tv Street Signs CNBC December 18, 2013 2:00pm-3:01pm EST
2:00 pm
rates, but i do think we're going to have, you know, reasonably good economic growth for a quite a period of time that's going to lead to earnings growth and good returns on the equity market. >> ken thank you, bob thank you. a little more of an optimistic view from bob and ken. will be the fed be as optimistic, forecast positive, will they taper? find out steve liesman at the fed. >> the federal reserve announcing a $10 billion taper, $5 billion each of mortgage backed securities and treasuries the fed saying in light of cumetive progress in labor markets, they decided to moderate the pace of its asset purchases and if the data comes in as expected here with further improvement they will taper further at future meetings. however, tapering is not on a preset course the fed says. the pace contingent on the outlook and the outlook for inflation and labor and assessment of the efficacy and cost of the program. but they are providing very dovish guidance on rates saying the highly accommodative pace of
2:01 pm
current rates is appropriate for a considerable time. in fact, they're saying they will be appropriate to maintain the current target range of the fed fund rate well past the 6.5 unemployment threshold they said in the past. especially they say if inflation runs below 2%. they've tapered, provided future guidance for tapering. that's number two. but also provided very dovish guidance about interest rates on the way out. more details, easter george did not dissent but eric rosenfriend when of the doves on the committee did dissince wet inflation unemployment elevated it's -- >> steve -- >> until the data is more clear. more here, the extent of the fiscal restraint was diminishing and the risks are more newly balanced for the economy. >> steve, sorry to jump in, because i know one third of wall street strategists expected a taper. that's it. are you surprised, the $10 billion, does seem to be impacting the market a little
2:02 pm
bit. the dow turned slightly down but most people, the reaction we got here in the newsroom was one of surprise. are you? >> no. it's exactly what i expected. the fed did -- laid out a three-part test for figuring out if they should taper. the three parts were met. just because all of wall street wasn't on board 20% of our respondents were on board, brian, 55% thought it would happen by next month. i don't think it's a big surprise. what is a surprise to me and just a little bit, is how dovish they were on rates. i didn't think the fed had to go this far in being quite so dovish on rates. apparently they wanted a little insurance because as you know, what are they're really concerned about is the markets believe in that longer term rate guidance so they're very, very dovish on the back end in order to provide a taipg on the front end which they called a modest tapering and saying -- they don't talk about how it's going to wind down but that's the first question for the fed chairman at the press
2:03 pm
conference. >> not on a preset course. giving themselves some wiggle room. reiterate what's going on in the markets. at first when the announcement of the taper came out just a couple minutes ago, we saw a negative downturn in stocks, a spike in the dollar. that's still happening. gold turned down and the ten-year bond yield spiked as well. now, of course, everyone is digesting this. the dow is up by about 63 points. it has extended gains. i think the s&p 500 is al also moving to the upside, just ever so slightly, the nasdaq is still down, but it has paired its losses. we'll continue to monitor the digestion and reaction in the market as we continue. let's bring in our fed panel once again, bob doll, ken volpert thank you for staying with us. david kelly, welcome to the show. your reaction, sir? >> well, i think logically this is what they had to do. if you look at what's happened this year the unemployment rate 7%, housing starts over a million units, the s&p 500 up
2:04 pm
25%. in this economy you have to pull back from the most extreme monetary policy in a century. it's overdue. i'm glad to see it. i think we are due to move back towards normal monetary policy. ultimately it is somewhat negative for the bond market but i think it should be positive for equities when people realize it reflects an improving economy. >> that was the point, david, we were trying to make before the decision came down and i was sort of hammering and pestering bob and ken about the forecast because it's like whoa, wait a minute, $10 billion off of a program that did not exist before 15 months ago, was not going to end the world. >> absolutely. we are -- we are $3 trillion away from a normal fed balance sheet and we're not moving towards it, we're slowing the pace which we're moving from here. >> hey, brian -- >> this is a small move towards rationality here. >> yes, steve. >> at 75, bernanke would still be breaking the speed limit on a lot of roads in america.
