headquarters in new york, this is the fed decides we are one hour away from the march rate decision and we are 90 minutes away from janet yellen's news, it's. what will the head of the fed say about the health of the economy as market volatility eases. consumer prices climbed in february, pushing prices closer to the fed's target. the yield is advertised since january. and we have a big lineup to parse through all things that today. tom caselli,da.com and randall kroszner, will be with us in the next couple of hours. i'm scarlet fu. with me this afternoon is tom keene and michael mckee. give us your first thoughts. tom: the press conference will be fascinating. we have a great set of guests starting with carl riccadonna, and the basic idea is to be informed on where the fed goes through the year.

the back story to me, the bank of japan couple of weeks ago, mario draghi, and those her bombshell announcements. point, as steve stanley said, the fed will need to stand up and punched the markets in the mouth, and tell them to stop bullying them because every time they told him to do something, the markets have a reaction. we have that in january and now all that has passed. scarlet: and the fed has a dual mandate, all in placement and price stability. with the labor market approaching of full employment, 4.9%, is the fed putting more weight on the inflation mandate? a key question, and i don't know if we could go inside the bloomberg terminal, but you can see the core rate of , february, rose to 2.3%. we are getting into territory where the fed would normally be worried. it seems to be accelerating two

months in a row. even no gasoline and oil prices are falling significantly. scarlet: that is the latest inflation rate in the fed will need to consider when they make the decision today. much more to come in the next three hours. first let's get word on the news with mark crumpton. mark: president obama nominated merrick garland for the vacancy on the u.s. supreme court. he is the chief judge of the federal appeals court for washington, d.c. >> to suggest some of that have served his country with honor and dignity, with a distinguished track record of delivering justice to the american people, might be treated as one republican leader stated as a political piñata. that cannot be right. tomorrow, judge garland will travel to the hill to begin meeting with senators one-on-one . i simply asked republicans in the senate to give him a fair hearing.

and then an up or down vote. republicans say they will block anyone the president nominates and say the seat should be filled by the next president. donald trump is the only path with -- candidate with a path to clinching the party's nomination before the cleveland convention in july. it takes a majority of delegates to win the nomination under party rules. trump would have to win 54% of the remaining delegates to clinch the nomination by the time the primary season ends on june 7. canadian prime minister justin trudeau says canada will seek a two-year seat on the un security council beginning in 2021. canada last held a seat on the council in 2000. don't miss our exclusive interview tomorrow. we sit down with the canadian prime minister on bloomberg

television and radio beginning at 9:00 a.m. new york time. global news 24 hours a day powered by our 2400 journalists in more than 100 50 news bureaus from around the world. scarlet: i'm scarlet fu. here with tom keene and michael mckee. the fed giving some new forecast about the state of the economy. michael: that comes at 2:00, as well as the dot plot, which we will be talking about today. you go back to the last time they raise rates, the last time they did a forecast, they said growth was going to be 2.4% of the course of the year. take a look at where we are. 1.9%, not far off. the on implement rate, they forecast to 4.7%, already at 4.9, and on the move lower. pce core, current

which is what the fed follows, a few tenths below cpi, but the momentum is the same. basically, the fed is on track to doing what they said it would do in december. so why are they so far off that the markets are concerned about what they are doing? scarlet: let's bring in our guest host, richard clarida. we're also joined by our chief u.s. economist carl riccadonna. carl, what is the state of the economy heading into this decision? rl: things looked decent and economy could probably handle a rate increase, but that will not happen because the fed is carefully watching the rebound in the economy after this soft patch last year. the economy grew just 1% in the quarter. that brings the year on year growth rate to below 2%. slower thanrowing 2%, there is the greater risk of a stall that overheat. so they are just making sure the

economy has taken the disruptions from her earlier in the year in stride before they continue on a tightening path. increase does not come until they get an official , until after the april meeting. let's go to richard clarida and his research. -- this is the s, includinghis mes this equation down here, the taylor rule. are we ignoring the rules right here? richard: we are getting back to the library should start to pay attention to them again. zero down and did unconventional policy, but you plug in the taylor rule and the unemployment numbers, you have to make one adjustment.

