change monetary policy, but what will he say about the rapid rise in the euro? christine lagarde one some clarity on u.s. dollar policy. treasury secretary steve mnuchin says he has been clear and consistent. president trump has landed in says he willhe bring investment back to the united states and tell leaders that america first is good for the world. occam to "bloomberg daybreak." i am david westin along with lisa abramowicz. lisa: let's get you caught up on the action across the board. s&p futures up a little bit. ftse sort of flat. the euro is weakening slightly before the key mario draghi speech. high, thehing another highest level since december 4, 2014. david: we have time for a very short daybreak first aid. we want to talk about the ecb,

the dollar, and president trump. the ecb. lisa: the ecb is facing an economy that is recovering and not just recovering, but is definitely gaining steam in the eurozone. the question is, will they announced some kind of ending of their bond purchase program and will they try to talk down that euro? the euro has been strengthening against the dollar. david: it is not just the economy gathering steam, it is the euro. lisa: the fear is that it will eat into the corporate profits. david: it also suppressed inflation that mario draghi said he wanted so badly. steve mnuchin says he has been perfectly consistent, there is no problem with the u.s. dollar even though it has taken a hit. you can see what the dollar has been doing over the last few days, not good. lisa: and took a leg lower after steven mnuchin broke ranks with previous treasury secretaries

who always commented about not wanting a weakened dollar. he broke with that protocol and saying it would be positive for the dollar to weaken further. this raises the question of whether we will start -- start a trade war sort of discussion. david: president trump has officially landed in davos and he says he will bring a lot of money back to the united states. "i'm going quote -- to davos to get them to bring back a lot of money. they are going to invest a lot of money in this country ." we know what he is after. lisa: i love your comment this morning. not that settle. the question is, what kind of reception will he get? things like chief executive officer's of companies have been more than willing to welcome him. david: his message, i said i would make america great again, and you are all benefiting. lisa: come on.

they do not think it is because of him. they think it is because of all of this economic stimulus. david: in fairness, he did not stop the economic growth because a lot of people around the world said given his protectionism, it would interfere with growth. last year they were talking about income inequality and this year it is all about money. they seem fine with what he is doing. david: the people in dollars are not too concerned with income inequality. lisa: they were last year. david: erik schatzker is standing by with larry fink, blackrock chairman and ceo, and we have been eager to hear what larry fink has to say. erik: good to see you in dallas. larry: good to be here. erik: have you -- i would like to have you way in on the pace -- weigh in on the pace of the

growth cycle. absent a shock, natural disaster or nuclear war, how quickly will be economy accelerate and how long do you think it can go on? let's start with the u.s. an extended to the global economy. larry: the u.s. economy has grown over the last few years. we estimate the tax reform, tax cut, and the budget is going to add at least 9/10 to the gdp in the next year, so we will see a u.s. economy growing at three and a quarter to three and a half. that is quite stimulus for the entire world. at the same time, what i hear in davos with the europeans, a year ago they were pessimistic about the future of europe, the eurozone, what will happen in france. the outcomes were all very favorable. you have now still a very aggressive central bank, so we are going to see a europe growing at least two and a half

percent over the next 12 months, maybe even higher. then you have china growing at six plus percent, and no one wants to talk about japan which for 30 years was flat. they are the third-largest .conomy growing at 1.5% if you add up the emerging world, we are in a unique as efficient of synchronized global growth -- a position of synchronize global growth. erik: that can last how long? lawrence: at least for the next 12 months, minus any political disruption. i think it could moderate because i think central banks' behavior will be changing. i think the ecb has more difficult problems that actually the u.s. and our federal , werve, the federal reserve estimate three to four tightening's over the next year. that does modify some of the growth.

and we will see where it all plays out. subject to some global problem that is more politically oriented, or a spike in inflation that we are not anticipating now, i think we should anticipate a fairly strong economy. erik: you hit on the nagging concern that can be expressed as inflation, or it can be expressed as tightening monetary policy. what is the possibility that the fed and other central banks take the punch bowl away, and that it does not just moderate growth, it spoils the party? lawrence: i do not see that at this moment. i would argue that we need to define what is good and bad inflation. i would think president trump would say good inflation is rising wages. that is what they are trying to do with the tax reform. erik: it feels good if your wages are rising. lawrence: i am not speaking for

the federal reserve, but if we had a spike in wages which created inflation of 2.5%, is that a problem? i do not think it is. erik: it is only a problem for the fed if you define price stability -- erik: at 2% -- lawrence: at 2%. they have been at 2% and we have seen it much lower, and wages are not the totality of inflation. i think we are still at an incredible point where technology will continue to . irupt and be deflationary think one of the bigger issues we have to address is china, as china does its reform, and we will see if they get around to these reforms, china has been the biggest exporter of deflation and they have such excess capacity. the reforms mean consolidating the state owned enterprises and reducing the excess capacity. could we see a china that goes

from an exporter deflation to an exporter of inflation, if they do those reforms? there are many things that need to be thought upon and considered. one thing we do not spend enough time on that i think i harp on every time i am with you, we do not talk about the pool of money that is still sitting here. here we are, our financial markets are up three times since the financial crisis, three times, and the pool of money sitting in cash worldwide has never been greater. china, withlem in 45% of disclose a bull income in a bank account. if you speak to the finance 72 percent france, of all french savings is in a bank account. erik: germany is earning no interest. lawrence: can you imagine the type of inclusion we would have worldwide if we had better financial literacy, we have more

people investing over the long run? the type of financial gains people would have in their 401(k) or ira, and i think that is one of the bigger crimes that we do not talk about, and that is one of the reasons why i believe we have more momentum, because of the pool of money sitting around. erik: rey dalia told me he thinks we are already in a fair market for bonds, and reminded everyone of the math. a 100 basis point move in treasuries will be as that of a bond bear market as we had in 1980, 1981. you are not sure you agree with that? lawrence: ok. i remember 1981. i was a bond trader. erik: how long do you think it will take to get to 360 on the year? lawrence: longer than people think. i am more concerned about a flattening yield curve.

the wall of money that is sitting out there is still quite substantial. 3.60, he get to a would have to see a behavior change by the bank of japan and the ecb. i do not anticipate that type of rapid change, so let's be clear. the demand for long dated treasuries is still so based on the differential between other rates in other parts of the world. there will be a time the bank of japan and ecb begin tightening. there will be a time when their arbitrage narrows and maybe bond yields increase. i do not see that now, unless i am wrong on inflation, and i do not believe the federal reserve does like the four tightening's i suggested. aik: the fourth quarter was terrible one for wall street's fixed income business. all of the banks said it was because of low levels of client activity and low levels of volatility.