2:05 pm
coming down from 85 to 75 still pretty fast. >> bob doll, you know, the reaction in the stock market now the dow up by triple digits up over 100 points, do you think there might be relief it was maybe not a greater amount of taper. >> i think there is a general consensus that you know what, the fed is finally signifying to us that the economy is doing better. 2014, the economy will be a bit stronger and a bit broader and this is just confirmation of it. this is good news for equities. >> you hit it on the head, ken. $10 billion. congratulations. >> thank you. i think the -- what we're going to see in 2014 is reasonably good growth. i mean we don't have the fiscal headwinds or the fiscal drag as much in 2014 and we do have, you know, the de-leveraging cycle that the consumer is getting towards the end and we are going to see good growth and the fed is looking at that as well. >> we're looking at before we
2:06 pm
get to bob and rick is the dow making a significant recovery. to mandy's point the dow took about a 50 to 60-point drop after this initial decision to back off of qe. i'm sick of saying the "t" word. i think bob pisani, people have acknowledged whatever it is included in the economy, whether it's the fed or what not, things are getting better thus earnings may expand, thus multiples might expand thus a stock market which is back above 16,000. >> well, i think you're right, brian. they specifically said that. they didn't say the expansion of the multiple but it says right here, the committee sees the improvement in economic activity and labor market conditions over that period since they've been qe has been going on as consistent with growing underlying strength be in the broader economy. nonetheless, i think steve's right. it's the dovish commentary that's really moving the markets here. the comment that they're going to keep rates low well past the
2:07 pm
6.5% threshold if inflation is below 2%. that's almost a change in that threshold that they're saying there and -- >> nearly. >> and despite the controversy around it it's clear they are trying to cut that knot around tapering and tightening and i think that's the main reason that the markets are moving up right now, brian. >>s rick santelli, you're down there in the bond pits. what are people saying to you down there? >> that it wasn't a taper, it was a -- just a "t," that's it. couldn't get the rest of the word. >> a tiny tweak. >> i saw two-year note yield up to 36. it's now right about where it was before at 34, 35. up to 160 print on fives, that's important. back down to 153. up a little over 290, around 292 in the ten, back three basis points under the 388 before it all started. the long end got real volatile. i saw 395 in tens. the foreign exchange volatility was crazy but at the end of the
2:08 pm
day i still think that the fixed income market, treasury market has it right. it's just a "t," not a taper. and as we move bigger into bigger numbers, taking off the liquidity, i think stocks will get a lot more of the response that many traders thought when they were going to get something a little bit more. as expected fed's trying to keep that market from finding its legs a little wobbly on the equity end. >> rick? we just made a swap, rick. an interesting swap here. we swapped $10 billion of taper in the end of the taper program for something as bob pisani said, lower than 6.5 on the unemployment rate an the current range of the fed funds. i think that may be a pretty decent bargain. i'm always worried about the initial reaction of markets ahead of -- right after these decisions but i think it's an interesting trade the market's made and it may be a reason to rally. >> in lieu of the holidays and academics that run the central banks, i say beware of gifts
2:09 pm
from wise men around the holidays. >> ken, steve nailed it. the line basically as we've said it and bob pisani hit it again but it's important and i want to reiterate it for the audience the federal reserve came out and said it is likely it will be appropriate to maintain current fed funds below the 6.5% unemployment mark because there's a lk of inflation. so ken, i guess we could read it like well, they're going to keep their foot on the other gas pedal, maybe not qe but low rates but at the same time if inflation never heats up, couldn't this type of incredibly easing scenario go on forever? >> well, i think -- i mean, theoretically probably could if inflation stayed that low. we think inflation will be picking up in 2014, somewhere around -- you know, somewhere closer to 1.5 to 2% range and you with that and strong economic numbers i think we're at the point in the cycle where strong data will pull forward when the fed starts increasing rates. it's going to be a year out or year and a half out but it's
2:10 pm
going to be pulled forward by two or three or four months and i think short rates will probably respond to that. but i do -- i don't think inflation if we get an economy growing the way it is now, that we're talking about for 2014 and we have unemployment rate moves into the 6s, i think there's going to be concern about how much slack there really is in the economy and is that going to create inflationary pressure. one of the things that's coming out, what percentage of the companies are actually giving pay raises and that's been increasing over the course of the last year. granted the numbers are still really small, but it's starting to grow and so we are seeing a little bit more kind of cost push that could lead to higher inflation in 2014 and beyond. >> certainly a lot of the things we're discussing and debating right now might be cleared up when bernanke's news conference starts 20 minutes from now. it's historic but it's his last as fed chairman. to reiterate what is going on in the markets. the dow up by 158 points right
2:11 pm
now. so we're getting a rally on the back of the decision to begin the taper process. you know, why delay the inevitable? let's get this process started. bob doll, my question is, though, do we continue to move positively in the markets beyond today? >> i think the answer is yes, mandy, assuming the economy tps to do what all of us are talking about and that is slowly but surely get better. the fed will follow the yield curve, they would follow the economy. i don't think they will lead it. that's what the dovish comment of rates was all about. they want to keep that part of it as stable as long as they can and only go there when they have to and i think ken is right, it may be sooner than they think. >> david kelly, let me get to you because the point steve liesman was so important, and if you think about it, it makes sense, right, which is, and i know our graphics said fed tapers because they did in this program, but will not these lower rates that they talked about for a longer time, add
2:12 pm
more than $10 billion in stimulus per month in just access to consumer credit so it didn't end the taper, it changed the taper, and, in fact, may have actually increased quantitative easing by shifting it on the rate side? >> actually, i see this sort of differently. i think what the federal reserve has done is beginning to remove liquidity and add confidence. the economy was shorter confidence than liquidity so i like to see that happen. with regard to the unemployment rate threshold the truth is they're giving into reality here. the unemployment rate has hit 7% at least six months before they thought it was going to and if you get rid of extended unemployment benefits starting in the new year it might begin to fall further. i don't think they've pushed off the day of the first federal funds rate hike that much at all over the last 12 months. i think we're still pretty much where we were. so i don't think that's that dovish. what i do think is positive here they're acknowledging the economy is getting better and i