the near-term policy rate was 2%, but now i think there is a neutral run 1%. you make that adjustment, and i think it could provide a good guide for liftoff. not today. i would love to make news, but not today. michael: a good point about getting back to rules. how dependent is the economy on financial markets, does the fed overestimate the impact of the markets, the tantrum we had in january and february, in terms of what the long-term path is? stan fischer said it well, there was uncertainty in september and january about how to read the turmoil in china, oil price markets. so the fed believes they have the option to step back and look at the data flow. believe they they are overreacting, but they are respecting the data, for sure.

scarlet: is there good inflation versus bad inflation? richard: the fed would like inflation to be 2%, so anything that brings it up to that, that few would view on balance as good. obviously, they look at oil prices and currencies as well. the fed would like to see wage gains. there is some evidence of which is picking up. see the why do we corbyn going on with oil prices going down so significantly, gasoline prices going down significantly. isn't this a sign that inflation pressures are building? carl: what we have seen largely to this point in time has been in the shelter categories. the hangover of the housing bust rate at rental vacancy extremely low levels, builders were not having enough capacity, so a tight rental market was driving shelter cost. now we are seeing that spread into other categories like medical care and other service categories. i will be a continuing theme as

wage pressures to cut. following something like the taylor rule will make sense in rough terms over time, but at present, the reason the fed is not following the rule it's they are still concerned about asymmetric risks. a lot of ammunition if they need to slow the economy down, hike rates, sell assets. if they need stimulus, they are not sure what is available. not much room to cut rates. the hurdle for another round of qe is high. the track record for negative interest rates is mixed at best. so the best policy option here is what they have said all along. let the economy run a little hot. we saw that with the on employment rate and in today's cpi data. this is a grammar as they go to the fed meeting, and then the coverage after, and then press conferences. let's look at the two-year chart. we have shown this many times.

we show this on radio a lot. when we would suggest is the rise of expectations over a year. richard clarida, simply, a beautiful chart of the new volatility. stan fisher talks about the new uncertainty. talk about this uncertainty in your world. richard: uncertainty is to be distinct from in position -- imprecision of your understanding. risk versus uncertainty. tom: do we know right now? richard: we know more now than in the fall of 2008. the uncertainty for global markets and investors is how to interpret the developments in china and the oil market. i'd like to get back to another point, which is simply that a lot of what unconventional policy did in 2009 through 2011, it suppressed volatility.

i think markets got a little addicted to the fact that this policy suppressed volatility. we have a lot of policy divergence, but the days in which monetary policy suppresses policy is probably over. michael: there are questions about how the fed reacts when it raises rates. they will find it difficult every time they talk about a live meeting, seeing some kind of tantrum in the markets. theyhappened in august, came out in early september and said we're not going to raise rates. now they have put off march to june. is there a four-month latency built into every decision? richard: i respect the fed for being honest and say global developments are important to us. realistically, what that means, is a lot can happen globally. you run into the issue of the tail wagging the dog. i think they want to get away with that -- from that.

i think chair yellen will give a balanced view, wants her options open to hide, but it the dollar strengthens, that lowers inflation. that is a factor. scarlet: i wanted to what extent the ecb and doj -- boj have limited their options. richard: like a lot of things in economics, it goes both ways. if they are using, that is positive for the global economy, should be positive for sentiment. on the other hand, if the ease and you have a big move in the dollar, that lowers inflation and maybe takes away the incentive to hike. it is very much a meeting by meeting call. a couple vacancies at the fed, i want to point you to that for a moment. make the case based on the delay , looking at what's happening in the markets. the dollar has gotten weaker since the fed raised rates.