there is no bigger client for the street than blackrock. is your level of fixed income activity that subdued? lawrence: overall, our business with the street has been reduced by the volatility. volume, butdollar our assets in 2017 grew by $1 trillion. the pool if you weight of assets we have from beta and organic growth, overall the business we provided to the street was pretty large. erik: let's talk about your letter to the ceos. it has been well received, not just by the corporate world. prime minister justin trudeau applauded you for telling companies they have to society. how much is this push a response to the political environment? lawrence: i would say it is more of a response to society's needs

more than the political environment. as i said earlier, i think we are in a world of even more inequality. more fragmentation. even with this incredible equity market rally, the anger has not gone away. erik: people are not participating. lawrence: that is my point. if you reflect on the very best companies in the world, these are companies that have purpose. these are companies that are connecting with their client. their employees feel connected. the very best performing companies are companies that are ,orking with a purpose intersecting their responsibilities in society their employees and intersecting with their clients. milton friedman, but everyone famously quotes but many famously misquote in his 1970 sa when he said it is just profits. he talks about, if you have an

ability to impact your community , and that produces longer-term profits, that is good. that is exactly what my letter said. erik: it is a strong message. "without a sense of purpose, no company can achieve its full potential. it will ultimately lose the license to operate from key stakeholders." some may interpret that as a threat. the ceos need to know how they are being measured. how do you find -- define social purpose? lawrence: we asked companies to define how they see their purpose, so it is not for me to tell a ceo and their board what is their purpose. it is for me to understand how they see their purpose. i may agree or disagree, but that is our prerogative. we are asking companies to think about their long-term -- erik: what motivates blackrock to take action?

it does not sound very systematic. lawrence: i would think it is quite systematic. there is a huge responsibility being placed on blackrock with the scale of the assets we are responsible for. more money is moving into passives. i cannot express my displeasure in a company by selling the assets. erik: you have to be invested. lawrence: the only power at have is the power of the vote. and so the paragraph about purpose is one paragraph in a two and a half page memo. we talk about focusing on the long-term, focusing on long-term strategy. you reviewed the long-term strategy with your board of directors. we want to understand how you have to pivot around the long-term strategy. it is a guidepost, not etched in stone. erik: that is what you are evaluating? lawrence: we want to make sure

they are focused on the long-term. if a company is pivoting because of activists and they are inappropriately doing something they told us they would not do in their long-term strategy, we would be against that. i have to own these shares on behalf of our clients -- erik: you are holding them accountable to what they say they will do? lawrence: yes, that is pretty simple. erik: you have flagged concerns around short-term-ism. but companies will use too much of the windfall from stock -- and tax returns to buy back stock. lawrence: keep in mind, a tax cut is below the line, not above the line. companies are measured by revenues, operating income, and margins, not totally by after-tax earnings. and we have a tax cut experience a very large market equity rally, we adjust equity prices to that new level of after-tax earnings.

that is a one-time event. after that, we have to see what they are doing. the market is reevaluating what after-tax earnings are. the rally the stock to the new level. maybe it is the same as it was before the tax-cut. what are you going to do about that? that is one of the things we are asking. i also said, if you do not express publicly what you are going to do with your newfound cash flow, you will leave yourself more vulnerable to an activist. erik: another question or two about your business. scale clearly is blackrock's greatest asset that helps absorb costs. origins are up 400 basis points in five years. and you do that over the next five years? lawrence: the main reason why operating margins have grown, we have really and based technology in everything we do. -- embraced technology in everything we do.

our cost her trade has gone down 82%. five years ago, we had half the -- 11,500 11.5 employees. now we have double the assets through the embracing of technology, aiding our human beings, not substituting them, and creating much more operating leverage. for hundred basis points may be a stretch, because i think if i get our margins up to 48% or 49%, i think i am under investing. erik: what is realistic? lawrence: i do not know. we do not manage to a margin. conscientious, that if we believe we need to be investing more in a technology or a business, we will do that here it one of the great successes over the last 10 years for blackrock's we have invested probably more than any other

asset manager and we are continuing to invest. see an opportunity that we believe shareholders will benefit by that investment, and it sacrifices margins over a short time, i will do that. origins or something we are very focused on, but -- margins are something we are very focused on, but we will be managing the business to get long-term gain for our shareholders. erik: that is larry fink speaking to bloomberg television and radio viewers and listeners here it -- listeners. david: it struck me that he started out saying, there is a huge pile of cash on the sidelines, and yesterday radel he is said the stupidest thing you could do is hold cash. -- ray dalia said is the stupidest thing you could do is hold cash. lisa: stock investors believe one sideline investors for their cash into equities, they will see this big rally.

what happens when people start earning money on their cash? won't they like the cashmore? this is a serious issue as libor rates reach the highest. david: that is a great time, when you start making money on cash. perhaps you will get some pressure. blackrock is really towing the line, trying to figure out how to remove liability for being so big by being aggressive with being a responsible investor. david: that was clear and that interview. they were conscientious of how big they have gotten and what social responsibilities, to make sure this is not used for bad purposes. lisa: and to keep regulators off their back. david: you are so cynical. lisa: fair enough. my cynical reading of that. david: we move on to england here it earlier in the day, john

sit down with prime minister theresa may ahead of her speech and davos. he began by asking her her views on cryptocurrencies. cryptocurrencies like bitcoin, we should be looking at the seriously, precisely because of the way they can be used by criminals. has beenomething that developing, increasingly developing. i think it is something we need to look at. john: president macron effectually said he could imagine a deal whereby financial services could be somehow elongated, but only if you went back on things like the court of human justice and things like that. would you be prepared to trade at all on that in order to get more access to business, especially finance, which is the biggest industry we have? p.m. may: the city of london is hugely important for the u.k. and also hugely important for a

global financial center for the european union and the rest of the world. i am positive about the future for the city of london. london is a really attractive place. the city has developed over a number of years. use the word "ecosystem" around the financial services industry and the united kingdom. john: would you be prepared to to doto keep that access, what macron said which is withdrawal little bit on the red lines like the jurisdiction of european courts, in order to get more access? p.m. may: when i am working for -- and in december we reached a successful negotiation of our brexit talks with e.u. i am looking at the implementation period, the time which will enable businesses to adjust to our new relationship after we have left the european union. i am clear that we want to

develop a deep and special partnership, a comprehensive free trade agreement. we recognize the importance of financial services and we want to ensure we can continue to see financial services and shoring that the city of london retains its role as a global financial center. few weeks, talking to financial services businesses in the u.k. as i have done previously, they are positive about advantages the u.k. has. i want to build on those to make the u.k. a more attractive place for financial services. john: would you consider paying for access to the single market, pay more and get more access for financial services? p.m. may: one things we agreed and discussed in the first phase of negotiations in december was on the financial sediment of the uk's withdrawal from the european union. the secondg into phase, which is about the basis on which we will be able to trade in goods and services, and

a future security partnership with the european union. i am positive that we will be able to get a good arrangement for the future, and arrangement which is a comprehensive trade agreement for the united kingdom with the european union, and the reason i believe we will be able to come to that arrangement is because what i see talking to other leaders is the sense that we would be pragmatic about it, because it is to the benefit of the e.u. as well as the u.k. that we have that good arrangement in the future. john: the less savory part of the city of london, we had the presidents club dinner the other night. first westminster, now the city of london, this issue of harassment and male entitlement. you have worked in the city and westminster. what does it take for this misogyny, some would say, to change? p.m. may: i was appalled when i read the report of this presidents club event. i thought that sort of attitude of the object of vocation --

women wasation of in the past and sadly we have more work to do. i will continue to work to a point where we can say that women are respected and accepted and treated as equals. david: that was british prime minister theresa may speaking with john mickelthwait in davos. brexit is a big topic, but i have to talk about the presidents club. this piece of journalism from the financial times where they went undercover for this charity event where basically women, it looks like were harassed through the entire thing and maybe that was the purpose here's it keeps going on everywhere and permeates every part of society. lisa: why is there an all-male charity event that nobody questions? number one. number two, it says all mail except for the women who are supposed to wear sexy

undergarments. david: they were recruited, you have got to be young, slim, and attractive. why is that? the only qualification is you have to be really cute. lisa: this raises the question, how deep does this go, and what political implications are there for theresa may? the has been a resignation or two over this. david: talking about the important question of financial markets and brexit, you cannot have that conversation without talking about the presidents club. you have to ask that question. it shows how widespread it is. comments,brexit everything is going great, and then you hear what is happening. david: it is a surprise that she is confident. she thinks it will be more attractive for the banks in london, that is a hard put. lisa: i am not surprised. what else can she possibly say? we shall see what happens and we

will be getting more on that. david: we will be covering much more in davos. we have some great interviews coming up. ofwill hear from bob printz bridgewater associates and later on we will be hearing from lloyd blankfein, the head of goldman sachs. live from new york, this is bloomberg. ♪

david: welcome back, i'm david westin with lisa abramowicz. so good to have you here. lisa: so good to be here. we are in the green across the world. futures and the nasdaq and dax up.

