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 ofe seen, and just a hint trauma to the whole narrative, but here we are. return they did not fed. janet yellen said in her press conference that she saw this as andd avenue, very unique, she spoke about this at length, but obviously, it was not a big issue, and as you can see, they are going ahead, and the market did not mind it. scarlet: treasuries fell, and what i thought was interesting was that hillary clark, a producer for us, read a back text of what happened the last on the fed raised interest rates, and she said oil prices changed the most. we saw oil sink lower even though the dollar did not have any clear direction. to: absolutely, and i want dive in and look at the yields which rose above 1%. these are at their highest level

since about april 2010, and so you have this question about a dovish hike. well, this is not what we would expect in a normally dovish situation. they bounced around. they clearly high, so they are rising, and people expect to see this, but certainly not enough to concern equities. but clearly going up higher. scarlet: yes, equities completely shrugged it off. come inside determined a because this is between the u.s. and german ones. this is what it looks like between the u.s. and europe. we have seen the selling of asasuries, and that yield, you mention, and that is moving up to five-year highs, and meantime, in germany, the two-year carries negative yields, negative zero point something.

so the spread has now why didn't to 1.33% -- the spread has now idened.n't -- wo gone closer to where it was before that mario draghi disappointment. scarlett: let's zoom in. what did david bloom call it? hawkish ease? got today. we scarlet: ok, you can see all of these votes and more. and a former fed chairman, ben bernanke, and ahead of fx strategy at citigroup. welcome, gentlemen. joe: so, we will start with you, stephen. the job did not drop. it is four hike next year. why did the market, at least looking for risk assets, like this statement so much, like this announcement so much?

>> i do not think they were looking for such a strong statement that it would be unchanged, as they began the hikes. was unnecessary but was in the statement made the markets think it was meant to be reassuring to them, but the. not moving down. it was a little hawkish. the fx markets were probably wrong to have the dollar up and dollar down. it was hawkish or dovish, and then to look at rates, i think the real key to what the fed was trying to do was make this a hike that was viewed as benign markets, and i think that they accomplished that. reason yields were so high is not because the fed was so hawkish. it was because equity markets were reacting so positively to it.

that was affecting the dollar, as well. scarlet: we talk about these oxymorons. at dartmouth college, compare and contrast what the fed said today with what the ecb try to do in early december but ended up disappointing market. >> well, i think janet yellen should be applauded, leading the committee to a unanimous decision that was clearly signaled in advance. it went very smoothly. i think this was a kind of lift off that the fed has wanted to see for quite a while. i think the challenges are what is behind the scene, so we know there are some beal's the would have liked to have waited longer to start the process. that would like to have seen this quite a while ago, so this is a challenge of building a consensus. some of the difficulties in europe is the diversity is more extreme, and that has created

challenges for the governing council, the ecb. joe: a major source of fascination in trade, and one of the things that i saw people talking about was a little bit of surprise that there was still four hikes in the dax next year, but there is the inflation expectation. is that inconsistent, that the inflation expectation for the fomc came down? andrew: i think there is a very important statement in today's fomc statement, which it knowledges that certain measures and -- ed downward, joe: i set expectations, but even the fed forecast themselves. andrew: those did edged down, but i think the truth is -- theional forecasters

philadelphia federal reserve bank does a survey. they now expect inflation over the next five years to average well below 2%, and so the credibility of the fed, the 2% is now at stake, so i think the question is, in the statement today, the committee says they are going to be looking at actual and expected progress, and i think the key would have to be the expected progress. if they want to regain the confidence of the markets, breaking inflation, and the confidence of the professional forecasters, they should be waiting for actual progress on inflation before moving further with the tightening process. scarlet: stephen -- steven englander, even as the numbers, if you look at, for his, different measures, the inflation rate, the current median cpi, the cleveland one,

they are all inching higher. they are moving in the right direction. steven: wages were beginning to pick up, even though she referred to it as incipient. i think there is a gap between the fed and the market still. if you take a look at the longest contract, the euro/dollar, the funds rate is about 2.75. it never gets to the level that anybody on the committee thinks is the actual equilibrium rate but that reflects two sets of participants in the market. maybe bill gross and larry summers and others who think that inflation is never going to pick up, and that inflation is a mistake, but i think in the eyes it as aed, they look at muted cycle.