financial conditions are getting looser. what is the reason they would give us today for not raising rates? carl: i think they are just watching to see if the economy is getting traction. you mentioned the tightening of financial conditions. it is not dissimilar from we saw at the start of the year. if that leads to the economy growing 1% in q2, the way it did in q4, that is a concern for the fed. chart, if to tom's you look at the last valley before the two-year when higher, that was the retail sales data that got the market moving in the other direction. people said, consumers will drive the economy. that will support economic growth in the first half of the year. that has backslid in light of the latest retail numbers, but nevertheless, we have confidence from the jobs data to know that the income growth is there, so

the consumer will ultimately be there. let's bring up the gdp chart. i stumbled on this one. 30 years back. we were at 3.7% real gdp. we have come down to a run rate of 1.6%. if you take the regression, the trend of all that noise of real gdp data, richard, this speaks to the political turmoil, which is the back drop of the supreme court announcement today, and frankly, this fed meeting. absolutely, we have had a slowdown in income growth and productivity growth. as a result, wages have stagnated, so you create a political tension. economist talk about gdp growth, the s&p at a near high, but millions of american, they have not seen a wage increase in 20 years, so you are right. slow growth creates those

tensions and we are in a period of global slowdown and productivity. scarlet: challenges ahead for the fed. that is our topic or this special. thanks to richard clarida and carl riccadonna. we will be bringing you full fed coverage. alan blinder of princeton university, bill gross of janice capital. next up is randall kroszner. ♪

scarlet: this is a bloomberg special report, the fed decides. i'm scarlet fu. it is time for the bloomberg business flash. sell side biggest supporters of valeant pharmaceuticals is downgrading her rating on the company stock.

she is turning against the drugmaker after valeant shares plunged 51% yesterday. she is flashing her rating to neutral with a $60 price target after previously having a buy rating of $175. peabody energy billing and interest payment due this week and is morning it may need to file for chapter 11 bankruptcy protection. shares have lost half of its value over last three months. have alll companies filed for bankruptcy protection in the past year. the ceo of ubs says performance at the wealth management and investment banking units have failed to recover in the first quarter. he is citing challenging conditions that are continuing into the year. banks around the world have been heard by a record low interest rates, plunging commodity prices, and cooling emerging market growth. course, that is ubs, and that

is an investment bank, and we are looking at that in terms of the markets. the ecb try to address the issues of banks negative interest rates last week. michael: they will lend the money to lend out on the condition that they do lend it out to get the economy going. it will not necessarily be for m&a activity. this is ald suggest huge back story over the next 90 days to see what the banks do in terms of financial stability and rightsizing. we also heard from sir howard this morning. let's do a day to check. down 34.s mckee?get to 2%, michael we could. tom: the euro, 110.75. intermediate, 37.85.

oil, churning. scarlet: for those of you just joining us on the radio, this is a special report, "the fed decides." let's beat with somebody who was inside the room for several years, former fed governor, now that the booth school of business, randall kroszner. you know they are going to be talking about the inflation numbers, you know they will be talking about the possibility of the phillips curve that, the possibility of wage inflation. the question is, can monetary policy stay ahead of inflation given it is so low, can it catch up if it accelerates, or is the fed going to be behind the curve, will get -- will that be one of the questions the debate today? randall: that is exactly the issue on the table, where is inflation going? we have seen very low inflation over the last few years, a few

signs of an increase, if you look at the core numbers from today, a little move up. if you look to the labor market, you are not seeing much wage pressure. we had a report out today that suggested incomes were declining, real wages were flat, and if you look at the numbers at the beginning of the month, decline in the work week, slight decline in nominal wages. of lowditional impact unemployment rate would be toward more wage pressure being we have not seen that. a lot of debate about when is it coming, and isn't coming? michael: that's the question. do you think, at this point, we are set up for acceleration of inflation later in the year that will lead the fed to move more quickly to raise rates and surprise the markets? does the market have inflation right, or does the fed? my crystal ball is pretty cloudy on that.