euro weakening slightly. the yen and euro strengthening against the dollar. u.s.the 10 year yield in and germany dipping a little bit. spanish yields flipping up one basis point. nymex crude at the highest level since 2014. david: let's head back over to the world economic forum in davos where erik schatzker is sitting down with printz. : good to see you. people know bridgewater. they know ray dally oh. they do not know you quite as well. are you the yang to his yen? bob: a little bit. i would say we are great partners. i was fortunate enough to join up with ray 31 years ago.

the company had just moved out of his living room, and i think when i went up to talk about the had justlped him -- i moved into the office and i helped him load books on to the library. we have been together since the beginning. i also had greg jensen, the three of us are really the team. erik: what are the biggest differences between you and ray in terms of personality, and the way you look at things and specialize in at bridgewater? bob: there is probably more in sync than indifference -- band difference. a central part of how we approach things is we have to come to agreement about how the world works, how markets work, and how to translate that into an investment strategy. say there is more in common, particularly on a values and culture standpoint. erik: he does certain things,

and you must do other things. bob: ray is very big picture. he is probably the best among the three of us at the very big picture. atrobably would be stronger the translation of that into portfolio strategy, client strategy, how clients take that information. erik: let's pick up on that thought, because yesterday when ray was here, we talked about where we are in the cycle, and i presume you when he are in sync on the idea that we are heading toward a point -- things are great -- then heading to a point where central banks will feel inclined to raise interest rates at a faster pace. if that is the case and if i expressed it accurately, what is the right portfolio strategy and positioning? bob: all assets have environmental biases. for every asset, there is a good environment and a bad environment.

we have been in a certain type of environment that has been kind of across-the-board good for equities, and we are transitioning into that midcycle environment into what we refer to as a late cycle. in the early stages of the late cycle, you have growth but not much tightening of monetary policy, still is good for equities and is better for commodities and bad for bonds. as you transition deeper into that and you face capacity constraints, you get more tight monetary policies and ultimately that is bad for stocks, bonds, and you want to hold on. erik: if it is good for stocks at the moment, and for the foreseeable future, and if it is good possibly even better for commodities, what does that look like? how much room does the american equity market or the global equity market have to run? bob: everybody is talking about how strong the economy is now, which is true.

the stronger the economy is, the less room there is to run. words, the goldilocks environment is particularly good for equities because it delays the tightening of monetary policy. the end really comes when the tightening of monetary policy withdraws that liquidity relative to what is being priced in. too much growth is a bad thing because it creates a much more acute trade-off between the pickup in growth and the timing of monetary policy. erik: is that what you think will happen? bob: probably this year, pretty strong, and probably more tightening, more rise in interest rates than is priced in , but probably not enough to offset the benefit of the improved earnings. in the near-term, it is good for stocks relative to bonds. transitioning, where people are underweight is in real assets, commodities and other real assets.

financial assets have done so well so long that people have forgotten. erik: the question everyone asks, can we have another 25% year on the stock market? bob: probably not. last year was an important transition year. we went from all-out monetary stimulation to central banks contemplating tightening but not doing it, but growth picking up. the stock market had a free run where you have the growth and the earnings but no rise in interest rates. going forward, there will be a tighter and more acute trade-off between the growth and earnings and the rise in interest rates. as you increase the discount rate on cash flows it will be a drag on equities, probably net favorable but less so. erik: people are talking more about commodities because they have begun to see prices move. bob: that is not a good reason. erik: that is how people behave. they look at historical returns, even if they are short-term, and

they want some of that. bob: mostly what happened is because prices fell, keep in mind commodity prices are the only prices that are down. because prices fell, it hurt the economics of investment so you had a reduction of capacity investment and at the same time, the demand has picked up. that has reversed the supply demand dynamics. erik: bridgwater is active in just about every market for financial assets in the world. are you at the point yet where you are thinking about crypto, and what i mean is probably bitcoin futures as opposed to the cryptocurrency? bob: no. it is something to understand in terms of, is it having an effect on macro economic conditions, is it affecting other things? i think it is the shiny object. i do not go chase the shiny object. look at cash flows, look at what you are paying for cash flows.

we want to stick to that sort of thing. erik: as long as it has no flat -- cash flows it is not an asset? bob: investing. prince,vid, that is bob the co-cio with radel io and greg jensen at bridgewater -- ray dally oh and greg jensen -- ray dalio and greg jensen. david: it was interesting to hear. lisa: real commodities and assets are undervalued, giving this idea that they could rally. he said stocks are going to perform better than bonds in this environment because he expects even though the fed will tighten rates more than the market is currently pricing in, it is not enough to offset the economic benefits from the positive earnings trend. david: we have to put that together with what we heard from his boss yesterday, who said it would be stupid to hold cash. larry fink said there is a lot

of cash out there that might drive asset values. >> we do not talk about the pool of money that is still sitting here. our financial markets are up three times since the financial crisis, three times. the pool of money that is sitting in cash worldwide has never been greater. there is a lot of cash on the sidelines. investors have cash on the sidelines. consumers have cash. they can feel they are being left out. they feel stupid with cash and this kind of environment. i think that will be great for earnings and it will be great for that stimulation of growth. we have to look just beyond that to say, what is monetary policy going to be, and how big is money -- difficult is monetary policy? david: it is interesting what bob prince said, the farther you go on the growing economy the less room you have to run. lisa: honestly, to me the big tension setting up 2018 is at when wet -- what point

get higher rates to people go back into cash versus take it out of cash? david: a great question. while we were listening to bob prince, they are continuing on a roll. they beat on revenue and earnings per share. they came out with a forecast for next year which is a pretty wide range from $8.25 to $9.25. the have turn things around. the have a lot of lean years. -- they have had a lot of lean years. positive news coming out of caterpillar. lisa: i wonder what that means with respect to global growth. david: capital investments, things like that. we are just minutes away from the ecb's first monetary policy of 2018. as you commute in today and cannot watch television, listened to radio. tom keene and jonathan ferro and

