slightly. remember, we have very low rates and we have made a very small move. >> met him chair, how concerned are you with interest-rate risk in banks now that we have ended the zero rate era?

is that a factor in decisions going forward? risk yellen: interest-rate at banks is something we have been monitoring carefully for quite a long time? the community organizations that we work with, part of our supervision has been ensuring that they manage appropriately interest-rate risk. ,arger banking organizations they are subject to stress tests and capital planning. these scenarios that we have presented in each of the last three years, the look at their would beo withstand much sharper, increases in interest rates. we are envisioning what happened. we want to make sure that if there were sharper interest rates, unlike our expectations, they would be well positioned to

handle it. and we've concluded that their capital positions are sufficient to whether it. this has been very much on our minds. >> lindsay dunn shire, with thaters." you keep saying these are holding back, but every day there are outside impulses. my question is -- if in a years time inflation remains where it is today, would you see that as a defeat for your theory? in this that part of the reason why the language has been updated in the statement that you want to see actual progress? yellen: we have said that we will carefully monitor actual and expected progress. i think that standard

fed policy has been to look through shops that are transitory. occasionally there are sequences of transitory sop -- transitory shocks. there have been further declines in energy prices. you know, as i said previously, i do ask that there is a bottom to that. i expect that we will be seeing it. we -- if we analyze inflation data and conclude that clearly transitory influences are holding down inflation, i do not want to say that we would respond to that. if we concluded that there were structural factors or a problem with our theory or some global that we are force

persistently holding down inflation in a way that was not transitory -- and i don't want meaningh any simplistic to what we would need to see to conclude that any inflation data. we took action to make sure we adjusted policy to maintain our 2% objective. if we sustained the departure, if we really needed to address it. >> over here. greg robb, from market watch there has been a lot of talk today and a lot of discussion thet the downside risk on environment. but you say in your statement

that it was balanced. to talk more about the upside risks that you see to the economy? some fed officials have been emphasizing lately the median cpi's from dallas and cleveland. how much weight do you put on those measures? starting with median cpi's, we look at a range in the median cpi has been somewhat more stable in the pce, but there is a systematic gap between these measures and their objective is to percent on the price index. so there is no simple translation. we do have pce inflation objectives. what's the other? the upside risks? there are upside risks to the

economy. focus on the downside risks. it's right to do so. we want to be careful of those. consumers are in much healthier financial conditions. their income prospects have improved. we see them buying a lot of cars . housing has been recovering very slowly. but the demographics would point to considerable upside for residential investment? i mainline forecast is for gradual recovery, but there is upside risk there. we have seen that the decline in drilling has been depressing investment spending, but there is upside risk to. the global economy, we tend to

focus on the many economies undergoing difficult adjustments or slowing growth, especially with declining commodity prices. even recently we have seen growth in emerging markets strengthen. not only downside risks, but we is that we regard the risks overall is balanced. >> chair yellen, steve beckner of mmi. you have often said that the fed will be down, but you have also said in a path that you want to avoid being mechanical. how will you avoid the market perception that you are falling into a pattern or becoming mechanical? >> we will try to avoid that. i do want to emphasize that

while we have said gradual, gradual does not mean mechanically timed, equally sized interest-rate changes. that's not what the committee means. my guess is that the economy will progress and a manner that's not sufficiently even. hikes,evenly spaced wanting to do with appropriate. i recognize that that's a danger but i do want to assure you that we will be data dependent. that is as the outlook response appropriately. i strongly doubt that it will mean equally spaced hikes and it certainly is not the intention of the committee to follow any mechanical formula of that type. >> bloomberg.

you just mentioned it may be possible that factors are holding on inflation as well and the dynamic that is helping with topline inflation is happening with court as well. it was revised, the median projection, and this is happening at other central banks as well. markets see much lower inflation. within the fed, how are you your models to look at a new reality and what are you learning as you do that? chair yellen: the main reason that we revised down our projection ever so slightly, it is hardly revised, for core inflation is because we have seen further appreciation that the dollar is holding down prices that spills over into court inflation. my own estimation is that core inflation will pick up.