inflation performance has been pretty different from the past. at this point in the cycle, we would normally see more inflation and wage pressure. certainly, the fed has tried to provide liquidity to the system to hopefully get the money supply growing, get inflation toward the 2% goal. we have not gotten there yet. usual circumstance, and in those times, reasonable will disagree. you have a lot of reasonable people around the table, and a lot of disagreement. believe there is a school north of the university of chicago called northwestern university. randall: i cannot hear you. [laughter] gordonere is robert saying to us the other day, that it labor participation turns up, that is the signal. we got the signal. what does that mean for you? seen a littleve

bit of a pickup of labor force participation but still at very low levels compared to word was. it would be great to see more of that. that would be tremendous because, as you were discussing before, even though the unemployment rate may be done below 5%, people are not feeling the benefits of 5% on implement rate. a lot of people are outside of the labor market. we need to be creating jobs and, hopefully, raising real wages. scarlet: are we at full employment, or will he know -- only know it after the fact? randall: this is one of the questions, we are not sure if the concept of full employment really fits anymore. we look at the unemployment rate, but now there are these brought her mother -- broader measures that janet yellen and others have talked about, including people who are part-time who would prefer to be full-time, people who are not looking for a job in the last six months, but had in the last

year. that number is much higher. that is over 10%. that number is always higher than the regular unemployment rate, but maybe that is telling us more about the true state of the unemployment market. so there is a debate on that one number to assess the question. michael: one of the numbers that that likes to look at, inflation expectation, the five-year forward. for those of you on radio, we have gained 21 basis points over the last three weeks, in terms of inflation expectations. does the fed have to ratify the markets and say, we are aware of this? how far can they go? randall: the fed was clear in its paragraph talking about inflation and inflation expectations. they noted how the market-based measures had declined reasonably significantly. my guess is they will acknowledge a bit of a

turnaround in those, as well as a turnaround in core inflation. does that mean they will be moving immediately? no, but they can have a serious discussion about moving rates in the summer. scarlet: we talked about the distinction between good and bad inflation. i just had a customer message me, good inflation is demand-induced, that inflation is fed-induced. klausner, -- kro toer, heart banks supposed surprise when it is least expected? why couldn't we get a drug a moment from our fifth today? randall: i don't think that is what janet yellen is going for. when the ecb made their announcement, the euro plummeted, interest rates plummeted. then at the press conference when mario draghi said there could be limits to how lonely can go on a just rates because

of the concern on banks, you had a whipsaw, and the euro, interest rates spiked up. i don't think that is what janet yellen is trying to achieve. she is trying to limit volatility, not add to it. randall kroszner, thank you for being with us. also more with richard clarida. and coming up, alan blinder joining us, alongside bill gross. and ira jersey of oppenheimer capital. ♪

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you don't see that every day. introducing wifi pro, wifi that helps grow your business. comcast business. built for business. when it comes to the fithings you love,. you want more. love romance? get lost in every embrace. into sports? follow every pitch, every play and every win. change the way you experience tv with x1 from xfinity. tom: our event coverage this afternoon, good afternoon. michael mckee, scarlet fu, and

myself. let's take a look at the data. it's been a quiet day. that could change suddenly. nonexclusive -- nymex crude with a lift today. the two-year yield looking at 0.98. we are seeing the yield left, without question. dollar index, i will watch -- at 2:00. talk scarlet: for the radio listeners, this is a special, "the fed decides." let's get a look at the first word news with mark crumpton. president obama nominated merrick garland to fill the vacancy on the supreme court following the death of antonin scalia at. confirmed to was the d c circuit in 1997 with