doves, who i think represent about 40% of the market, will have to give up their extreme has and is him, and i think even without the fed center being more hawkish than they are, the weight of the doves will diminish, it will mean that the expected hath will come. ecb and going into the meeting, you were a little skeptical that the rally could continue, and that proved to be prescient, given that the ecb delivered. where do we stand now? can it pick up? even: i was thinking about that, as well, and the dynamics were such that it was a pretty bad year for investors, and the year starts again on january 1. the last day or two w, investors fomc, andg past the

the u.s. economy is doing fine, no reason to have the extreme pessimism that some have voiced, and if you do that, there is only one way for it to go. the ecb is not going to be more hawkish than we think, and the fed, if they are at all right, they will deliver more than the market sees. ok, you are staying with us, andrew levin and steven englander. before we go to break, here is janet yellen today speaking about the risks to the global economy. : the risks to the global economy, and those risks persist, but the u.s. economy has shown considerable strength. ♪

scarlet: i am scarlet fu. what did you miss? the obama administration is bolstering aviation security and tightening screening for bees that and immigration administrations, and jeh johnson is an a bulletin, which interim threat for the terrorism advisory system. mr. johnson: we are in a new phase of the global terrorism threat which has implications on the homeland, particularly with the rise in the use by terrorist groups of the internet to inspire and recruit. we are concerned about the self

radicalized actors who could strike with little or no notice. procedure willw be an effect for six months, and it will recommend ways in which citizens can help with counterterrorism efforts. say assaultricans weapons should not be outlawed, opposed by 53% to 45%. peoplehalf favor arming over tougher laws. and authorities say two men arrested over the weekend may be linked to the terror attacks. the two were picked up at a refugee area in salzburg and were accused of taking part in a terrorist organization. entered the country using fake passports and were apparently awaiting orders to carry out attacks. a baltimore judge has declared a mistrial in the case of a police officer in the case of the death of freddie gray. the jury was not able to reach an agreement after three days.

william porter was accused of manslaughter, the first officer to stand trial. protesters gathered outside after the decision was announced. and you can get more on those and other breaking stories on the new bloomberg.com. we are back right now with former fed chair advisor and former fed chairman and bernanke advisor andrew levin as well as englander at citigroup. you highlighted something that janet yellen said about inflation over the next year and how she will be looking at actual and expected inflation and that actual is interesting, real evidence that inflation is picking up. what will she be looking at to see that those goals are being met? it is: i think significant that oil prices have dropped further in the last months. they were down close to 40% last year. this year, they are down another

40%. that is going to pass through into headline inflation over the next few months. gas prices will come down further. and it will help with the core inflation, which is a key indicator, so the federal reserve forecast that they released today is that next year, next autumn, core pc inflation should be at 1.6% according to their forecast, but if core inflation is actually heading downward over the next months, that would cast significant doubt on the inflation outlook. would raise a question about the credibility of the fed target and give a call for a significant adjustment. steven: i am not that worried if they can trace this to the prices. in the speech, said chair yellen alluded to the fact that there is a temporary pass through into core inflation.

our economists did some research on that, as well. they're going to be signatures saying, look, if the employment rate falls and the rate is low, we will have inflation forever, whereas this impact from energy going tone day oil is stop falling, and a year after that day, we're going to see the core bounce back up. joe: and going back to this thet, yellen talked about demographics driving housing. she mentioned the strong household balance sheet, but you also said median api has also been somewhat more stable than --, alluding to the fact median cpi has also been somewhat more stable than pce, and kind of as stephen was pointing out, the inflation picture is not that bad.