7:00 to 9:00, and then pimm fox joining at 9:00. live from new york, this is bloomberg. ♪

kailee: in the next hour, erik schatzker will be speaking to lloyd blankfein from davos. we are just under two and a half minutes from the ecb's first policy decision of the year, and here is what we are expecting. unchangedicy amounts,

guidance. alleng us now are david from london and michael mckee. david, go back over the ground i just read. is that what you are expecting? david: certainly no policy changes. is whatresting thing mario draghi acknowledged, that the eurozone is on the upside. the balance of risks of move to growth continue to surprise on the upside. the more the markets will discount not just the end of kiwi and bring forward -- qb and .ring forward -- qb -- qe this is not the month for a key policy decision. that will have to wait for march the eighth. david: how do you see the interplay between the inflation mario draghi has been

on a quest for. what is going on with the euro? michael: the ecb keeping a close eye on the euro, but you look at what happened with the exchange rate, and as our colleagues at bloomberg intelligence note, it is more a question of dollar weakness than euro strength. have a chart, this is g #btv 9186 and shows the difference between the euro and trade weighted euro. the ecb will be more interested in the white line, the trade weighted euro. it went up briefly and has started to come back down again. they are not as concerned. that is a gain of about 1.2% since the last ecb meeting. the euro is up 5%. it should be a bit of an inflation signal but not a huge one. lisa: do you think the market expectations for mario draghi to address the euro are overblown? michael: a little bit, given that the ecb president tries to

stay away from talking about the currency. he may talk about how the ecb has brought about economic strength that could bring us to more inflation down the road, which would be a code for how the euro reacts. as david said, this is not the eurozone.the ecb and it will be a bit like the month of march. the maine ecb has left refinancing rate unchanged and the finance -- interest rates at present levels for an extended will run until an inflation path has sustainably adjusted. michael: no change in this month. david: let's go to ecb headquarters where matt miller is standing by. matt: i am in berlin. i can tell you that we were not expecting a change in forward guidance.

we were not expecting a change in policy or bond buying, and we did not get those things. 2:30y, the news will be at when draghi holds his speech and holds the q&a session. he will be pounded with questions about the euro. at this level, it is obviously fairly high and got their fairly quickly almost overnight. that especially considering the comments made by treasury secretary mnuchin yesterday in dollars, a lot of the press at the frankfurt meeting will be asking him about the euro and how he plans on responding. david: you are still a lot closer than we are to frankfurt. what are the pressures on mario draghi? you have heard from some other people making noises about where it should go, and some hawks coming out. there is a lot of pressure on mario draghi to be more hawkish. matt: that is right.

they have said they want to see an end to quantitative easing, and they want that communicated to the market. that we haves surveyed expect that in june or july if at all, but the hawks have been out there and have been relatively vocal. the biggest challenge now for mario draghi is this appreciating euro makes his inflation target more difficult to hit. a lot of times when you get a currency fall in value, that means inflation rises and when a currency rises in value, inflation comes down. he has not been able to achieve this target in the 10 year, and will want to be able to do it before he leaves in october 20 19th, and will want to be able to raise rates. wea: what is the dog whistle should be looking for from mario draghi when he talks at 8:30 eastern time, 2:30 your time?

he will not address the weak euro directly, but he will potentially signal at it. how? matt: he is going to have to answer direct questions about the strength of the euro. overare going to be asked and over again, and he will not get out of the press conference without doing so. if he says anything beyond, we do not comment on short-term moves about the direct euro-dollar rate, he is going to have to address at some point the broader rise in the euro, and say whether or not he thinks the appreciation has been too quick or not. the ecb policy is not to be too concerned with the absolute level of the currency, but to be more concerned with the rate of change, the delta. if he sees that that delta has gone too quickly, he will have to comment on it. there has been job owning in the other direction and he will want to do the same. great matt, it is really

to have you in berlin, not frankfurt. i want to go back to david o when in london. we have been watching the reaction with the u.s. pound in the dollar, and the dollar has not lost much. lisa: the reaction has been highly muted. no reaction. david: is that because the market expected this? david o.: absolutely. it is more about the press conference and about the meeting march 8. there is an important ecb watchers conference on march 14 when the ecb can further push the forward guidance to a wide audience. i do not think the exchange rate really matters for the ecb as much as has been suggested. the eurozone is pricing on the upside. if that continues, that is the most important thing. the chief economist has been stressing this new measure of inflation. that has picked up. it was running at 2% in germany

the middle of last year and it has picked up in the eurozone. they are trying in a sense to break the linkage between what they are doing on the policy front and the headline inflation rate. i think they are maneuvering to a position where they stop doing qe, even if inflation as well away from target. there is no reason to keep doing qe, and the market should discount the fact that they could raise the rate very slightly in december. that is becoming more of a distinct possibility. the eurozone this year could grow by 3%. in december, the ecb was forecasting 2.3% growth. david: what about quantitative easing? it does not look like an emergency for the economy in europe. michael: that is why they would like to get out of it as the economy is strengthening. we should step back and say, this is what we are talking about. the ecb said in december it

would cut back on its asset purchases. it has them at 30 billion euros keepth, and they will going until the end of september 2018 or beyond, until the governing council sees a sustained adjustment in the path of inflation. if they change their guidance, they may drop the connection to inflation, which would enable them to end it in december -- september, or they could go on to december. everybody is looking for some sort of change in that language guidance, the forward guidance about when they will stop qe. then you go onto to the idea of when they will raise interest rates. they will keep them at their present levels for an extended past the time, well net asset purchase of our -- lisa: when is the market pricing in an end? david o.: if you speak to most

people who trade euro government bonds, there is exceptions it could end in december -- september. nobody is expecting it to extend out into 2019. lisa: are you saying that if they indicate they are going to be extending it, there could be a rally in european debt? david o.: yes, but they are not going to do that. they are not going to make any decision about what they are -- he will not say it until june or july. given the strength of the eurozone economy, everyone accepts that they will probably year.d stop doingqe this there has been a lot of hawkish comments coming out from various governors. has rode back from some of these more hawkish statements. for the press conference today, to what extent does draghi try

and remain dovish? he has to acknowledge the eurozone economy is growing faster than the ecb was thinking in december. the eurozone is surprising very much on the upside. david: let me cut to the chase -- well mario draghi ever preside over a rate increase? michael: good question. the bet right now is that he might get one in. he leaves in october 2019, and endsebate will be once qe and they go into 2019, when did they start raising rates question mark they are at -40 basis points so he would probably be raising it to about -25. it is a safe bet he will not have positive nominal interest rates under his presidency. david: this is what i do not quite understand. 2006, 2007, moment,