backing from a majority in both parties, including seven current republican senators. debate scheduled for salt lake city, utah has been canceled. donald trump and john kasich said they would not attend. the debate will schedule the day before the utah caucus and arizona primary. it would have been the first presidential debate held in utah. angela merkel is condemning unilateral border closures. she says it will not lead to a sustainable resolution to the refugee crisis. she spoke to german lawmakers in berlin today saying the problem can only be solved if european leaders try to solve a common solution. the german leaders said eu leaders must assess turkey's postal to take back refugees, making their way to greece. the eu summit gets underway in brussels tomorrow. in brazil, a new turn in the big corruption investigation. former president who the da silva will join current president dilma rousseff's

cabinet as chief of staff, according to a government leader. andaces criminal charges joining the cabinet would make it tougher to prosecute him. tom: thank you. of course, economics, finance, and investment on the day. that with we do someone with expertise in financial economics, and that would be randall kroszner. the former governor of the fed. i'm looking at financial stability. citigroup making financial stability a key attribute. when you see the actions of deutsche bank in germany and london, the action of select u.s. banks, do we have financial stability? randall: we have certainly made --gress from where we are were before the financial crisis, still a lot more that

can be done. i think we are seeing unintended concert once is of some of those regulations. a lot of the volatility that occurred with respect to deutsche bank had to do with a certain type of bond introduced after the financial crisis, the so-called conversions of debt to equity. a lot of concern about those. instead of making the system more safe, the concern was that they made the system more tumultuous. watch with the fed is doing, you were there when the fed was expanding its communication, along with financial stability. are they having problems communicating and is that contributing to financial instability? randall: i think the fence communications have been solid. of course, you can never get this stuff perfect because we do not have the same 60-year experience with the data series

that we have, and the words, but you can see, the words make a difference with respect to mario draghi. i sometimes say it is open mouth operations, which is what the central bankers say, rather than open market operations. that was really the case with respect to the ecb. getting it right is tough. janet yellen has tried hard, and my guess is she will try to give some comfort to the markets, but not too much, because she wants to leave her options open. thelet: when we talk about improved financial conditions, so much seems to be driven by the recovery in oil prices. has concessions, if any, the fed made to oil being a much bigger factor than anticipated for inflation, growth, and jobs? the fed tries to look through the short-term movements in the inflation rate to see where inflation is going over the intermediate to longer run.

that is why they often focus on the core measure that strips out the more volatile food and energy sectors. that said, we have seen a pretty sustained decline in energy prices. they had to take that on board and the knowledge that. that is one of the challenges, what will predict where inflation is going, is the movement in oil prices going to tell us that, or strict we looking at the core? in the longer run, it seems to be the core that will tell us more, and that is why they focus on personal consumption expenditure index, core cpi, and that is even mind the headline number was negative, the core number was not bad. core numbers have been improving but market-based inflation measures give us a mixed picture. michael: inflation expectation numbers have started to turn around. fed officials were worried about that.

randy, in the january statement, the fed left out its balance of , assessingtee implications for the labor market and inflation, and for the balance of risks to the outlook. that is what they said in the statement. avoiding a balance of risk. what do you think that balance of risk is, and do they put it back in? think they will certainly acknowledge that some of the numbers have been strong since the last meeting, some good employment reports, gdp was stronger than many had expected, some upward revisions. they will certainly knowledge that. whether they will change the balance, i'm not quite sure we are there yet. things to university of chicago booth school of business randall kroszner. we are back with richard clarida of pimco.

i kept thinking about this monetary divergence aim playing out over the last couple of months. the markets are obsessed with it. everyone is talking about the divergence between the european central bank and the fed. given the moves in the japanese government bonds, you could argue that it is a bigger deal. yield fell to 46 basis points, below the treasury yield. both at 69 basis points today. that is the white line in the blue line. what does that tell you? monetary divergence globally, two big central banks into negative rate territory and doing massive quantitative easing programs, both were late to the qe religion. bernanke and mervyn king at the ecb got going on this in 2008, but they now have major programs in place with the get rates. absolutely, monetary divergence.