2:13 pm
think what the economy needs more than anything else is a pat on the back from the federal reserve to say okay, go and take riskses because this is a better environment. >> and also you wonder if they hadn't announced the taper whether there would have been a negative reaction because people would have said man, the economy must be that weak. >> not just that. they will be building a problem for the long one if they don't begin to taper now. >> steve, trying to jump in? >> i was sitting next to a very excellent fed reporter in the lockup and we were remarking about this and how easy it was to tell this story and the guy said yeah, i was writing both stories, the taper story and no taper story. it was hard to write the no taper story. it didn't make as much sense to him as this one. when this got laid out and we understood it it fit into pieces here. the only thing outlying to me again was that extension here and i think david kelly is right to the extent that they're giving in to reality, remember 7% is where they were supposed to stop qe. the question that's going to happen in the press conference,
2:14 pm
what's the timetable now for ending this or do you have one? >> well, that's a good question. i've got a better question because we're going to run out of time before you have to jump into the lockup here. bob, i'm going to stick it out to you, should our investors, bottom line, be clear-cut here, should our viewers and listeners increase their allocations to u.s. equities or other equities, europe, whatever, because of what happened today? >> i think so. the fed is -- i'm a broken record here saying what we've all been talking about. the economy is getting better and it's broadening and their ability now to begin the tapering process is putting a rubber stamp on that if you will. the answer is yes, and i like -- i like david kelly's word confidence. not enough of us. there should be more. i think there are reasons for more confidence, maybe this will be the catalyst to get that going. >> okay. >> can i -- >> can i make one final point, mandy. >> very last point. >> the key point here, i think one of the reasons the market is
2:15 pm
rallying is the fed put the bernanke put, whatever you want to call it, is essentially still in place in 2014. they made it clear here in a brilliant paragraph, asset purchases are not unon a preset course and the committee's decision about their pace will remain contingent on the committee's outlook for the labor market and inflation. >> you know -- >> it's still there. >> there's too many people to thank and it would take the rest of the show because we have it going but thank you all. happy holidays. happy new year if we don't see you. i will not. mandy it's important to make this point because we're going to go to a break and get more, and also by the way, get the press conference which is big and we've all been waiting for this end of the year rally courtesy of the big man with the beard. >> auto right. >> i think we finally got it and it's not santa. >> it's ben bernanke. >> this guy may pull it off. he may just pull off -- jim cramer said this too -- one of the greatest economic maneuvers. if they can wind this thing down, shift it a little bit over here without this collapse that a lot of people predict --
2:16 pm
>> a soft landing manage it to the downside. so many said they're not going to be able to do it. the longer they wait the worse it's going to be. i'm glad they started this process. >> they didn't end the taper. they shifted it more to the consumer. they want you to borrow money. low rates forever. still ahead, we are going to get the bond master himself's reaction. bill gross of pimco, there he is, i know there's a lot going on in that big brain of his, we will try to pluck some tasty bits out when we return right after this. my mantra? family first. but with less energy, moodiness, and a low sex drive, i saw my doctor. a blood test showed it was low testosterone, not age. we talked about axiron. the only underarm low t treatment that can restore t levels to normal in about 2 weeks in most men. axiron is not for use in women or anyone younger than 18 or men with prostate or breast cancer. women especially those who are or who may become pregnant
2:17 pm
and children should avoid contact where axiron is applied as unexpected signs of puberty in children or changes in body hair or increased acne in women may occur. report these symptoms to your doctor. tell your doctor about all medical conditions and medications. serious side effects could include increased risk of prostate cancer; worsening prostate symptoms; decreased sperm count; ankle, feet or body swelling; enlarged or painful breasts; problems breathing while sleeping; and blood clots in the legs. common side effects include skin redness or irritation where applied, increased red blood cell count, headache, diarrhea, vomiting and increase in psa. ask your doctor about axiron.
2:19 pm
welcome back. i'm sharon epperson at the nymex. volatile action in the gold market after the fed decision to taper by $10 billion. we are looking at gold prices that immediately plunged to 1220 an ounce only to rally back up to 1244 an ounce. the reaction has much to do with yes, they saw the "t" word but realized we're also going to look at this very dovish outlook on interest rates and we're seeing a record number of shorts in the gold market now starting to cover those positions. so we are looking at gold prices higher and they could continue higher, traders say, throughout the session. for more on what's happening in the markets i'll turn it over to dominic chu. >> fear the taper we're going to get you up to speed. the dow industrials has rocketed up towards session highs,
2:20 pm
hovering near it right now, up nearly a percent and about a percent away from the all-time high. among the best performers in the blue chip index industrial 3 m, exxon mobil, travelers on the insurance side of things and heavy machinery company caterpillar. for the ten-year treasury yield a bit of a roller coaster trade so far but see there on balance those interest rates are at least kind of ticking higher towards that 3% mark. we'll see how it pans out. back over to you. >> all right. dominic chu, thank you very much. just a quick look here, and i just tweeted this out, if you know anybody who's realtor make them buy you a drink because what we learned from the federal reserve is that interest rates are going to remain low for a long, long, long, long time, on the ral tore's side, the housing market may continue to do well and all the home builders, toll brothers, lennar, among others, are all much higher today leading the s&p 500. >> lennar which is the number three u.s. home builder reported a 13% jump in quarterly orders and the great number on housing
2:21 pm
startses so it certainly is building the case for a stable housing market going into 2014. >> all right. let's go to pimco founder and co-cio bill gross joining us on "street signs." bill, you read the fed's decision, you heard all the arguments, what's your take? >> well, brian, we had it 60/40 in terms of a taper and that doesn't sound like much but like i told our invest ment committee yesterday, 60/40 can make a lot of casinos rich and we had it on the right side. >> i'm not going to vegas on that. >> not good enough odds. >> put it this way, pimco's tony said today if the fed brings a lump of coal in the form of taper they better bring some candy canes as well to keep us little investor kids happy and that appears to be what they've done with the language and the well past taper language in terms of the policy rate. >> it's great to have the uncertainty removed, isn't it? markets hate uncertainty.