idiosyncraticous factors affect court inflation, for example nonmarket prices -- price increases. those are hard to understand here we have been running at a slow pace. there are factors that have affected inflation in medical care prices that could change over time. there is some issues and tied it -- idiosyncratic factors. but i personally do not think we are in a world where inflation is determined in a different way than it has historically. i see import prices and energy , headlineholding down and also core, and i do believe it will pick up. it has been said, if that theory is wrong and we do not see inflation unfolding in a way that the committee expects, we will make adjustments overtime and policy. >> you have a background as an

academic commodity looking into these models to see if they need to be adapted? chair yellen: we have many people studying inflation models. i try to -- let me express some humility about them. i do not think that they are perfect. onetary policy is based economic forecasts. there are theories about how the economy works that govern many aspects of economic forecasting. consumer spending or residential investment or inflation, the underlining theories are not perfect and they are subject to uncertainty. this is true in all aspects of forecasting. is why we -- which change our forecast and a models that are persistently not

working. we're always trying to develop better models. i am not aware of a different model of inflation that would be superior to the one that we employ. verify that inflation is moving in a manner that will be -- and if it is not we will adjust policy accordingly. >> jeremy, then nancy. with --, are you concerned that your decision could have an impact on situations abroad that could impact the u.s.? chair yellen: we are constantly monitoring for development, especially in emerging markets. we understand that in the global economy, with integrated product and capital markets, that things

are linked and the performance of the u.s. economy has important spillovers into emerging markets and vice versa. trying very carefully, we have made a commitment to emerging market policy makers and that we would do our best to communicate as clearly as we could about our spillovers iid might result from abrupt or anticipated -- and unanticipated policy moves. i think that this was expected and i hope that it been communicated. i do not think it is a surprise. this action takes place in the context of the u.s. economy that is doing well and is a source of strength to the emerging markets and other economies around the

globe. so, that is there could be negative spillover their capital flows, but remember there are also positive spillovers from a strong u.s. economy. that many view is emerging markets are in a stronger position than they ,ould have been in the 1990's for example, that they have stronger macroeconomic policies. they have taken steps to strengthen their financial systems and are better positioned to deal with this. on the other hand, there are vulnerabilities there and there are countries that have been badly affected by declining commodity prices, so we will monitor this very carefully. avoid have taken care to unnecessary negative spillovers.

nancy marshall with marketplace. growth is not where you would -- wage growth is not exactly where you would like it to be. how much will that play into next year as you decide to raise interest rates more and when? chair yellen: my expectation is in a strengthening labor market we will see faster wage growth and i believe there is, with the 2% inflation objective,for wage growth to be higher than it has been. we may be seeing some incipient signs of past wage growth. in compensation and some slight firming in recent months and average hourly earnings. i hesitate to say that this is a firm trend. we have been disappointed in the past. wage growth is not -- there are

many factors that affect it. it is not definitive end any sense -- in any sense. but it has a bearing on the inflation outlook. and also has a bearing on assessing how much slack there is in the labor market and i think a number of my colleagues looking at the slow pace of wage seen their have estimates with the longer run unemployment rate have come down. i think that is one of the factors that has prompted those adjustments. so, you know, it does affect views about how much slack there is in the labor market. >> thank you. >> we have been listening to janet yellen, a spirited press conference. we welcome all of you on bloomberg radio. 1.006.ld is out to

i want to go to a terminal and see the question that stopped them cold. this is the two-year yield from the beginning of the year. here is the recent leg up and a celebration today of higher -- i was stunned at how the reporter from routers stopped janet yellen cold, did you notice that? she is not one to get caught up in a new number or new phrase. we will know it when we see it. and you'll have a probably pretty good idea what is happening as well. other key points she made, policy is we want to move now so we do not have to move later. we expect inflation to rise. >> what else did you hear? there was a different -- this is a different press