andrew: the idea of the mean is you take out the highest and the lowest and then it take what is left, the median. this is about three quarters of a percent lower than it was in 2005, 2000, and 2007. if you look at core inflation, it is lower than it was in 2007, so these are actually very consistent in telling us there and if you look back a year or two years, the ate inflation was running 1.4%, very close to where it is today, so i think the issue that , persistentsistent downward pressures on inflation that are not going to be going away anytime soon is a real risk to the fed outlook. joe: do you find that, too? steven: i would point to the fact that these indicators are

beginning to rise, suggesting that the forces are more concentrated than they used to be, very narrow. and it is a good leading indicator. in fact, it is a better future core what inflation is going to do. a lot of this stuff has nothing to do with the markets. there is health care issues, other issues, nonmarket pressures that are beginning to emerge. to combine the labor market and these other factors. it is still only 25 or 50 basis points. scarlet: ok, only. and andrew 11,r you will both be with us. and earnings-per-share rising 2.14 last year, better

than what the street was looking for. they were looking for$2.50 for fedex. we consensus among analysts survey was for 12.4 billion dollars, and the fastest-growing of its fedex, in part purchases, the ground business, and volume there grew 9%, average daily volume, growing 9%, so no longer double-digit healthyut still very growth for their ground business, and they are reaffirming the earnings-per-share as well as capex. therate economic growth, so shares are higher by 3.6% in after-hours trading. goolsbee,next, austen a former chairman of economic advisers at a school of business, joining us with his reaction to the fed decision today. ♪

scarlet: i am scarlet fu. what did you miss? what do people with money at stake think? here is sam's they'll on earlierrg though -- go" today. sam: i think this is probably too late. i think the economy is closer to falling over than it is to going up. the fed for more on decision, we are joined by austen goolsbee, a former chair of advisers.

thanks for joining us. is the economy strong enough to deal with this rate hike? i hope so. i have been a little pessimistic on this point, and i think it is worth looking around the world, where you have got a bunch of things going on with a lot of the trading partners of the u.s., and i think i would emphasize i do not think the fed has ever tightened when growth was this slow before. i think they have been wanting to get off 0%. they have been seven years predicting that we were going to have inflation and that we were about to have a takeoff, and they were wrong force evan years in a row, so i hope we can get away with it, but i am nervous that in the relatively near future, they might have to reverse it. scarlet: some trepidation there. thefed target rate, since early 1990's, it has averaged 3.15%. thestructural changes in

u.s. and globally prevent us from ever revisiting those levels? time,: forever is a long and i would not think it is forever, but in the near turn, yes. i think there have been some major changes. by theas the damage done financial crisis, but i think you just add on top of it all of the uncertainty associated with the slowdown in china, the problems in europe, and the meltdown in emerging markets, and it makes me nervous that they are itching to raise rates. if they do succeed, and this was going to be 25 basis points, and we are not going to have another race for a long time, it probably will not make that much difference. but the fed has a dual mandate. inflation and the job market. we are not at full employment, and there is no installation. we are well below the target, so

i guess they do not get the nature to get the rates up. joe: yes, yellen, i feel like if she were right here, she would say that financial or monetary policy works with long legs. she said that in the conference, and they cannot wait to hit these numbers, because by then, if they had to play catch-up, that would really freaked out the markets. that would not be an issue? janet yellen is a friend of many years, so i am no way being critical of her, but like i said, they have been predict thing for years that it would take off and that we would be in an inflationary environment, and they have been wrong, consistently, for seven straight years. it is a little bit of a leap of faith to say, yes, we have been wrong for seven years, but now our model says we are about to

have inflation, so we have to move quickly. market expectations do not suggest this is what the world thinks. scarlet: he is making decisions. austen: the second thing he said is that we are six months too and that is exactly the logic that says it might be too late. why are we raising rates in an environment like that? scott -- scarlet: so caution is the word of the day from austen goolsbee, a professor at the business school. thank you. coming up on "what'd you miss?," do lower rates mean higher valuations? we have the charts.

that is coming up. ♪ the only way to get better is to challenge yourself,

and that's what we're doing at xfinity. we are challenging ourselves to improve every aspect of your experience. and this includes our commitment to being on time. every time. that's why if we're ever late for an appointment, we'll credit your account $20.