2:22 pm
this at least is one certainty that's been injected into the market. we've all got our pens and papers here, give us your predictions on the back of this going into 2014 what are rates going to do, what are stocks going to do? >> well, let's examine the language. they didn't have a preset schedule in terms of this taper but $10 billion out of 80, let's project going forward that by the end of 2014, they will have finished the taper if certain conditions have been met. then they speak to basically in terms of the policy rate for, you know, well past that period of time. we're into 2015 for sure and, you know, as i read the last statement, haven't seen the new statement in terms of the detailing we're going to get more from the press conference, but the last statement in terms of its well past language said employment well below 6.5%, inflation projections for the next year or two going forward above 2.5%. so, you know, can we get above
2:23 pm
2.5% in terms of inflationary expectations within the next 12 months i'm not so sure. i think the policy rate which is the important consideration here now that taper is under way, will be firm at 25 basis points until at least well into 2016. >> i mean i think it was only like a month or two ago you were on our show, bill, and you said that all asset classes were looking at least a little bit bubblish. do you think that's going to get better or worse going into next year? >> well, it's getting worse today. not that stock market at a 15 p/e is bubbly but it's true with policy rates at 25 basis points and with ten years artificially compressed in terms of yield, despite being higher over the past six months, it's true that all asset prices are artificially priced and we have to be concerned about that as we move forward. what asset prices need basically is a real economy that grows at 2 to 3% for an extended period of time. we haven't seen that yet. hopefully we're going to see that and that's what the stock
2:24 pm
market is banking on today. we still remain a little skeptical in terms of the fed's approach relative to a cyclical economy being boosted by asset prices. we haven't really seen that for the past three years. >> you said hopefully and we all hope for the best but hope is not an investment strategy by the way. are you expecting, expecting not hoping, for 3.5 to 4% annualized growth next year? if so, if not, how are you changing your investment strategy? >> we go not, brian. 3.5 % to 4% is close to what we experienced in the last quarter but there was inventory related. we still expect 2 to 3% economy in 2014 and we wonder globally whether euro land and other areas such as japan can produce similar types of -- types of pops or boosts. global financial environment. the global economy needs to pick it up, needs to, you know,
2:25 pm
exhibit, you know, a capacity to get out into orbit so to speak as opposed to fall back down to earth and so 2% to 3% okay but we remain skeptical based on lots of structural influences in terms of demographics, people getting older, you know, the race against the machine, technology, all of those things, you know, are head winds against growth. so 2 to 3% that's good but it's not great. >> what's the headwind of all headwinds? what keeps you up at night? what could be the thing that derails this? a misstep handing over to yellen? anything you fear in that process in. >> yes. let's remember the kahuna of all kahunas is the leverage inherent within the system not just -- >> huge margin debt, huge leverage. >> if the fed makes a mistake, let's not say that they've made a mistake by tapering too soon, let's say that that's, you know, on a balanced path going forward but if they make a mistake in terms of what the u.s. economy
2:26 pm
and, in fact, the global economy because we've preset their rates too, can stand in terms of a policy rate going forward in 2016, '17, '18 what is the right rate now as opposed to the right rate back in 2006 and 2007? so that's the critical element that they'll, you know, inch their way forwards going forward. if they make a mistake in a highly levered world there will be problems. >> what looks ugly right now, bill? what wouldn't you touch with my money? >> what we're advocating is basically go with what you're most certain and we are most certain that the fed will stay where they are until well into 2016. does that mean two to three-year treasuries? yes. a lot of yield? not really. but basically in duration space as all bond managers are used to managing that basically means you can buy more of those two and three-year treasuries and perhaps produce a 3 to 4% return. that's what the total return fund is doing and that's what
2:27 pm
pimco is doing. we're banking on the front end as opposed to the 30-year or 10-year. >> what would you invest in overseas? when the idea of the taper was first introdoesed to the market back in may we saw emerging markets take a hit. some people feel they're completely oversold and ready for a comeback. do you think if this is managed carefully, that emerging markets could make their comeback next year, bill? >> they will if it's managed carefully and produces the, you know, the real growth boost in the united states and in japan and euro land which then will, you know, pull emerging economies with them. we're a little bit skeptical in terms of the bond market, what do we like? we like very solvent countries such as mexico. mexico has an interest -- >> mandy's going to -- >> don't feed the beast. >> releasing our predictions for next year. the end of this week. one of my predictions has to do with a bullish view on mexico. sounds like you're feeling the
2:28 pm
same thing. >> they're reorganizing their energy policy for one. half the debt that united states has. their inflation rate is a little higher but their interest rates are 5 to 6%, and so, you know, is that a can't miss situation? not really. but we're neighbors. we're connected. to the extent that they're half levered relative to the united states not a bad bet at 5%. >> i like to hear that, bill. that's why we like having you on, by the way. it's fantastic stuff. i do want to remind our viewers and listeners out there we're about two minutes away from the expected press conference. this is bernanke's final press conference. he will pro side over a meeting in january that is one of those meetings that does not have the press conference and this is where the action came up because guys like steve liesman will pound ben bernanke to understand why they made this move, why not. bill gross one question i have for you as well, which is this idea and i don't know if you heard it in our previous discussion before you joined, maybe the fed hasn't tapered. they may have changed their own bond buying program, but yet,
2:29 pm
through longer easier rates, have simply shifted the idea of qe further on to the consumer? agree or disagree? >> well, i think they have. whether they've shifted it on to the consumer or shifted it on to the 10 to 30-year holders of bonds which will be inflation dependent going forward based on this policy, that's how i would pose it. they haven't really tightened certainly in terms of their language when they speak to well past the unemployment rate lower than 6.5% so we're looking at easy money here for the next two, three, four years. is that a benefit to consumers? i suppose. is that inflationary? we'll see. that will be the key consideration for policymakers in 2014. >> just to quickly recap what's going on in the markets for everybody concerned at this stage. the vix, it is way down. the dow up by 140 points. the ten-year yield has dropped down going into the decision it was at 2.875%.