conference this time around. there wasn't the energy. they raise interest rates and market got what they were expecting. this is what is happening. just to show you where we are. s&p 500 is up 31 point. the dow is up 244. and the nasdaq, 78. those are a little bit higher than they were when the press conference started. you can see the move as she began talking. higher on the day. so you have a bit of an idea of the santa claus rally going on right there. and in the bond market, we have had a significant moves, largely in the belly of the curve. the 10 yield note is up. it is at 230. and the five has moved significantly. and the 2-year note, that is pushing through 1%. barely moving to basis points. so you are seeing the fed

influencing interest rates as you would expect. and the stock market as he would -- as you would expect. >> we will continue our coverage through the day. james cameron is legendary at morgan stanley, right or wrong, he has simply put money at risk and his perspective at risk. i want to make clear, the money question is, did anything change your view today on where you want your bonds to be six months out, or one year out? james: i think there are a couple of things. she told us something about response, they are going to hike interest rates gradually. the second day is she told us to parts of the input function. they will carefully monitor inflation, that is something we will need to watch. so it will not rise quickly. the other, the financial conditions. she does care about what other financial prices are doing. that means to me as a fixed

income portfolio manager is that we need to construct a port vila that can out carry the rate rise. if you can do this, you can earn excess return. the other thing that is interesting, yields are at a different level. we are looking at treasury yields which are low, but other yields are atment about 2.65% for a high-yield yields-- and high-yield are up. these are competing with equity. so in many ways a fixed-income market is well set up to take on what janet yellen is saying about a slow rise in interest rates. as long as we have economic recovery next year and we do not have a recession, we can expect a portfolio to achieve this. >> does it bother you that the fed long run forecast does not come down and it is

significantly above where the market is? james: it does not bother me. with the fed did today was correct. i do not like the terminology, dove-ish rate hike. dots should year, not come down. maybe in 2017 they come down. i can understand that but probably speaking if we have too of a move down, that will be in inconsistent message. that makes no sense to me. it adds confusion to the market. >> we will bring in our next guest. here is a quote from william gross, i love this. you wrote it in your latest. ring at up right away. are casinos, the print money,- they

but they are also manufacturing chips they will never have to redeem. a casino is an appropriate description. system in well-known gambling circles that is sophisticated lee called the martingale. what is actual progress, what does that mean to you? is you need tole double up to catch up. and many banks are doing that. janet yellen said today in the press conference that they have ish stance.a hawk she reflects a model that emphasizes transitory as opposed to structural factors and it continues to suggest short legs

in monetary policy. i think that the fed is basically living in an old age as opposed to a new age in a way that is relative of high leverage. it is reflective of globalization. >> right. she refusing to a -- and she is refusing to acknowledge it. >> i need to ask you about credit and the high-yield market. which way will that spread play out? can it move higher in yields, or will we see carnage in the high-yield market? i think we have reached a point in the high-yield market. the market for the first part does the function of retail. and it gives confidence and it is certainly shaken these past few days and past month.

high-yield prices have gone down by about 10-50%. confidence --f but i think with high-yield where they are come up hundred-600 basis points over treasuries that we collect a value that can hold its own for the moment. i think treasuries are attractive, but they cannot be that attractive if she continues to insist that monetary policy operates with short legs and that inflation ultimately, and actually very shortly, goes back to 2%. where is she in terms of what is happening? four issue in terms of commodity prices? were issued in terms of the influence of monetary policy on the continent of europe? fashioned a an old central banker and she needs to modernize her and her staff.

