>> a look at how equities reacted to the decision. all you need to know is that it is green on the screen. highs within three points of a record on the s&p 500. you change of the board and we got clarity about the fed ending the taper in march and maybe rate hikes going out further. the fed now pricing in at least two by september. that is the market recap. what did you miss starts now.

>> stocks rallying as investors are looking at jay powell and saying the central bank maybe has an effective way to combat surging prices without choking out economic growth. we continue our focus on the big decision by fomc officials, moving to one of the most hawkish policies in years, moving to end their asset buying program earlier than planned, and raising interest rates almost as soon as then, but investors seemed to like what there'd. kailey: decision that was taken well by risk assets. tapering, looking at $30 billion coming off a month, and saying that they are looking at three hikes of rates in 2022 and 2023. howell said he is not that worried about the omicron variant and that he thought

inflation would come down in 2022. listen to more of what the chairman had to say. >> supply and demand imbalances have continued to contribute to elevated inflation. these problems have been larger and longer lasting than anticipated. we are phasing out purchases more rapidly because with elevated inflation pressures, the economy no longer needs increasing policy support. the economy is much stronger. i was here with the fed when we lifted off last time and the economy is stronger, closer to full employment. there's a provision in what used to be called -- provision, what used to be called a balanced approach provision, that will enable us to, in this case because of high inflation, move before achieving maximum employment. >> let's break that down with the chief investment officer for fixed income at voyeur him -- at voya, matt toms.

a 10 year yield around 1.45%. what changed for you today? matt: the fed had a measured tone on the back of inflate date --inflate gates, where transitory was retired, so not a drastic change to the approach. that is what the market is responding to, a fed that looks like a plane in turbulence with a pilot not sweating profusely, inflation believed to be hi gher but not out of control. >> pal raised eyebrows about the gap between the taper and when the rate hikes begin. were you surprised? matt: it is logical we think to get the taper out of the way.

that is important. we don't believe they are linked , but getting the taper out of the way, there's already over $1 trillion of excess savings in the fed. we don't need for asset purchases. we believe march is in play next year but would stop short of timing the beginning of taper ending and hikes beginning. >> we saw yields take a round trip. the flattest curve of the year on the two and 10. do you think we have seen the bulk already of that? matt: we think the bulk of the flattening is priced in. mathematically, if the fed hikes, you will push the two year treasury forward, up into the 1% zone. so will be hard to steepen the market rates a whole lot with the two-year moving up, but the real thing to look at is the 10-year is a real good indicator of the terminal fed funds rate. we skew more towards the 1.5% to

1.75% standpoint, so don't expect the curve to get much higher than that at the 10 year point, and card to get lower than 50 basis points. taylor: is that fundamental, or as someone at blackrock is putting it, there is so much yield seeking capital still out there that it can absorb any quick tapering of those bond purchases? is that were technical in nature? -- that were technical in nature? -- that more technical in nature? matt: there is certainly technical support but certain indicators are structurally higher, telling us there is a chance this could unhinge either way. that is what is different. there is two way rest. if inflation does not moderate and you seem a push from wages,

not just lower quartile baha'i report tile, you could have the curve steepen. that is fundamental, overrunning the technicals you referenced, but in the absence of a sea change, the technicals are incredibly strong and that's good for the equity market. the low discount rate helps equity valuations and that is what you are seeing this afternoon. romaine: consumer spending being a primary thing affecting our economy, still holding strong, but when you look at the data we are getting on retail sales numbers and private industry data, do you have any worry that the amount or piece of spending, i should say, by consumers, will not be able to sustain what we have seen over the past few months? matt: a worthwhile question and fear. we have 2 trillion dollars of excess savings in the consumer's hands in the u.s.