2:30 pm
it's now around 2.844%. it's changing a little bit as we speak. gold was already high going into the decision. it's currently still higher but not quite as much. we're still waiting any second now, ben bernanke will be walking out for his last news conference. i wonder if a look of relief on his face. >> better believe it. probably coming back to princeton to deal with the students. the mexican i pc up 0.4%. thank you very much. appreciate your time, bill. let's go to fed chairman ben bernanke and his final press conference as fed head. >> good afternoon. the federal reserve market committee concluded a two-day meeting earlier today. as you already know from our statement, the committee decided starting next month to modestly reduce the pace at which it is increasing the size of the federal reserve's balance sheet. the committee also clarified its
2:31 pm
guidance on interest rates emphasizing that the current near zero range for the federal funds rate target likely will remain appropriate well past the time that the unemployment rate declines below 6.5%s especially if projected inflation continues to run below the committee's 2% longer run goal. today's policy actions reflect the committee's assessment that the economy is continuing to make progress, that it also has much farther to travel before conditions can be judged normal. notably, despite head winds the economy has been expanding at a moderate pace and we expect growth will pick up some what in coming quarters and waning fiscal drag. the job market has continued to improve with the unemployment rate having declined further. at the same time, the recovery clearly remains far from complete with unemployment still elevated and with both under employment and long-term unemployment still major concerns. we've also seen ongoing declines in labor force participation
2:32 pm
which likely reflect not only longer term influences such as the aging of the population, but also the discouragement on the part of potential workers. inflation has been running below the committee's longer run objective of 2%. the committee recognizes that inflation persistently below its objective could pose risks to economic performance and is monitoring inflation developments carefully for evidence that inflation will move back towards its objective over time. this outlook is broadly consistence with individual projections submitted in conjunk with this meeting by the fomc participants. as always, each participant's projections are conditioned on his or her own view of appropriate monetary policy. fomc participants generally expect economic growth to pick up somewhat over the next few years. their projections for increases in gross domestic product have a tendency of 2.2 to 2.3% of 2013
2:33 pm
rising to between 2.8 and 3.2% for next year with similar growth estimates for 2015 and 2016. participants see the unemployment rate which was 7% in november, as continuing to decline. the central tendency of the projections has the unemployment rate falling to between 6.3 and 6.6% in the fourth quarter of 2014 and then between 5.3 and 5.8% by the final quarter of 2016. meanwhile, fomc participants continue to see inflation running below our 2% objective for a time, but moving gradually back to 2% as the economy expands. the central tendency of their inflation projections for 2013 is 0.9 to 1.0% rising to 1.4 to 1.6% for next year and to between 1.7 and 2.0% in 2016. let me now return to our decision to reduce the pace of asset purchases. when we began the asset purchase program in september 2012 we
2:34 pm
said that we would continue purchases until the outlook for the labor market had improved substantially in a context to price stability. since then, we've seen meaningful cumulative progress in the labor market. since we began the current purchase program the economy added about 2.9 million jobs and the unemployment rate fallen to 7%. for comparison when we started the program many forecasters saw the unemployment rate remaining near 8% throughout 2014. recent economic indicators have increased our confidence that job market gains will continue. for example, nonfarm payrolls have recently been increasing at a pace of about 200,000 jobs per month and the unemployment rate has fallen by 0.6% since june. with fiscal restraint likely diminishing with signs that household spending is picking up we expect economic growth is strong enough to support further economic gains. further fomc participants see the risks around their forecast of growth and unemployments as
2:35 pm
having become more nearly balanced rather than tilted in an unfavorable direction as they were. as you know we've been purchasing $85 billion per month in longer term treasury and agency mortgage backed securities. starting in january we will be purchasing $75 billion of securities a month reducing purchases of treasuries and mortgage backed securities by $5 billion each. it's important to note, though, that even after this reduction, we will be still expanding our holdings of longer term securities at a rapid pace. we will also continue to roll over maturing treasury securities and reinvest principal payments of agency debt and agency mortgage backed securities into agency mortgage backed securities. our sizable and still increasing holdings will continue to put downward pressure on long-term interest rates, support mortgage markets and make financial conditions more accommodative which in turn should promote further progress in the labor market and move inflation back toward the committee's objective
2:36 pm
of 2%. our modest reduction in the pace of asset purchases reflects the committee's belief that progress towards the economic objectives will be sustained. if the incoming data broadly support the committee's outlook for employment and inflation we will likely reduce the pace of security in further measured steps at future meetings. continued progress is by no means certain. consequently future adjustments to the pace of asset purchases will be deliberate and dependent on incoming information. asset purchases remain a useful tool we are prepared to deploy as needed to meet our objectives. with unemployment still well above its longer run normal rate which committee participants currently estimate to be 5.2 and be 5.8%, and with inflation continuing to run below the committee's 2% longer term objective, highly accommodative monetary policy remains appropriate. to emphasize its commitment to
2:37 pm