2008 never happened and we had a european economy doing what it is doing now. we would never have a central bank with this level of intervention. how do we get back to the real world? david o.: the other important thing about the eurozone is its attraction of 20 national century -- it is a collection of 20 national central banks and 19 sovereign. there is still this issue with the banking sectors of individual companies twined in with sovereign bonds, the governments in those countries. if this is not the u.s. or u.k. or japan, if it is the eurozone, it almost faces a crisis at the 2008 to 2012, at which point draghi had to step in. we have gone an awful long way from their bank, and the eurozone is surprising on the upside. most central banks want to change policy. lisa: what is the chance of an orderly unwind of the ecb

stimulus? it seems like the market is pricing that in 100%, that they will wean themselves easily. david o.: i think that is absolutely right. there is a good chance that they will not just raise the deborah rates before -- depot rates but also the -- rate which is currently at zero. at the end of the day, the market is increasingly pricing in these scenarios. at the moment, the economy is providing the emphasis for spreads to broadly tighten. this trade i think will continue. david: michael, come back to the united states. does what mario draghi says have any effect on the fed? does it limit their optionality? michael: no, because we are not talking about any kind of rate moves and the fed will be well along before the ecb gets to it. the fed will not do anything at its meeting next week and will

probably be pacing the idea of doing more if the dollar continues weakness and brings in inflation. david: david owens, great to have you, coming from london, and bloomberg's michael mckee. coming up at 8:00, a very special interview. erik schatzker will sit down with goldman sachs ceo lloyd fine fine -- lloyd blankfein. we will see what mr. blankfein has to say about the global economy and about trump policies. live from new york, this is bloomberg. ♪

david: the ecb did not announce any change in monetary policy a

few minutes ago but what will mario draghi say about the rapid rise of the euro? christine lagarde want some clarity on u.s. dollar policy. mnuchin secretary steve says he has been clear and consistent. we will hear from lloyd blankfein in just a few minutes. daybreak onloomberg this thursday, january 25. lisa: let's get you caught up on what's going on across the markets. we have been seeing a lot of green in the s&p 500 leading up to the open. earnings are coming out with caterpillar coming out with strong earnings and they beat on the fourth quarter and have pretty aggressive projections for the next year. biogen had a better than expected earnings projection. you have ford down.

was up more than 3% in pretrade action. frankly, many people have been after the amazon purchase of whole foods. the revenue is going up at the profit is not and they save they have to get this thing fixed in their new ceo is working on that. can see, the s&p 500 and the ftse in london are both up today. the euro is strengthening against the u.s. dollar, continuing the trend with the dollar weakening. it's the weakest against rival currencies since 2014 and crude oil is super to -- is super litan. super litan. this is the highest level going back to 2014. i don't think it's an accident that the dollar and the oil art trading in tandem. it's an important trend to notice and there is a question

if these are crowded trades and will they break. david: the big news will be the news from mario draghi after we hear from lloyd blankfein. monetary policy has not been changed in the ecb but everyone is to hear what he says about the euro and inflation and qe. lisa: president trump is joining them. testify withd to robert mueller in the special prosecution indicating there is some conclusion of at least one part of the investigation. david: your husband is a prosecutor and they know the stuff and they are still working on the details. this is a very intricate thing. they say it could be march before it wraps up. asa: at what point do we have sense of whether this is market moving or we can put this behind us. does anybody care outside of the peanut gallery? david: if i were a market, i

would not -- i would want to know what it is. the fact that he is testifying, it could be the last step in the investigation. lisa: it's likely the last step in an investigation but is there anything else behind that? potential investigations are potentially market moving. david: there are some financial things that there are rumors about but we don't know. lisa: it's amazing how little we know. david: we will hear from the president when he gets back from davos. erik schatzker is live with lloyd blankfein, the chairman and ceo of goldman sachs and they are sitting down for a live interview now. erik: we are live on bloomberg television and radio worldwide with lloyd blankfein of goldman sachs. nice to see you. you have had a few weeks to evaluate the tax bill. how does it affect your business and how does it in -- affect the competitive environment?

relative to the place of american business in the world come our place has improved. i think we have caught up to the rest of the world. i think it's an appropriate thing to do to make american businesses competitive with businesses of other developed markets? erik: does it change the competitive environment for your industry? >> it has a lot of benefits for our industry. we were a relatively high taxpaying industry. they did a good job of widening the base of moving deductions and having a kind of rate that will be common for everyone. they have equalize the of keeping money overseas versus keeping at home and i think it is made the system more sensible. to that extent, we like operating in a sensible system. do you agree with the idea, if you will, that at least, among banks, the savings

from the tax cut will be competed away? -- there is ability the opportunity to price things more aggressively and your margins shrink. >> who knows? to a point where prices clear. think people will necessarily invest more but that's the intention. some people will return capital but one thing you hear is that people will not invest in their business so return the capital either in the form of dividends or stock buybacks. i never quite understood that because it amounts to the same thing. if i can't invest in my business at a return to the return i have, i will return to my shareholders. will go out and invest in a company they think is a higher return. ultimately, it's the

shareholders money. they will decide where to invest it but it gets invested and that reinvestment is good for the country. erik: the firms in your industry were well-capitalized, profitable, and competitive before the tax cut. will this force changes elsewhere? thanks, forean example, want to remain competitive with the u.s. banks that now have an advantage, what will they have to do? >> our tax rate has always been higher. predicate of your question, we were profitable. the banks were profitable but the criticism by investors of most u.s. banks is that most banks in the united states did not earn their cost of capital. erik: for a while, that's true. >> people have thrown around for a long time the number of 10%. was adjusting for the change in the tax law about 10.8% and

jpmorgan is about the same but very few of the other banks make double-digit returns. you can say that the banks were profitable but nobody thought they had a nexus of return. most of the tax in the u.s. banking system at a return that was the opposite of excessive and did not catch up to the cost of capital. system a healthy banking is the predicate for a healthy industry. in this cycle with american banks have been 13? i'm trying to remember 13. erik: what do you think it will be now that you have the tax cut? roe for most of the large banks in the united states have been 13%. erik: not most, maybe jpmorgan hit that at one point. hit 13 and 30 but not since the financial crisis have

we seen the number anywhere. it's been rare. been abovesistently 10% but just above. i don't think any of the banks have killed it in terms of returns since the financial crisis. functionnecessarily a of business being bad but the banks of been required to hold a lot of capital and that's part of it. some people might like that outcome because the extent that you have a lot of capital, you are safer and sounder but you have to be careful that the returns get over what people think of as the minimum return they need to invest in your institution or you will not have banks. so banks perform at a slightly more normal interest rate environment with perhaps some deregulation on the way, what might roe's look like over the next few years? >> higher. erik: by how much? >> as high as we can make it.

>>we work against an opportunity set. it depends where you are in the cycle. higher than they are now. erik: what about 15? >> highly possible. we won't even agree on the path so we will not -- we cannot agree on the past so we will not agree on the future. erik: there are questions about your fixed income business which had a tough year. it was the toughest fourth quarter since the financial crisis. what is the problem? this is a poor part of the cycle for the fixed income business and people can quibble how much of this is cycle and how much is permanent. if itld not extrapolate

was the most feverish part of the market and extrapolate from that. we will not extrapolate what the opportunity set is in fixed income when you have a flat yield curve with no volatility and virtually zero interest rates around the world. i don't think this is the best opportunity set. having said that, we probably underperformed a bit with even -- within the opportunity set we have. the strategic part of the question is how much you are investing in income opportunity and how well did you execute. i think we could have executed better as far as the investment in the opportunity. i think we have an appropriate investment. it has been reduced in the market has helped reduce the opportunity. 20% revenueng under which is what we always try to achieve. bynkly, we reduced it really, really, really driving growth and or other businesses.

we had record years across the board in our other segments. notwithstanding, a very difficult opportunity set and a difficult year in what historically has been the business we are identified with. we increase our revenue. we outperformed in the other segments that week compensated for week fixed income. i don't think necessarily it stays that way. we get accountable for running the business throughout the cycles. at any given moment, we are getting advice. we take it into account but our fixed business and commodity business is a jewel. if oil will stay plus or minus a few dollars from the same price all year, it's not necessarily going to the the golden age of commodity trading. factor.ecution is a strategies a factor. talent is a factor, too. do you have the right people running the business? >> we have the right people

running the business. erik: do you have the right people in place? we could5,000 people, probably find somebody better in certain places but people have said a lot of things about goldman sachs. i never heard that we lack for talent. erik: that's fair. you have explain some of the weakness by saying goldman is indexed to a certain market. what do you mean by that? saying there's a certain kind of opportunity set. erik: does that have to do with the kind of clients you have? >> if the price of oil stays the same or energy stays the same, how much are you going to spend to hedge your energy risk if you think tomorrow you will wake up in the price will be the same? at a time of low volatility, it's not just that the margins are smaller, people do less business. but other firms face similar opportunities.