that's being spent down gradually. the pace is critical. it is estimated to be in the six to 18 month horizon. as that is spent down, the ability of consumers to continue this surge, and let's not confuse supply and demand, and on the backend, it is slow, but we think the sales number could for shadowy consumer saying that high prices means i will buy less, not buying ahead of even higher prices. taylor: when we talk about corporate balance sheets and the readthrough to credit, you saw spreads widening. will that be the trend as we see policy normalize? matt: at the higher end of the quality spectrum. as treasuries become less

distorted by central-bank activity, the aaa, aa, single-a, high-quality components should and criminally be forced -- should incrementally be forced wider. so what we are calling for is more of a barbelled approach. maintaining that lower quality exposure to higher income components. romaine: great to get your insights, matt toms, giving us insight about where we stand with what we got out of jay powell and how the fixed income market is reacting. more insight on the equity side. bloomberg intelligence chief equity strategist gina martin adams joining us now. we had a massive rally in tech stocks. gina: pretty good rally in tech and in the dollar, which should have notable consequences for

global allocations going into 2022. generally, the equity notion -- the equity market celebrating the notion that we have this pest dispelled by the news, but also the market taking the signal that the terminal rate might not go as high. the fed will work to contain inflation, normalize policy, and they are sticking to their guns despite fears recently about omicron and potential variants around the world, new infections, slow growth. they are saying growth will not slow enough to materially change our playbook, and the equity market is taken as a positive. -- is taking a as a positive. taylor: talk to was about this dollar strength. matt: what it does more than anything -- gina: what it does more than anything is keep u.s. stocks inflated relative to stocks around the globe. in the u.s., it benefits importers relative to exporters. it is generally better, risk on,

a relief rally so far. if the dollar continues to catch fire, you would usually start to see things like small-caps doing better, cyclicals gathering momentum, maybe a better signal fundamentally for those stocks, but we are not there yet. right now it is just a testament that the u.s. is strong, the rates plan is changing and we have a flight of capital into the u.s. kailey: still looking at a 10 of 150 basis points -- 18 year yield so 150 basis points. -- matt: pretty much. that's kind of all there is-- gina: pretty much. that's countable there is. even if you have a little flattening in the curve, that's the best possible condition for stocks. we've done analysis over how the yield curve impacts stocks. as long as rates are rising, that's a better condition for stock markets, because as

rates fall, that's a signal that growth stocks are deteriorating, so these conditions have historically been good for stocks. frankly, there is room for rates to rise before the relative value favors bonds over stocks. we have been in this environment where relative value favors stocks for some time and we are still there. romaine: we will see any time in our lifetime where bonds will over favor equities? gina: it could be a while. romaine: a serious question. we have been writing about the risk heading into next year. at the top, inflation. the next, it may policy mistake by the fed. do you think we have cleared that hurdle of a policy mistake? gina: not yet. for now. today, we can have some relief. i think there will be risks throughout next year, a year in which we constantly question

whether the fed is far enough into this game, because i think inflation is becoming increasingly embedded. it is less and less obvious that it is transitory. we are seen wage pressures evolve and growth is not going away. demand is still reasonably strong. there's a whole demand component that nobody has really talked about. we have focused on the supply side, saying that will go away and problems will ease, but there's more to it than that and we will find that out. taylor: and the question of why are we still buying bonds when it is a supply issue, and powell say we are aware of our position as a global central bank, conditions change rapidly, so we are finishing in march, so we don't -- he didn't say scare anyone, but he kind of hinted that we have to because we have not signaled otherwise. romaine: that is the question, why not just end the bond buying now? gina: they have to take some degree of a measured approach. this is a rapid taper.

what they are doing is really rapid and a bit unprecedented so the fact that it is being received this kindly is great. the other thing we have not talked about his financial conditions and stability and the fact that maybe this incredibly easy policy was contributing to some financial instability making market participants somewhat uncomfortable to degree that they can backpedal and normalize policy and create more stable financial conditions. that is a great thing and maybe part of why we have such optimistic markets today. romaine: yeah, all right. january 26, that meeting. taylor: the second person who said march is live. romaine: that's two meetings away. by fed standards, it is basically ripping off the band-aid i guess. gina martin adams, chief equity strategist for bloomberg intelligence. next, more insight with alan blinder, princeton

university professor, former fed -- for vice chair of the federal reserve, in a second. ♪ ♪