rate you by the idea of increases next year, or is that off the mark? bill: i don't. onis dependent in her view inflation moving back up from what are transitory factors are. she insists even if oil stabilizes at current prices, inflation will not go back up and there is an equivalence to that, but let's face it. commodity prices are continuing to go down. there is high leverage of a global economy that is not doing well. and to emphasize only the u.s. economy, which is only growing at 2%, that to me is not really reflective of reality. i think next year, yes it will not be a one and done type of move as reflected by the press conference and her attitude, but to the extent that we have two

and wait, this is probably what we will see. she will be waiting on inflation hitting 2% for a long time. >> let's talk operations. the open market -- is the fed's new regime going to work? we have not talked about the reverse repo operation. , 30 billion per counterparty, will you be borrowing securities from the new york fed? bill: i think lots of money market funds may be, but there certainly going to be a demand at the higher level. but my gut says this critical question, can the fed raise the lower bound to 25 basis points or more? they have the upper one at 50 basis points and at the interest rate they have subsidized banks without 50 basis points, but can

they in effect on a transaction basis, hundreds of billions of dollars, can they make the lower bound work? we will see that starting tomorrow. i think it is a cripple question. because if they cannot, there will be dislocations and money market flows and systems and of course it will be reflective of central banks and -- the central bank being unable to raise the interest rate to a level where they want to go. >> short-term, we have to wait and see how this plays out. across the rest of the curve, the fixed income, is there a pocket that is going to be troubled here? that will not go along with the fed? well, going along with the fed which is dependent upon how quickly they go, my opinion is that 2% as an ultimate target is

at maximum level, the green dots suggest the .5% and that is a dislocation between markets and how it things. i do not think that they are going there. but for the moment, in terms of minute to minute transactions, the market is selling off. >> i spoke yesterday to lauren summers, we had a fascinating conversation on stagnation and we are hearing that from you right now. it is absolutely critical that within our time of disinflation of real yield, that 2% level, are you predicting that within this time you have -- and that thatew 2% will be 1.6%, is stagnation -- structural stagnation? bill: it is reflective of what summers is talking about you i have talked about for a long

time, the structural factors that janet yellen is dismissing. we have a high level of leverage globally and in the united states. we have a demographic situation in which the boomers are aging and will save more and by less. we have a productivity problem which janet yellen mentioned, at least in the press conference, that is lower perhaps because of technology and influences on the labor market. --s a structural influences this way of thinking is basically capping the rate at 2% or lower. and certainly getting there takes a relatively long period of time to janet yellen's way of thinking, because of short legs or monetary policy, taking only 12-18 months. >> the key thing here is the effect on the real economy going forward. today has been a day of money markets and monetary policy, where will we be in the real

economy six months out? or a year out? >> one year we do not know. six months out, she is saying not much different. things will get a little bit better. we will see a little bit more inflation, but a small rate increase will not do much of anything to the economy. bill: i do not think it does. to the extent that the path going forward is anticipated to be much higher than what i am suggesting at 2%. it will create damage, damage in terms of the housing market and in terms ofe and investment in the real economy is financial markets, because financial markets are dependent upon that short rate in terms of leverage and barley. and you know, that ultimately affects the real economy. of course it does. >> what is something we need to watch? we have all been thunderstruck

by the decline in commodities in japan, and in china, and it goes on. gross paying attention to? : it is a combination of factors. he mentioned a lot of them. the chinese currency rate, which continues to depreciate, not by much but it is a trend. and you mentioned oil and commodity prices. leverage, all that in combination creates a system that is sensitive, more than sensitive to the number of deleverage basically of the system on an ongoing business. basically, the system itself is at risk in terms of delivering -- de-levering. they are position for 2% growth

in the united states. they are not necessarily positioned for a negative effect in terms of emerging markets, brazil, argentina, what may happen in puerto rico. these are shocks that potentially lie ahead and could affect the real economy. >> bill gross, thank you so much. we appreciate your time. and michael, that was the harshest criticism from bill gross. >> we will bring in brandon. whatross is not buying janet yellen said. did she make an effective case? brandon: did she make an effective case that is one and done, yes. how often can you say the word gradual? i think we can say gradual, everybody go home. she said, this is modest. even after this, this is accommodative. as far as looking at data, we're

back to data driven. the real question for me that came out of the press conference was the way that they are looking at inflation. at one point she said structural factors. she did not say structural factors are driving inflation. she put it in this objective. if they were -- at that moment everybody's fingers started clicking. i started taking notes. that is what we are all wondering. are these transitory? are they given by oil or is there something wrong with the way that we look at core inflation. we have to have humility, she said. she said they are not perfect. >> brendan, thank you so much. you stopped her cold with your question. , thomas.ng us you owned the analysis of wage growth. is the wage growth out there to give janet yellen actual progress?