it's not the same on a relative basis. we could have been better in execution but we do well over a cycle. we underperformed the opportunity set but not by much. nobody did very well. you should judge over the cycle done well but if i wanted to pick a single point to judge, it would not be the worst moment or the best moment. the tide is rising, everyone looks great and when the tide is falling, everybody looks poor. we have done pretty well over the cycle. the same crowdh running the business today. erik: wall street is equally fascinated and terrified by automation. how much promise does that hold for a firm like goldman? alumnilked one of our through the fixed income floor. in his memory, there was noise

and screaming back and forth. you could hear a pin drop but it's not just the way people are committing prices. prices are being made electronically. they are distributed that way algorithmically. it's tremendous but let me tell you -- tremendous means less likely to make errors. erik: less than humans? >> less expensive to run. it may displace a certain number of humans but the importance of good humans at the fulcrum of that lever become even more important. the definition of who is making -- once upon a time, the trader was sitting there exercising intuition. intuitionave that built into an algorithm and somebody is making that algorithm. in some cases, it's the software designer, it's the programmer that really is what the trader has been using because they are anticipating all the impulses

that would go into the information and they are designing it into the system. things are moving around but at the end of the day, used on the judgment come you still need exercise, you still need a relationship and you still need to communicate. some is done digitally but the basic core of what we do still need to be done and we are still doing it. offer theh businesses most promise in automation? >> anything that's volume intensive still goes. one of the initiatives aside from all the technology that we have in our existing businesses, technology has opened up new horizons for us. goldman sachs has always been associated with wholesale businesses. erik: now you have your consumer bank. >> the technology has allowed us to get into the consumer business because the consumer experience is only an element of that business. what's important is digital distribution, algorithm risk

management, distribution and it is sometimes making a credit decision for five people was not in our wheelhouse. making a credit decision for 5 million people absolutely is. erik: a question about crypto. >> is that superman's planet? erik: every investment bank appears to be building a business of cryptocurrency trading. where do you stand? >> i get showered with these questions. contracts andres we clear them for our clients. for our clients that want to , we saytures on bitcoin we would clear that. but trading and making market, we're not doing. therehow much demand is from clients for futures clearing at the moment in bitcoin? >> not a lot. erik: does that surprise you? >> no. will it ever be a lot?

erik: >> it might but there are things under heaven and earth that could go one way and went another way. i don't think it will take a store of value that moves 25% in a day and goes down by half in a week. a transactional medium that's so hard to do and where a high percentage gets lost or forgotten or stolen, it's not great. but if it does work him i will be able to explain why it did. in other words, i could think of reasons why it would work but it doesn't rise to the level from those reasons i predict it would. erik: thanks so very much for seeing you.reat lloyd blankfein, chairman and ceo of goldman sachs live on bloomberg television and bloomberg radio worldwide. david: always fascinating to hear from him. return onalk about

equity in return for banks in the tax law will really help them. they will never get back to the good old days because they don't have as much leverage. lisa: the other interesting --ect was algorithmic ricks risk management. you need an algorithm to manage the trading. question andother he touched upon consumer lending. he said the automation and the artificial intelligence allows them to better quantify the risks and make advisory comments for consumers. david: goldman sachs is really moving into consumer banking. lisa: and moving in the opposite direction of someone a banks. david: that was a great conversation. at the same time, british prime minister theresa may has been speaking on davos and talked about free trade. it has not been matched

by action so maybe she saying something about china. technology has been questioning some job security. she talked about artificial intelligence with ride -- driverless car's. let's listen in. this is bloomberg. >> in others like online hatred and bullying, we need norms and expectations of how civilized people should interact in ways that cannot be achieved through legislation. ♪

ever u.n.ng the first summit with government and industry to move further and faster than reducing the time it takes to remove federalist content online and increase significantly their efforts to stop it being uploaded in the first place. when he to go further. david: that is british prime

minister theresa may talking about terrorism. it was home secretary and was part of her responsibility before being prime minister. she got on the subject of uber. she said it made mistakes but we don't need to shut it down. welcome back to bloomberg daybreak. what's going on in the markets? lisa: there has not been very much reaction to anything happening with the ecb. we will see if that's still the case in a moment. nasdaq and the dax in europe is up and the euro is weakening versus the yen and the euro is fluctuating around the dollar. it's trying to find a good level of ahead of what may be a potentially interesting session with mario draghi. let's get a sense of what's going on across assets. the 10 year yield in u.s. and germany are dipping a bit and the spanish 10-year is flat and

crews continuing to climb to its highest level since 2014. not a lot of response to the ecb statement. we will see whether that is different. exactly whatl see mario draghi has to say in about seven minutes from now. we will hear his news conference from frankfurt. we will preview that. thank you so much for staying with us. here in new york, michael mckee is with us and good to have you with us. let's try to anticipate the news conference, the questions people are likely to press him on. what's the number one question people ask? >> about whether bond buying will end later this year and the timing exactly of when the depot rate could increase. people will be interested in what he says about the eurozone

recovery, whether he stresses it's much more skewed to the upside. the other thing which is clear in this is reinvestment. when the ecb stepped down its rate of bond buying, their wave -- they were stressing reinvestment in 2018. there will be some discussion around that. the exchange rate of the euro is another thing. mario draghi will basically play down the strength of the euro. the euro zone economy is doing well. of the reason the euro is strengthening is the eurozone is tracking a lot of equity flow which is markets part and parcel of eurozone recovery. of the more innovative aspects of the ecb bond purchasing program was their decision to buy corporate bonds. are you expecting mario

draghi to field questions about the steinhoff incident where the company was downgraded rapidly to a below investment grade and they had to sell and take a loss on that. what do you think will be the biggest challenge for the ecb going forward with this as a backdrop? about what'sow been released is that in terms of corporate bond buying an agency paper, that has held up relatively well. the stepped down in bond buying has been seen more in the sovereign space. they are carrying credit risk by buying credit. are not indemnified against losses potentially on the balance sheet. the bank of england started doing corporate bond buying and it was identified by the u.k. treasury against losses. if the eurozone is still

surprising on the upside, it becomes less of an issue. corporate bond buying seems to be something they are still targeting and something they want to continue at a rapid pace. we went into quantitative easing in europe and here, people were concerned that the referee is getting into the game and it will skew the entire market. has that really happened? has it done damage to the bond market? michael: we will probably have to wait to see in that regard. people are concerned about the fed and the fact that they bought mortgage bonds. there is the idea that a central bank would allocate credit is a problem for many people. this was an emergency situation and that is why we had to do it save a central banks but it's another reason that janet yellen and jay powell and mario draghi want to get out of this. indicatione show no of ending their program. they seem to be quite happy with