provide a high level of monetary accommodation for as long as needed the fomc also enhanced its forward guidance. for the past year the committee has said that the current low target range for the federal funds rate would be appropriate at least as long as the unemployment rate remained above 6.5%. inflation was projected to be no more than half a percentage point above our 2% longer run gol and longer term inflation expectations remained anchored. we have emphasized these are thresholds not triggers. meaning crossing a threshold would not lead automatically to an increase in the federal funds rate but it was appropriate for the committee to consider whether the broader economic outlook justified such an increase. with many fomc participants now projecting that the 6.5% unemployment threshold will be reached by the end of 2014, the committee decided to provide additional information about how it expects its policies to evolve after the threshhold is crossed. based on its assessment of
2:38 pm
current conditions in the outlook, which is informed by a range of indicators including measures of labor market conditions, financial conditions, and inflation pressures, the committee now anticipates it will likely be appropriate to maintain the current federal funds rate target well past the time that the unemployment rate declines to below 6.5%. especially if projected inflation continues to run below its 2% goal. in part, this expectation reflects our assessment based on a comprehensive set of indicators that there will still be a substantial amount of slack in the labor market when the unemployment rate falls to 6.5%. this continuing job market slack imposes heavy costs on the unemployed and under employed and their families and reduces our nation's productive capacity warranting our ongoing highly accommodative policy. but as the last phrase of the enhanced guidance underscores, the prospects for inflation provide another reason to keep policy accommodative. the committee's determined to
2:39 pm
avoid inflation that's too low as well as inflation that is too high. and it anticipates keeping rates low at least until it sees inflation clearly moving back towards 2% objective. our forward guidance is reflected in committee participants latest projections for the path of the federal funds rate. although the central tendency of the unemployment rate for the fourth quarter of next year encompasses 6.5%, 15 of 1 fomc participants do not expect a rate increase before 2015. most see our target for the federal funds rate as rising only modestly in 2015 while three do not see an increase until 2016. for all participants the meeting projection for the federal funds rate is 75 basis points at the end of 2015 and 1.75% at the end of 2016. in summary, reflecting cumulative progress and an improved outlook for the job market the committee decided today to modestly reduce the monthly pace at which it is
2:40 pm
adding to the longer term securities on its balance sheet. if incoming information supports the committee's cannottation of further progress forwards its objective the committee is likely to reduce the pace of monthly purchases in further measured steps in future meetings. however the process will be deliberate and data dependent. asset purchases are not on a preset course. the fomc also provided additional guidance on future short-term interest rates, stating that it expects to maintain the federal funds target in its current near zero range well past the time that the unemployment rate falls below 6.5%. especially if projected inflation continues to run below 2%. the federal reserve's enhanced guidance about its policy intentions and substantial and still increasing holdings of longer term securities will ensure that monetary policy remains highly accommodative, consistent with the pursuit of its mandated objectives of maximum employment and price stability. thank you. i will be glad to take your questions.
2:41 pm
>> thank you. "the washington post." today was the first reduction ins asset purchases and you just said that future reductions will likely occur in measured steps but not on a predetermined course. can you tell us any more about the framework you all put in to use to determine the timing of those reductions and previously you had said that you expect the program to end altogether by the middle of next year. is that still a likely scenario? >> well, as i said, the steps that we take will be data dependent. if we are making progress in terms of inflation and continued job gains i imagine we'll continue to do probably at each meeting a measured reduction. that will take us to late in the year, not necessarily not by the middle of the year. if the economy slows for some reason or we are disappointed in the outexamines, we could skip a meeting or two. on the other side if things
2:42 pm
really pick up of course we could go a bit faster. my expectation is for similar moderate steps going forward throughout most of 2014. >> steve liesman, cnbc, mr. chairman, thank you. when you say similar moderate steps going forward, is $10 billion an increment that people should anticipate and is equal amounts of mortgage backed securities and treasuries also what one should anticipate? finally when you say well past the unemployment rate of 6.5%, why not pick a number? why say well past? thank you. >> sure. on the first issue of $10 billion, again, we say we're going to take further modest steps subsequently so that would be the general range, but again, i want to emphasize that we are
2:43 pm
going to be data dependent. we could stop purchases if the economy disappoints, we could pick them up somewhat if the economy is stronger. in terms of nbs versus treasuries we discussed that issue. i think that the general sense of the committee was that equal reductions or proxate equal reduction was the simpler way to do this. it doesn't make a great deal of difference in the end to how much we hold, so that was going to be our strategy. on the issue of another number, the unemployment rate -- let's talk first about the labor market condition. the unemployment rate is a good indicator of the labor market. it's probably the best single indicator that we have and so we were comfortable setting a 6.5% unemployment rate as the point at which we would begin to look at a more broad set of labor market indicators. however, precisely because we
2:44 pm
don't want it look just at the unemployment rate, we want to -- once we get to 6.5% we want to look at hiring quits, vacancies, participation, long-term unemployment, et cetera, wages, we couldn't put it in terms of another unemployment rate level specifically. so i expect there will be some time past the 6.5% before all of the other variables that we'll be looking at will line up in a way to give us confidence the labor market is strong enough to withstand the gypping of increases in -- beginning of increases in rates. the survey economic projections distributed, that's individual assessments and not the committee's collective view, but nevertheless, it gives you some sense of current expectations about the length of time. the sep shows that the 6.5% is expected by a large number of people to be reached about the end of next year, end of 2014,
2:45 pm