other countries are cutting rates as well, so you have a handful of countries that are in a hiking mode, although gradually. monetary divergence, what has been fascinating, looking at currency markets my entire career, has been how complex this is for current two markets to digest. randy made a good point last week, when you had the ecb announcing its policy further cutting rates into negative territory, initially saw the euro weakened, and then mario draghi mentioned something about that was it on negative rates, and then it strengthened. the same thing happened with the boj. if anything, currency is more complicated now than it was before. tom: few people know that you are and for it on the german political experiment. let's go over what randy kroszner mentioned. this is one of the litmus papers of the system.

we have had this recovery, and here is the last few days, this rollover of this derivative instrument as a measure of deutsche bank. do you agree that financial stability is front and center, and is there a question of where we are? richard: of course, financial stability is front and center, and broadly speaking, since the crisis, we have moved to simple final model of the big banks, to make sure they are better capitalized, and get them out of market-making activities. big banks are a lot more boring than they were. is a positive development for financial markets come in the sense that they provide a source of equity capital to banks in times of duress. it is a new product, so there is a learning curve on how to evaluate them, but i think it is a positive for the financial system, precisely because they provide a source of equity capital to banks under duress. michael: going back to

divergence, the bad pass answer would be, even if we see some reaction to the other banks lending rates, if they can get their economies better, we are better off. you can see the trade weighted dollar, it grows for an extended period of time, and then you can see exports, the yellow line, falling throughout that. now we have the dollar starting to weaken again and exports going up. even if the dollar goes stronger, it exports can go up, then it doesn't really matter. richard: that is a great point and you have well summarized the central fed of you that they are supportive of foreign central banks easing policy to restore full employment and price stability, willing to accept the consequences of that in terms of security, if they strengthen the economy. of course, that was the defense position in 2002. what i would say, mr.

sanders of vermont has a different view. the politicians right now have a radically different view on dollar strength, then the fed. i don't think we want to necessarily bear up too much into politics because the candidates do not seem to know what they are talking about. tom: should i put that on twitter? michael: all things equal, a stronger dollar will have an in -- impact on exports, and i have this year. we are going to see exports rise again, if those economies get stronger. richard: we cannot minimize the impact of the big decline in commodity prices. that has been hitting the commodity exporters. longer term, we believe low commodity prices should be a positive for the global economy. thus far we have not seen it. i think we will see it eventually. distinction that

we will see low commodity prices down the road, and the distinction that we are in verse shape now. scarlet: we are veering into the hypothetical here. forget, in the united states, exports are only about 10% to 12% of gdp. where is everybody benefits from the lower prices we get from imports, because we import so much. degree, to what richard, do you think there was central-bank coordination out of the g-20? richard: excellent point, and they have been discreet about that. nobody has confirmed or denied it. the least interesting things of those meetings are the communiques. there are a lot of bilateral meetings, informal meetings over coffee, diet soda perhaps. i think they do compare notes,

and in particular, it is relevant, given at the beginning of the are there was a lot of concern. will try to try to surprise us again and do a big evaluation? remember, china is now the head of the g-20 process this year. feel a particular sense of responsibility, and that is why i have lowered my that we get a negative denver surprise out of the currency. radio, andnd i on your colleague was shocked at the completeness of mario draghi's actions. does our fed have the power in the toolkit to do a completeness of action, when they have to? he is a great colleague, and i have learned so much from him already. what was innovated about what mario draghi did, essentially in this new program, not only are they going to lend to banks,

they are going to pay banks to lend under certain conditions. obviously, very attractive financing. a big part of what he is discussing now is what the fed did in a slightly different modality in 2009, 2010, asset lending facilities, for example. tools of thatave form, and others, i believe. when it comes to what the fed will actually say and do, what will be the question that janet yellen cannot answer at today's conference? richard: are you going to hike at the april, june meeting? janet yellen wants her options. i think i have said before, typically, some who buys an option has to pay a positive price. so far, she has maintained maximum option analogy without having to pay the price. certainly, she will want to maintain that.