it but it does not seem to have distorted the economy there. this i am smiling because is such a loaded question. ity people would say, depends what your definition of distorted is. i was looking at the financial times, showing that the amount of negative yielding debt has shrunk by over $8 billion this month. that's a lot but there is still almost $9.7 trillion of negative yielding debt out there. what is your sense of what the likelihood is that this could be really ugly as we move out of this very unnatural concept of negative yielding debt and a positive territory? >> central banks are concerned about it. looking at seven centuries of bond market corrections. day, the ecb the

has been recycling a lot of the current accounts in the eurozone. brokexed income market down in the u.s. for the third quarter. there was a central buying, around 250 billion euro. that was because of qe. domestic institutions have not been able to sell paper so they have been selling, the bund is has beenundesbank buying into the u.s. fixed income market. the recycling may well stop so bonds another reason why buying may go up faster than people think. it's one reason the fed is less concerned about the flattening yield curve. they figure as the ecb pulls back, fewer dollars will be coming into the u.s. treasury market at the long and. a minute ore about

so away from mario draghi's press conference. to what extent has the recycling of current accounts back into the u.s. accounting for the flattening yield curve? i think it must of had an impact. at 2015-2016, there were substantial flows out of the eurozone into u.s. financial markets. that will tail off this year so it's another reason along with the fed raising rates to expect interest rates to go up. the bank of england will likely raise rates if not once this year, twice. we are entering a phase where the fixed income market will probably see yields going up in general. within the eurozone, the spreads

may well come in further from here. you talk about the differential between the u.s. in the eurozone and how the european quantitative easing has funneled directly into the u.s. you can see that if you look at the bloomberg. the gap between two-year yields in the u.s. and germany has reached the highest level since the late 1990's. points or more than 2.5 percentage points more that you are earning in yield to own two-year u.s. treasuries versus two year german bund and this is a phenomenal indication of how global the bond market has become. michael: it has an impact for the dollar because one way to hedge against that is with the dollar. the initial jobless

claims are out. they were sent out by email. michael: apparently they had technical problems. expected5 thousand was and i came out as 230,000. the yep, but what of the slope of the curve? you have a steeper curve over there than we in the united states. >> that's true. the spreads on the 10 year part of the curve between u.s. treasuries and german bunds remain around 200 basis points. reason wet of the have seen this asset allocation switch. half of the paper was bought through the qe paper from foreign investors. domestic institutions of not the natural sellers of german bunds. it's been foreign investors.

david: we are waiting for the beginning of this news conference in frankfurt, germany at ecb headquarters. mario draghi has sat down to let's listen in. -- so let's listen in. >> ladies and gentlemen, let me wish you a happy new year. the vice president and i are very pleased to welcome you to our press conference. we will now report on the outcome of today's meeting regarding the council which was also attended by the commission vice president. based on our regular economic and monetary analysis, we the interestep rates unchanged. we continue to expect them to remain at the present levels for an extended period of time and well past the horizon of our asset purchases.

regarding no standard monetary policy measures, we confirm that our net purchases at the new monthly pace of 30 billion euro are intended to run until the end of september, 2018 or beyond of necessary. in any case come until the governing council sees a sustained adjustment in the path of inflation consistent with its inflation aim. if the outlook becomes less favorable or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase the asset purchase program in terms of size and/or duration. the euro system will reinvest the principal payments from

maturing securities purchased pp for an extended after its net purchases. as long as necessary. both tol contribute favorable liquidity conditions and appropriate monetary policy stance. incoming information confirms the pace of economic expansion which accelerated more than expected in the second half of 2018 -- 2018. -- 2017. the strong cyclical momentum, the ongoing reduction of economic slack, and increasing capacity of utilization strengthened further our confidence that inflation will converge toward our inflation aim of below but close to 2%.

price same time, domestic pressures remain muted overall and have yet to show convincing signs of a sustained upward trend. background, the recent volatility in the exchange rate represents a source of uncertainty which with regard tory possible implications for the medium-term outlook for price stability. overall, and ample degree of monetary stimulus remains underlyingor inflation pressures to continue to build up and support headline inflation developments over the medium-term. this continued monetary support by net asset

purchases, by the sizable stock of acquired assets, and the forthcoming re-investments and by our forward guidance on interest rates. explain our assessment in greater detail starting with the economic analysis. by0.7%p increased quarter on quarter in the third quarter of 2017. following similar growth in the second quarter. the latest economic data and survey results indicate continued strong and broad-based growth momentum at the turn of the year. our monetary holocene measures, which have facilitated the deleveraging process, continue to underpin domestic demand. private consumption is supported

by rising employment which is also benefiting from past labor market reforms and by growing household wealth. business investment continues to strengthen on the back of a bit -- as i've every -- of very favorable financial conditions and solid demand. housing investment has improved further over recent quarters. broad taste the global expansion is providing impetus to euro area exports. the race surrounding the growth outlook is assessed as broadly balanced. hand, the prevailing strong cyclical momentum could lead to further positive growth surprises in the near term. on the other hand, downside risks continue to relate i

merrily to global factors -- to relate to merrily to global -- to relate primarily in global factors. cp inflation was higher, down from 1.5% in november. this reflected mainly developments in the energy crisis. looking ahead, on the basis of current futures prices for oil, annual rate of headline is likely to hover around current levels in the coming months. their part, measures of underlying inflation remain subdued. owing to special factors and have yet to show convincing signs of a sustained upward trend. forward, they are expected to rise gradually over

the medium-term, supported by our monetary policy measures. ,e continue economic expansion the corresponding absorption of economic slack, and rising wage growth. turning to the monetary analysis, broad money continues to expand at a robust pace with an annual rate of growth of 4.9% in november, 2017 after 5% in , reflecting the impact of the ecb's monetary policy measures and the opportunity cost which is lower of holding deposits. accordingly, the narrow monetary aggregate continued to be the main contributor to broad money growth, expanding at an annual afterf 9.1% in november

9.4% in october. the recovery in the growth of loans to the private sector observed since the beginning of 24 teen is proceeding. of 2014 the beginning has been proceeding. it increased after 2.9% in october. the annual growth rate of loans to houses stood at 2.8% in november compared with 2.7% in october. the euro area bank lending survey for the fourth quarter of that loan growth continues to be supported by and a furtherand easing of overall lending conditions. pastor of the monetary policy measures put in place since june, 2014 continues to significantly support borrowing

conditions for firms and households. , notably forancing small and medium-size enterprises and credit flows across the euro area. to sum up, a cross check of the out come of the economic analysis with the signals coming from the monetary analysis confirm the need for an ample degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below but close to 2%. in order to reap the full benefits from our monetary policy measures, other policy areas must contribute to strengthening the longer-term growth potential and reducing vulnerabilities. the implementation of structural reforms in euro area countries

continues but needs to be substantially stepped up to increase resilience, reduce structural unemployment, and boost euro area productivity and growth potential. regarding fiscal policies, the increasingly solid and broad-based expansion strengthens the case for rebuilding fiscal buffers. this is particularly important in countries where the government debt remains high. fromountries would benefit intensifying efforts towards achieving a more growth friendly composition of public finances. a full, transparent, and consistent implementation of the stability and growth pact and the macro economic balance over time and across countries remains essential to increase the resilience of the euro area economy.