and then the first rate increases according to the so-called dots chart take place near the end of 2015. that's the order of the mag eny today i think that people are currently expecting but i emphasize it will depend on our being persuaded that over across a broad range of indicators the labor market is sufficiently strong that we can begin to withdraw accommodation. >> jon. >> jon from "the wall street journal". mr. chairman, as you well know, the fed is going through a transition next month. can you talk about the role that janet yellen played in formulating the policy that's being laid out today and what kind of consistency the public can expect as we go into her tenure, assuming she's confirmed, with the program that you're laying out today, will it carry on under her leadership? >> yes, it will. i have always consulted closely with janet, even well before she
2:46 pm
was named by the president and i consulted closely with her on these decisions as well and she fully supports what we did today. >> the "financial times." mr. chairman your inflation forecasts never get back to 2% in the time horizon that you cover here out to 2016. given that, why should we believe the fed has a symmetric inflation target and in particular why should we believe you're following an optimal control policy as you've said in the past given that would imply inflation going a bit above target at some point sp. >> again, these are individual estimates, big standard arrows around them and so on. we do think that inflation will gradually move back to 2s% and we allow for the possibility as you know in our guidance that it
2:47 pm
could go as high as 2.5%. even though inflation has been quite low in 2013, let me give you the case for why inflation might rise. first there are some special factors such as health care costs and some other things that have been unusually low that might be reversed. secondly, if you look at the fund mentals for inflation including inflation expectations, whether measured by financial markets or surveys, if you look at growth which we now anticipate will be picking up both in the u.s. and internationally, if you look at wages which have been growing at 2% and a little bit higher according to many indicators, all of these things suggest that inflation will gradually pick up, but what i tried to emphasize in my opening remarks and which is clear in our statement is that we takes this very seriously. it's not easy to -- inflation cannot be picked up and moved where you want it. it requires, obviously, some luck and some good policy.
2:48 pm
but we are very committed to making sure that inflation does not stay too low and we are continuing to monitor that very carefully and take whatever action is necessary to achieve that. >> multiple controls -- >> even under optimal control it would take a while for inflation -- inflation is quite -- can take quite a time to move and the responsiveness of inflation to increasing economic activity is quite low, so -- particularly given an environment where we have falling oil prices and other factors that are contributing downward forces on inflation, it's difficult to get inflation to move quickly to target. but we are, again, committed to doing what's necessary to get inflation back to target over the next couple of years. >> craig from bloomberg news. there's been a great deal of
2:49 pm
discussion in your profession about the potency of policy at the zero boundary and to kind of bounce off robin, it's very striking that inflation's fallen while qe three has been in place and the economy continues to undershoot the fomc's forecast. so i guess the simple question is, are you giving up? you know, i mean have you reached the limit of your policy tools an is there nothing more you can do? the economy is still running way below the trend line that existed before the financial cris crisis? >> well, everything depends on what benchmark you compare it to as you know. i said last year that monetary policy was not a pan na see ya, it couldn't solve all our problems and in particular, it can't do anything about a slowing and potential growth, which appears to have happened at least to some extent. it can't dop much or anything about fiscal policy which is working in quite the opposite
2:50 pm
direction, so given those things, i think the outcomes we've had are perhaps not as bad as you would -- might think. in particular, the -- as i've mentioned many times the congressional budget office assessed the fiscal drag in 2013 as being about 1.5 percentage points of growth. we look like we're getting in the low 2.0s actual growth. add those numbers together it's a counterfactual. it says the monetary policy seems to succeeding in offsetting a bit of that fiscal drag, which we were not sure we could accomplish. we're certainly not giving up. we intend to maintain a highly accommodative policy. nothing we did today was intended to reduce accommodation. we're still going to be buying assets at a high rate and increasing our balance sheet and holding onto those assets. our guidance today, we strengthened our guidance that we expect to keep rates low well beyond the point unemployment
2:51 pm
hits 6.5%. >> peter barnes, fox business, sir. was it a close call in the discussion today among participants and members, given all you've said about the outlook and your forecast? was there a lot of debate on whether or not to go ahead and start tapering now or wait longer and wait for more data? >> well, certainly it was a very important decision and we debated it quite extensively. the question we asked ourselves is did we feel comfortable to say that we had met or at least were well on the way towards meeting the criterion we set when we began the program in september 2012 and that was a substantial improvement in the out look for the labor market. if you look at cumulative improvement, and i mentioned some figures in my opening remarks, or if you look at recent numbers, either on employment, unemployment, and
2:52 pm
also in terms of growth, we're seeing encouraging numbers in terms of household spending, for example, auto purchases, fiscal drag is reduced, stronger numbers internationally. now, i don't want to overstate the case. as you look at our projections, you'll see we only assume or project a small pick up in growth going into next year. but there was a pretty widespread view that there was a reasonable expectation, first, that the recent gains in the labor market would continue. and remember, we're just beginning this process now, so by the time we complete this process, i think it's very likely that we'll easily pass the hurdle of -- of a substantial improvement in the outlook for the labor market. now, it is true that while we have passed the -- or made significant progress on the labor market and growth hurdles, there is still this question about inflation, which is a bit