back in january, when the markets were selling off in a look at the world was coming to an end, i said the world will look different in a couple of months and it's important for the fed not to get to sleep by the data points. in her own way, she may remind people that it makes sense to step back, as they had done. so there may be a little pat on the back. scarlet: a bit of a victory lap for the chair. thank you, richard clarida. all day we are bringing you coverage. later on, alan blinder and gross. ♪

worldt: from bloomberg headquarters in midtown manhattan, this is a special report, "the fed decides." it is time for the bloomberg business flash. linked in's says future is not as bright as once

thought. morgan stanley is slashing their price on the shares. analysts say they seem to have hit a wall with large enterprise customers and the product shows slowing growth. the downgrade is the latest after a lackluster earnings report. sun edison's annual report is on hold for the time being. identifiedey have material weakness in its internal accounting systems that require more time to fix. investors had expected sun edison to file a 10k yesterday. the u.k. unveiled a sugar tax. the surprise move adds another burden to food and beverage companies grappling with restrictions, as well as a shift to healthier fare. cola sharesd pepsi are also lower today. let's take a deep dive into the bloomberg terminal. this is something mark -- mike

mckee mentioned. inflation measures are starting to climb. the one you want to pay attention to is the white line, the u.s. break even. 10 andlook at the 30-year, they have trended up, but have not moved in comparison to the one-year. when you look at five years, the one-year bring even seems to go up every year around march and april and then comes back down. does the bond market really get inflation right? to, but they tend will not look at the one-year because it is subject to a lot of variability, depending on what is happening in the economy, oil prices, that sort of thing. the belly of the curve is where the trading will be. i bet our next guest will say that. scarlet: let's get a data check as "to the announcement. .om: equities, bonds, currency

the euro is weak or today. we have seen that through the morning with oil lifting after a few days being down. the german two-year. rather, the u.s. two-year. just below 2%. that is a change from this morning. the dollar index, dollar fractionally elevated. a churning market, as we get to the important statement from the fed. scarlet: for the radio listeners, this is a special report, "the fed decides." i'm scarlet fu. michael: we are joined now by oppenheimer's ira jersey. also still with us is richard clarida. the keyant to get to question we were getting to with randy. is there inflation to worry about, and is the fed on top of

it? morning's cpi was particularly important with that regard. there was a story on the bloomberg terminal this morning that new home are having a problem finding homes because there is credit and house prices continue to climb and there is not enough supply in the market. inflation youis have to worry about. is the fed behind the curve? probably not yet, but they could bp or we are worried about the wrong policy mistake. some are worried about the fed tightening to quickly. level, not tightening at all could have bigger implications going forward. michael: you are confident monetary policy can react quickly enough with whatever inflation threat the market is seeing? ira: fighting inflation is much easier than fighting deflation.

withed saying they are ok inflation running above trend for a while, because we know how to stop that. we know we can hike by 50 basis points, we know how to deal with high inflation. but the fear is still inflation being too low. headline inflation will be low for a while because you still reasons oil, a lot of that headline inflation is not the problem. even in places like europe, prices are relatively stable, even though they are at levels that nobody really likes. scarlet: but we cannot vanquish those inflation peers, richard. no, and certainly not a threat in the u.s., in large part due to effective fed policy. in many emerging economies, they have no trouble generating inflation, look at brazil and russia. i want to jump on something that ira said.