it's our promise to you. we're doing everything we can to give you the best experience possible. because we should fit into your life. not the other way around. scarlet: i'm scarlet fu. "what'd you miss?" let's get the first word news. president obama plans to be with families of the terror attack in california on friday. the president is making the stop as he heads to hawaii for his christmas vacation. 14 were killed, 21 were injured. classes are back in session in los angeles a day after e-mail threat led the school system shutdown. officials say all schools are safe and crisis counselors are available. most high school students are taking semester finals now. a government health insurance deadline is being extended.

the white house says anyone needing coverage has until tomorrow at the night to find out. more time was needed because of unprecedented demand. the satirical newspaper "charlie hebdo" is giving $4.4 million to the victims of the terrorist attacks in january. they say they will turnover donations from 84 countries in thgovernment will appoint an oversight committee to determine how the money will be redistributed. can get more on these and other breaking news stories 24 hours a day at the new bloomberg.com. we need to get a recap on market how markets closed. we had two days of gains already. never mind, the continued rally. >> and absolutely extraordinary day. marketsand it wasn't just an idf pushing down rates and seeing stocks rise. obviously a huge risk on

reaction. scarlet: a huge risk on reaction, and if you look at oil, that was one part of the risk asset class that didn't participate. >> yet high yield didn't mind. scarlet: stay with me here. higher rates could mean lower was, that eight of the 10 past bull markets -- the concern is that contraction in equity valuations may be inevitable. >> we are definitely seeing people forecast what is hard to forecast.

it is also hard to imagine much expansion given where we are. scarlet: at this point it is hard to forecast inflation. we are back with stephen engle, head of g 10 effect strategy. also with us is andrew levin. you heard before the break saying there is no urge in a hike, the economy still has plenty of slack, we are not at full employment. do you agree with him? >> i do. the congressional budget offices produce estimates of full employment. we take them twice a year. the latest estimate indicates that we are still 3 million jobs short of full employment, which means we need another year or two of strong payroll growth to close out gaps. according to the cbo's estimates, the fed is tightening at an earlier stage than they ever have before in the last few decades.

that sense i agree with austin and with a bunch of other commentators in the past few days who said that it seemed inevitable that it wasn't .ecessary >> from the date left off to the day it slackens off, the unemployment curve drops off. to think that you are tightening and i don't think anyone at the fed does think that. the other point is this. it's true that u.s. economic growth has been disappointing, but the disappointment has been on the supply side, and that is not something the fed can deal with. the fact that the unemployment rate keeps dropping tells you growth is enough

to stabilize the unemployment rates. it's the worst in 60 years, but it's not clear that something from monetary policy is in a position to address. scarlet: it seems like the fed dashboard was pretty big when determining lift off. we finally got it done but they were looking at a whole bunch of different metrics. for the rest of this tightening cycle, does the dashboard expand even more, or does the fed start to narrow her view to a few select metrics? >> there is a lot of trepidation that yellen referred to about whether the world would come to an end with a 25 basis point hike. scarlet: they clearly has an. n't. >> so far. it's a question of whether the fed's attachment to equity markets are asset markets ey have to -- th support them in the aftermath of the great financial crisis. now that we have a pretty good head of steam on the labor

market and it is stabilizing and beginning to go up, it's not so clear that the fed down the road will be that focus on asset markets as they have been. joe: what do you inc. about how sensitive -- what do you think about how sensitive yellen has been? does she want to see stocks rise? gone?the fed put -- chairderal reserve yellen, someone asked her what are the attainable effects going to be. she talked about the fact that car sales alone are going to be more expensive than. consumer credit cards for many consumers will go up. those kinds of credit conditions will tighten. if those tighten in a smooth,

moderate way, that would be exactly what the fed would be looking for. moreose things move abruptly, that was certainly leave the fed. but i don't think the equity market in and of itself is a target in any way of the fed. scarlet: when we look at what else is going on here, i wonder if the fed removing a rate hike in 2017, changing things a little bit in 2018, is that even valuable to us when we don't know what's going to happen for 2016? or is it an academic exercise? >> we think that number will change six or eight times before we get to those dates. i vote on the academic end. scarlet: especially with oil prices not finding a bottom in junk prices continuing to sell off. >> it's a two-way risk but it's likely they won't affect us. up until now for the last