strengthening economic and monetary union remains a priority. the governing council welcomes the ongoing discussions on completing the banking union and the capital markets union and, further economic monetary union. we are now at your disposal for questions. >> mr. president, i have a question concerning the asset purchase program. when you launch the program, you decided to keep the approach is strictly according to the capital key but you are deviating from this after a new calculation. why is this so? is this affecting the neutrality

of the purchases? it's not so, it does not affect the neutrality of purchases and i will tell you the reasons. the ecb does not favor certain countries over others in its pspp purchase program implementation. purchases are guided by the ecb's capital key which takes into account gdp and population. focusing excessively on any foricular purchase period, example, in 2017, it could yield in the wrong predictions. the holdings eased the relative metric for any assessment of the program and not the recent purchase flows. an example, you

currently, the euro system holdings of german securities are above the german share of the ecb capital key. this equates to the euro system holding 18 billion euro more in german securities than what is implied by the ecb capital key share. deviation the largest from the ecb capital t is greece - key is greece due to their ineligibility. the holdings of portuguese securities are 1.8% which is 27% below compared to a share of ecb capital key which is 2.48%. differ as then design of the program is flexible and the distribution of actual purchases often deviates from the ecb capital key.

for example, it if we fall short of purchase targets in one jurisdiction for market liquidity reasons, then the shortfall is made up in others. this has happened since the beginning of the program. it's nothing new. relevant tois is the process of reinvestment with the amounts to be reinvested sometimes reinvested over months and this could lead to temporary changes and the relative net purchase shares. , impliedn countries purchase shares are above the capital key percentages as we don't buy the required bonds and other jurisdictions due to various program constraints. for example, eligibility criteria, market liquidity, all these adjustments reflect the programs built-in flexibility

and the commitment to a continued, smooth implementation of the program. our general approach has never been changed. our purchase shares are guided by the ecb capital key as opposed to market cap which is a reference for all other purchase programs. individualomparing jurisdictions net issuance on the actual purchases in the respective countries, suggests that the downward impact of the program on yields for countries such as germany should be higher than on other countries. thank you. >> my first question would be about your comments on the current volatility which you say represents a source of

uncertainty and with regards to the implication for inflation. about yourlk strength and conviction about inflation returning to the target. much euro is already a problem or what will have to topen for the exchange rate come in line with the inflation target. would be question about your discussion on reviewing the forward guidance. the account of the meeting from december indicates there is a mention of a need to revisit the guidance early in the year. has this discussion already started? so, what is the basic summary of that discussion? >> thank you, let me answer the second question first. let me get the record straight -- several members of the governing

council were surprised by the -- the of the accounts effect the reading of the accounts had on the markets. i want to clarify this. first of all, there is no difference between the accounts and what i said in the press conference. did youas asked was, discuss cutting the link in your guidance between the asset purchase program and inflation and what is your view on that question? i responded, we did not discuss cutting the link. i went beyond what was in the account in my press conference. as a consequence of the continued expansion and the component coming from the forward guidance of interest rates, we will gain further importance of this is a natural process led by the recovery. monetary policy accompanies the recovery.

we have not discussed the link. it says looking ahead, the view was widely shared by members who need to evolve gradually without a change in sequencing. the only discussion that took place was about the need to have a discussion. started conference going to the substance but the actual discussion of the council was only scheduled in the discussion which was supposed to take place in the early part of this year. that's important to clarify. discussion has not really started. theeally went through events from october until now. we were trying to assess whether something has changed. there hasn't been much of a change.

other than a continuing strengthening of the economy even more than expected. we have downside risks relating to geopolitical for exchange markets. but by and large, growth is balanced. can we declare victory? the answer is no, not yet. price pressures are muted. underlying inflation still does not show signs of any convincing upward movement. price pressures along the pricing chain remain stable and subdued. recent data on wage growth confirms some lift from its lows of 2016 second quarter but it's a lift that so far is mostly due to wage drift, not negotiated wages. we have to look and see if this is picked up.

long-term inflation especially look -- long-term inflation expectations remain unchanged. by and large, there is not much of a change which led us to policy astate the i've just said in the introductory statement. we continue the monthly pace of 30 billion euro extended to run until the end of september, 2018 and so on. no need for me to read it again. also, we went through how we whether progress in achieving her inflation objective has taken place. we have three criteria. the inflation rate has to be on

a path that reaches levels below but close to 2% in the medium-term so it's not touch and go in the medium-term. several speakers are market today is that our commitment to this objective remains firmer than ever. most members reiterated the steadfast commitment to reach our objective. the second point is that when we look at inflation paths over the coming weeks, months, years, we see a range of paths but this range has to be pretty narrow. in other words, we have to be convinced, we have to have confidence in the degree of convergence. that's the other thing and we will look at that. the third criteria is that this conversion should be self

supported. in other words, we will have to do without her monetary policies. -- without our monetary policies. we are not there yet but finally, even when we judge that adjustment has progressed enough, our monetary policy will remain very accommodative. why? because we will continue to for an extended period of time and especially the interest rates will remain at the present level -- that's the fundamental importance -- well past the end of our net asset purchases. basically, very little has changed. since decemberd

that the expected path of short and rates, interest rates has moved upward and that the exchange rate volatility has increased. we discussed some of the causes of these developments and there are basically three sets of causes. the first is the unquestionable improvement in the economy. as the economy improves, this will accompany quite nicely our monetary policy and it will accompany the improvements in the economy in a way that the relative influence of the four pillars of our monetary policy will change and will move more and more to reinvestment for a until stocksf time and bonds of been accumulated.

one causes the improvement in the economy. the second cause of these movements that was found is the heightened market sensitivity to perceived changes and our communication. i think that is unquestionably the other reason. finally, however, there is a third reason. this is related essentially to the exchange rate that the use of language being discussed and exchange rate development, that doesn't reflect the terms of .eference that have been agreed imfcer 14, 2017, the [indiscernible]

is this your question? my answer is longer and longer and i apologize. i will stop here. event, hopefully i answered the question. >> i have a direct follow-up question. let us talk about the dollar weakness. that's probably what you were referring to in your last comment. to hear very helpful from certain members of the u.s. administration that a lower dollar is something they like. that. your view on are we heading toward a scenario that we could call a currency war? perhaps leave it like that. i have another question -- you earlier said you don't think

there will be an abrupt end to programe asset purchase until september. are you sticking to that message it can you envision to end and only have the reinvestments going forward after september? thank you. >> thank you. on your first question, let me reiterate what i say when you talk about exchange rates. we don't target exchange rates and we say exchange rates are important for growth and price stability. due to certain movements in the exchange rate are justified by the strengthening of the economy. --.'s part of nature, it is the issue is whether these other movements in the exchange rate

which may be caused by the use of language that i said is not part of the terms being agreed to recently. whether that has an effect on our inflation path. inflation, that is our main concern. whether early to assess the pass-through has already taken place and what will be the extent of this pass-through. it's pretty clear, however, that some people are questioning the extent by which pass-through actually happens nowadays. it's pretty clear that large movements in the exchange rate are bound to have a pass-through. agreed toge that we in washington said this. 36recognize that this is the

meeting of the financial committee in the imf. we recognize the excess volatility or disorderly movements in the exchange rate can have adverse implications for economic and financial stability. we would refrain from competitive devaluations and will not target our exchange rates for competitive purposes. i think that is my answer. the answer to the second , as far ases, i said i was concerned, we did not have a proper discussion, did not have any discussion today. as far as i was concerned, we never stopped abruptly. we have to distinguish between sudden stop and extension of the program and gradual