this is a fed that has indicated, at least from leadership, that they would not be averse to running the economy hot. they will probably never say that they are aiming to overshoot the 2% target, but if that results, it will not be the end of the world. in particular, chair yellen reminds us that two percent is supposed to be the average, not a ceiling. michael: how high can they go and for how long? round numbersnk are relevant, so maybe two point 2, 2 .3 is something they could handle. i think 2.5 would be a little for which they would be less comfortable. but right now, we are below 2, and we have been for a few years. scarlet: one was a last time we were about 2.5? randall: 2006. tom: as we talk about inflation, there are eight ways to look at this. cpi, thee cleveland

white line, which is much more stable and intelligent. is core. this is the leg up we have seen, to your point of elevating up and over. so there is a real question about the velocity of price change, depending on which you use. one of the things that a lot of people look at is the lower volatility. even within the core inflation, you can look at some sectors of the economy that have been incredibly stable, but you look at what is happening with wages in the u.s., they are not growing quickly, but they're also not going down. wages adjusted for inflation have gone up nicely the last couple of years. at some point, you would imagine with the participation rate rising, with unemployment continuing to fall, that there would be a wage push. even though you have market-based inflation measures that look at cpi and goods inflation being stable although because of the dollar, services

inflation has been moving pretty nicely. the services economy is around 3%, goods economy, about minus one, and that is the average you get. tom: michael, help our guests explain this. here is the dot plot. i call it a game of thrones. this is the king's landing battle in season three. on kidding. the red line is the market and the green line, there are people like richard trying to guess where we are going. look at the red line, it comes down. these are the vigilantes like ira jersey going after richard clarida and the rest of them. watch how the red line widens out. this gap is stunning. michael: interest rate swaps in the red, in the green is the

median of the fed. ira, that redline has never matched green line, and the dots continually change, so why do you guys on trading desks care, why is it such a big deal? ?ra: the dot plot it is not anymore. when it first came out, we had something to pin our hats on, the fed is promising to do this, they will be hiking at this pace -- but it became pretty clear within a couple of quarters that it really didn't matter. and it doesn't. is the market or the fed right? probably somewhere in between. the market right now is at barely one hike this year and that is that four. dot you is an aspiration not a forecast. the fed would love to hike four

times because that means that they are booming. , the markets are pricing in the probability that things go the way the fed says, plus the probability, which is another number, which is that they cannot get off zero. the market pricing will always differ from the dots, which is a meeting you, not the average. now is notrket right pricing in the worst-case scenario. it is pricing worse than the worst-case scenario. scarlet: could the u.s. withstand about 25 basis point hike right now? were telegraphed, yes. the challenge of janet yellen today is that there would be a lot of confusion about what the fed is up to. could the economy handle 25 basis point in june? absolutely. statement fore years, the fed has said, when we raise rates, this is what we will be looking at. labor market conditions, will be looking at inflation pressures,

expectations, and we are looking at financial and international development. what do they do now and at the next meeting? ira: right now they are balanced, and then they will make statements that they will likely hike in june. michael: richard, do you agree? the questionink is, do they reinstate the balance of risk, do they wait to do that until april? the message coming out of the press conference today is if the economy comes out as they expect, there will be price hikes, not four. scarlet: what should investors be doing in the meantime, ira? ira: you could be in the belly of the curve, the 10-year markets. i don't think you will see much movement out there. on a relative value basis, but are to be in 10-your u.s. that in other negative interest

rates. richard: we think credit got hit with a broad brush earlier this year, so investment grade credit. tom: here is the two-year yield. this is retail sales. excuse me, cpi. too much bloomberg terminal. here we are at 1%. this is exciting. we have seen a little bit of movement in equities. i know that is not the best gauge, given they are unchanged for most of the morning, but they did take a little leg lower. i'm not sure what the decision is that would be bad news, but you look at the bond market, no change. in terms of treasuries, we are looking at declines in

treasury prices. that means higher yield. 1.99 percent, just under that 2% that you are so fixated on, tom. the five-year at 1.51. 110.88.llar, weaker at >> no change in interest rates. that is what is most important now. equally important is the dot plot. the fed scale back his plan for rate hikes. policymakers not expect to raise the fed funds target by only .5%. i don't need to tell you that is a big change from where we were in december, just three months ago when policymakers anticipated a full point of increases through the end of 2016. i will say this, even the most hawkish members of the fomc have to ratchet back there rate expectations and, clearly, that sa a