tom: i think it is interesting that -- it was the very last question asked, and she sort of conceded the point that wage growth could be on the rise. that is certainly part of the narrative she was trying to weave. keep in mind, if you look at inflation, to me this is one of the key is to points within the summary of economic production, and feel at the inflation forecast, they took down their inflation estimates. yet even with that, even with the admission that inflation, kids -- because it could be a touch lighter than they think, this is not close to the estimate. so they will continue to have hikes next year. i think that is all part of the bigger point that if you look at the long run estimate of the unemployment rate, they do not touch it. and there estimates for 2016, 4 .7%. if you're reading between the

lines, that means they are probably buying into the notion that you could see wage fracturing. buying income obviously bill gross is not buying them. wrom morgan stanley, d yen you look at rates, he is saying it will be damaging. to think so? tom is making good points. the rate -- we have to understand, these rate hikes that she is talking about for 2016 is really a question of option out it. let's say that we do not to the growth or inflation that we want, what can she do? she can readjust it lower at the march meeting or some later date in june. i think that option out he is important. i do not think that they wanted to remove that from the marketplace. and i think it is a pretty good decision on her part to do that. host: where is the economy right

now? did she have the economy to create optionally? -- option now it's the -- optionality. we will get that story later. wouldook, here is what i say. in regard to the feet of whether -- fate of whether it is for hikes or less. people have to brace themselves for this, this is a reality, inflation is on the rise. for technical reasons, yes. we'll get ahead on inflation. if you think that crude will end with $45, if you think that next year it will end with $45, that o little get inflation t 2.5%. but we will keep headline of the table for a minute. court is actually go to be on the rise as well. you will see court take 2.5% for two key reasons, again they are

underappreciated, one is shale prices. and the other one, the budget deal. you now are going to see significant increases in medicare. both of those factors alone will push headline and core north to 2%. and the unemployment rate is just a lower. i think by the end of the year, as it progresses, we could talk about a fed that could accelerate the pace. host: that is different from what we heard from bill gross, who is focused on some thing else. >> it is different than what we are hearing from jim karen. the economy overall, is it going into 2016? we don't have a good clear read on it. the fed is taking out one position -- is sticking out one position, what is the damage if they are wrong? >> it is somewhat limited. they have only hiked interest

rates in a small move. we will see the damage in the financial conditions. if they continue to tighten, equity deterioration, credit is blowing out, or the delegates stronger -- or the dollar gets stronger, those are the things we can watch and see and then make adjustments accordingly. i think that is the point. when the fed talks about gradual, they're talking about how fast inflation will rise. , that iss not rise gradual. --host: michael will jump in on this. you, tom. michael, you really did a great job on the yields good at 90 day yields of the 0.25.

and even negative -- and it has even been negative for a while there -- a while. >> i guess that wraps it up. this is great tom. we are not going to have to call this the fed has decided and weather has -- and what they the decided is raising interest on excess reserves to 50 and starting reverse repose at 25. thank you first staying with us through this special report. closing bell is moments away. scarlet fu and joe weisenthal will continue coverage with "what'd you miss?" the fed we have situation where they decide to raise interest rates in almost a

decade, and the market liked it. joe: there were so many people who thought this could not happen, and they said if it did ever happen, the markets would hate it, and i think janet yellen has to be pretty thrilled. the markets are responding very calm, and this is an absolutely historic day. normally, you would buy on rumor and sell on fact, and we normally clear near highs, and the dollar has been bouncing around paint it was stronger and weaker, and we knew this was a crowded grade coming in, and david spoke to was yesterday that generally the dollar does fall initially on a rate increase. joe: you never know how the market is going to react. we never know. it was all based on -- maybe trade was extremely crowded. there was some 11th hour drama over the last week, with the distress with the volatility we