several years, the. ploe dot plt has been essentially academic. months, theresix is a possibility of a collision, because the fed will be making decisions whether to hike again in march, in june, in september. the extent to which members of the fomc today vote down the same projections that they wrote in september means they have pretty strong views that they do think they will hike again in march and again in june. the markets, if that happens, will be surprised again in june, in september, because in the end the fomc is the desire, not the market. -- is the decider, not the markets. the markets are seeing the extent today to which 10 out of

17 fomc committee members expect the funds rate to be up at 1.5% by the end of next year. who gets to decide that? the committee, not the market. if the committee feel strongly that is where it will be. scarlet: that brings up a good point. what was interesting about this decision was that it was unanimous, even though several in the passive voice their misgivings. why is this a significant? >> i think this was a key turning point, to leave the bureau after seven years. it's clear that everyone on the fomc respects chair yellen very highly. this was her leadership decision to move ahead. i think it was a good thing for the fomc. chair and hasard, said that she understands there and be dissent sometimes, that could be a someone thinks they should tighten the margin go they don't, or that they

ahead in march and a couple members of the committee think that is a mistake. mity is ahink the entit permanent characteristic. scarlet: ok. thank you so much for joining us today. we have somewhere breaking news, this time from aig. it will buy back an additional $3 billion of shares on top of its current authorization of $4.3 billion of stock buybacks. the back story with aig is that carl icahn as a pressuring them to boost returns. his suggestion is to split up the company. aig succumbing to some pressure by saying that it will buy back an additional $3 billion of shares. we will be right back. ♪

scarlet: i'm scarlet fu. "what'd you miss?" it's time for the bloomberg business flash, some of the biggest business stories in the news right now. fiscal second-quarter profits topped analysts estimates as higher base rate and lower costs boosted the bottom line. adjusted earnings were $2.58 a share. the company also set a record number of holiday shipments would be handled by online sales. it was a hit and miss for oracle. forecasted when they $.60, but they missed on the top line, reporting $9 billion. oracle pressured -- it is seeing

results from investments in cloud services with more customers asking for delivery online. saysovernor of puerto rico it will defer on its debt payments in january or may. today at anlier appearance at the national press club in washington. he said puerto rico would default, there is no money. is your bloomberg business flash. joe: in a unanimous vote, the fed raised interest rates and removed the reverse repo cap. now to break down what happened. explained to us this issue of moving it on the reverse repo. >> happy fed day. this was a pretty interesting decision that the fed made. in testingople,

these reverse repos, which is one of the key tools they will use to get rates up off the zero aund, it is being tested with $300 billion daily cap on the facility because the fed hasn't wanted to go too far into money markets. a lot of people thought they were going to inch that cap up a little bit, raise it up from $500 billion, but they decided to go unlimited and scrap the cap. that removes the risk that the fed can't borrow, train enough liquidity to get rates up. off's definitely a concern people's plates in the money markets right now. joe: something else that happened today, you pointed out werefive-year real rate, treasuries adjusted for inflation hit their highest level since 2010. what is the big picture story here?

>> i love this chart. door on theting the zero interest rate era. back,n't see all the way but going back to 2010, this went very negative and now it is positive again. this is sort of the rate that matters to the real economy. this is the rate that consumers borrow after adjusting for inflation. it is back into normal territory. you could say it has been accomplished at this point. it's just a really poignant example of how far the fed went. joe: i like the use of "poignant." everyone was talking about the dots, they are still four projected, will they come down? you say they were dovish going into 2016. how come? >> the statistics behind this

are interesting. dots came down a lot more than the median dots did. back in september, the median whichere below the mean, suggested you had some outliers to the upside projecting higher. this just sort of shows that yellen brought some of the outliers to the upside in. you still have a lot of dots, seven dots in the new plot that only project four or less rate hikes next year. this reinforces the notion that they will go gradually. also the variance of the dot style, the dispersion, has decreased. there seems to be consensus around slower rate hikes, which is exactly like someone like janet yellen would want, especially about should be fast or slow.