2:53 pm
of a concern, more than a bit of concern, as we indicated in our statement. our outlook is still for inflation to go back to 2.0%. i gave you reasons why i think that will happen. but we take that very seriously. if inflation does not show signs of returning to target, we will take appropriate action. >> hi, rebecca jarvis, abc news. mr. chairman, now that you have introduced tapering into the system, if the economy were to stumble again in the future, would you recommend or have you discussed with your colleagues increasing bond buying in the future? and have you considered any alternative measures? for example, more direct stimulus directly into the economy, if it were to stumble again? >> what kind of direct stimulus do you have in mind? >> any type of stimulus you would not essentially not be buying it back from the banks? >> well, in terms of the legal
2:54 pm
authorities that the federal reserve has, we don't have some of the -- >> if you could ask for it. >> if i could ask for it. we're getting now into a fanciful discussion, i think. i think our basic tools are asset purchases. and we are allowed only to buy treasuries and agency securities. we're not allowed to buy corporates the way many central banks are. we have -- with interest rates near zero, we can manage our forward guidance. and i think that has been helpful. that's been effective. we probably could do more with that. but there are limits to that as well because beyond a certain point markets may not accept -- you know, may not view the long distance way ahead guidance as being credible. we can change the interest rate we pay on reserves, which is something we've talked about. the other kind of thing that -- the only other thing i can think of that amounts to a direct
2:55 pm
infusion into the economy, if you will, is actions similar to the british funding for lending program, where they provided cheap funding to banks if the banks could show that they had increased their lending to households or small businesses. we could, in principle, do something like that. we've looked at that. buzz we because we do have a discounted window where we lend to banks. however, somewhat differently from what was going on in the uk and in europe, here our banks are flush with liquidity, plenty of cash on hand. they owe lots of reserves, of course. so our sense was that they just wouldn't be any take up on that program, at least under current conditions. we do not have the authority to lend directly to small businesses or other types of institutions. and in any case, i don't think right now that tight credit in
2:56 pm
most areas is the major problem. i think what we have in many cases is that firms are either not looking for credit or their balance sheets are not strong enough that they pass creditworthiy screens at the bank. we do have a range of things we can do, but we are already being, i think, pretty aggressive. >> would you increase the bond purchases in the future? >> under some circumstances, yes. >> i have a narrow question and a related question. did the changeover in leadership play a role on when to begin tapering? the related broader question. you're a historian of monetary policy. what do you think future historians of monetary policy will have to say about your helm. >> the first answer is, no.
2:57 pm
second answer is i hope i live long enough to read the textbooks. what we've showed -- there have been two big changes, at least, more than two. but two that i would cite at the fed in the last few years. of course, the result in many ways of the crisis. the first is that federal reserve has rediscovered its roots in the sense that the fed was created to stabilize the financial system in times of panic. and we did that. and we used tools that were analogous in spirit to what the central banks have done for many hundreds of years. but, of course, adapted to a modern financial system. the other thing that was unique about -- or maybe not completely unique, but largely unique about this period was that we were trying to help the economy recover from a deep recession at a time when interest rates were almost -- or essentially zero. that required us to use other
2:58 pm
methods, most prominently forward guidance and asset purchases. neither of which is entirely new. but clearly this is -- unless you put aside the depression where monetary policy was on the whole pretty passive, this is the first -- one of the first examples, at least, of aggressive monetary policy taking place in a near zero interest rate environment. now we're seeing, of course, japan and uk and other countries also taking similar types of approaches. and i think that will be an issue, an area monetary historians will be interested in exploring, as well as monetary purists and empirical studies. >> jason lang with rutders. chairman bernanke, today with one hand you're giving the economy something by telling us that -- or signaling that you may keep interest rates lower for longer than we previously thought. but with the other hand you're
2:59 pm
taking something away by reducing the large scale asset purchases. if you think that overall this is maintaining the level of monetary accommodation steady, is that a sign that the decision to reduce the asset purchases is relatively less about an improved outlook for the economy and, perhaps, more about the concern that the asset purchases are less effective or might be feeling bubbles? thank you. >> well, as i said before, asset purchases are a supplementary tool. our main tool is interest rate policy. the reason asset purchases are supplementary tool because it's less familiar. we have less ability to calibrate how big the effects are, for example. it's also true that as the balance sheet of the federal reserve gets large, managing that balance sheet, exiting from that balance sheet, become more difficult. and there are concerns about
3:00 pm
effects on asset prices, although i would have to say that's another thing future monetary economists will want to be looking at very carefully. so, our view was in september of 2012, was that we had interest rates already low. and they were expected to stay low for a good long time. the economy, though, was faltering. we needed an additional boost. and so we brought in the asset purchase program again. we put in a specific objective, which is substantial improvement in the outlook for the labor market. our sense was, was once that intermediate objective was obtained, was that the economy had grown and was moving forward, that at that point we could begin to wind down the secondary tool, the supplementary tool and achieve essentially the same amount of accommodation using interest rates and forward guidance. and so i do want to
117 Views
IN COLLECTIONS
CNBC Television Archive Television Archive News Search ServiceUploaded by TV Archive on