>> the number of triple c companies in the country and the lower leverage in balance sheets, even with a modest increase in interest rates, could be damaging. and then it is a domino effect. we fall first and the companies follow. the economy slows as those companies cut spending and employment. romaine: scott minerd, guggenheim cio speaking earlier on bloomberg about what he thinks could be a recession coming in 2020 three, saying the

fed is doing a high wire act. let's get to our next guest, who has written a ton of books and scholarly articles, more numerous than we can go into, alan blinder, former chair of the federal reserve, now professor at princeton. dr. blinder, i want to start with your assessment of how jay powell and this current fed have guided the markets and more importantly guided all of us here in this country to sort of understand what they are looking at, what they find important, and what type of confidence they are able to instill in us that they have inflation, or at least the broader idea of inflation, under control. dr. blinder: i think with two exceptions probably, their guidance has been excellent. i mean, evidence of that is what happened today. the markets, you know, they moved, of course, but they did not move radically on a very

major change in fed policy. you think about doubling the taper pace and really changing dramatically the expected interest rates, so that was a lot for the market t swallow, and paving the way was communication and guidance beforehand, part of that story. i think the two places where they have not provided adequate guidance, but it hasn't hurt them yet, is the definition of full employment, what exactly does that mean? they say a lot of things. that's reasonable, but i think markets and nonmarket people like me don't have a very good understanding of what would constitute full employment in the fed's estimation. and the second thing is this flexible average inflation targeting. we don't know for how many years.

our we past 00 -- are we past it? are we not there yet? but powell is reassuring and frank and trustworthy. these don't seem to be bothering markets much at all. kailey: the markets seem to be relieved may be that the risk of a policy mistake looks less so after that press conference. do you think we are in the clear on that front? dr. blinder: well, i heard your last guest. in the clear is way 2 optimistic. -- way too optimistic. i don't see any potholes they are about to fall into but there are too many uncertainties to say we are in the clear, omicron, supply bottlenecks -- looking for the right adjective -- rancorous fiscal policy debates in washington.

a lot of things happening that could come tumbling down on the fed's had, so in the clear, no, but so far so good. taylor: there are comments that we are not in trouble yet with the lack of a strict definition of employment. a lot of the commentary i read today said that inflation, checked that off, full employment, on our way, but you are right, we have not really defined it. are we at risk of having to tackle inflation without fully understanding or reaching with full employment really is? dr. blinder: i think we are. as an example of that, i think you could make the case we are they are now -- are there now. you do not have to make the case, because labor participation is not back where it was, but it is possible to

make that case given the unemployment rate, the joel data, and a number of other things, we are pretty much at full employment now. romaine: we are at full employment. there was a general shift, though, that we heard out of the fed, i think it was about a couple years ago out of jackson hole, this idea that they were putting a little more emphasis not just on employment but more importantly on, i guess, an even recovery. you talked a lot about the difference in rates between black and white and employment, the gender imbalances here. do you see it all a commitment to that still based on what we heard out of them today? dr. blinder: well, i think the commitment appears in the dedication, really, the pushing the unemployment rate very very low and keeping it there. it was 3.5 percent before this for a show started, a 60 year low, and it wasn't making the

fed nervous or anything. i think that's the way the fed shows its commitment. i have always said and still say the best thing you can do about, say, the black unemployment rate is have a very tight labor market. taylor: we only have about -- kailey:kailey: only 30 seconds left but are there -- but there are still vacant seats on the fed. could that change the policy picture going forward? dr. blinder: it is unlikely. there is not that much rampant disagreement. in addition to that, as you know, the fed has always been a chairman-led organization. it is not really a democracy, but they do have a formal votes and people sometimes vote against the chairman, although powell is not encountering that these days, but it is not a democracy. it is led by the leader and we sort of know where the leader stands. taylor: very interesting

comments and we are grateful for your time, alan blinder, princeton professor and former federal reserve vice chair. final thoughts is so stick with us. this is bloomberg. ♪

romaine: for a federal reserve that normally moves at a relatively slow pace, what we have seen is almost speedy gonzales. taylor: a total change and the market got clarity. they are dropping the word transitory and recognizing inflation. the market says thank you. we are feeling that. we are glad it is being validated. kailey: the market was expecting the fed to be hawkish, so they got what it was press again. romaine: they got what they were pricing and kind of, maybe sooner. interesting, because before talking about the disconnect

between when the taper ends and the rate hikes begin, he said it might be faster than expected. fed meetings coming up in december -- coming up in march. that does it for us. have a great evening, everyone. you're watching bloomberg. ♪

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