joe: thank you. we will be right back. ♪

scarlet: i'm scarlet fu. "what'd you miss?" emerging-market stocks rose today the most this month as the federal reserve finally raised interest rates. history has told us that higher rates in the u.s. could mean disaster for e.m.'s. our next guest says they will be able to handle them. the managing director of emerging-market portfolios in blackrock. joe: thank you for joining us. there's always this debate, is a rate hike bad for e.m.? less cheap money?

or is a good because he gets the uncertainty out and people can go investing in e.m. again? did we learn anything that settle this debate? >> it is too early to tell. but the bottom line -- if you go history, it makes liquidity that much tighter and it makes our fal global funding. with time the fed hikes, one exception in 2004. way -- iarned the hard think this time will be different. i think this time we are better able to handle this hike then the market anticipates. think about it. the currency is much more flexible, the adjustment mechanism is right there. high, and that gives them a lot of cushion to

absorb the shock. liabilityollar is much lower this time around. leverage is high in e.m., but currency debt is much lower. the combination of these things tell me that we are able to handle it. we have other problems, and i don't think the fed is one of them. scarlet: the tough medicine the imf administered during previous crises helped e.m. be better prepared. >> that is the bet. i take a little of that credit. sheet,p your balance show off your indebtedness, let it become more flexible -- that is the kind of thing that allows you to take the kind of shocks. say these daysto given how gloomy the e.m. situation is, but i think we will be better able to handle it. joe: in an edm conversations

someone will point out that e.m. is not a monolith. today we got the news that brazil is being downgraded, the political situation continues to deteriorate. what do you make of brazil right now, and what are some countries that look particularly attractive, well-positioned for this rally? >> the brazil situation is highly idiosyncratic. i don't want to say it's on related, but it is certainly -- unrelated. this is better described as a depression. the political anchor is completely nonexistent. most importantly, the fiscal adjustment is also completely inverted. the only game in town is now counterproductive. the more they

hike interest rates, the worse the economy. it did not come to us as a surprise that the numbers got downgraded. the timing was a bit of a surprise, but i think that half of credit worthiness was expected. scarlet: argentina scratch currency controls, and apparently the people can trade freely tomorrow. that seems rather abrupt. talk about what needs to happen in the next couple months for this to be a success. surprise -- i am surprised by the quality and the policy measures. there are three things they need to do. they need to value the currency and open the current account. the question is do they have enough cushion of reserves. they seem to be showing up. they seem to have enough reserves to help. and finally, they need to do

something on the accounts. joe: i'm nervous. thank you for joining us. break,: before we go to we will hear from janet yellen at today's news conference. she addressed the news that they blocked clients from pulling their money from the fund. >> after you focus credit funds with rather unusual open-ended funds, it had very concentrated positions, especially in risking and liquid facingand it had been very significant redemption pressures. ♪

scarlet: welcome back to "what

did you miss?" tomorrow we will look ahead to what investors need to monitor coming into this historic rate increase. 6:45 a.m., the fixing of the overnight life world rate. that theysting is began rising last night in anticipation of the tightening. joe: then of course at 8:00, we have the reverse repo rates updates. this is such a key tool for the fed to start soaping up the a liquidity. we will start to see how they will make the mechanism work. scarlet: 9:30, rates on commercial paper. fedkey here is that the doesn't just raise rates at banks but across the financial system. joe: then we will have the results of that reverse operation at 1:15 p.m. eastern time. we will get a clear picture of how it works. this is an unusual rate hike because there is this gigantic

balance sheet and there are lots of moving parts that they haven't had in the past. they had time to put these tools together and now we will see how they work. scarlet: these are the mechanics of the rate in

>> last night, the road to the white house led through las vegas. tonight, it detours through next day analysis. center.rs front and right.ances now, this stage is set for the final republican debate next day analysis this year, and america's opinion is at stake. tonight, theshow 2016 candidates on the