money and u.s. large cap companies with high cash balances actually start to leave the market. >> it's been great having you. thanks for spending the hour with us. the markets counting down to the big fed decision and rallying a little bit. still wait and see though and we will wait and see with "power lunch" which begins right now. it's decision day. will the fed hike or stand pat? >> the fed has been swhat irresponsible. >> i think the market is more prepared for this increase. >> investors throughout the world will know the answer in one hour. >> this isn't the time to be moving. >> the impact can't be overstated. it touches every part of the american and global economies. stocks, bonds, commodities, your money, your life. this is a cnbc special report. countdown to the fed with mandy drury at cnbc headquarters and tyler mathisen in washington,

d.c. >> good afternoon, everybody, and welcome to a beautiful nation's capital today. i think it's no exaggeration to say that today the biggest, most consequential decision, the one that will affect the most americans in the most immediate way is being made right here today in washington in the building behind me, the headquarters of the federal reserve where the men and women of the open market committee have been meeting. mandy? >> will today bring the first rate hike in nine years? that is the big question. in less than one hour from now the fed's decision will drop. where do policymakers stand right now headed into the big decision? senior economics reporter steve laesm liesman is also in washington live. what are you hearing? >> i think it's worthwhile to go back and say how did we get here? how do we go into a meeting of such consequence without really being sure what's going to happen. 50/50 on both sides. you heard at the top of the show

some of the brightest minds are disagreeing. i want to show you some critical fed comments made that's led us here. let's start with september 4th, the beginning of this month where john williams came forward and said i do worry on both sides of the ledger. we don't want to wait too long. we don't want to undermine the recovery. he's a centrist there. and jeff lacquer, one of the hawks on the committee, gave a speech that same day. the case against further delay. go back a week earlier where two of the most senior officials of the federal reserve within two days gave conflicting comments. stan fischer telling me, when the case is overwhelming, if you wait that long until you're totally confident, you will wait too long. that was two days after bill dudley said the decision to begin the normalization process seems less compelling. that was amid the market volatility. the question for dudley is whether things have calmed down enough. and then the last comment made

by janet yellen on monetary policy. she said we now think the economy can not only tolerate but needs higher rates, but that was before all the concern about chinese economic recovery. it was before all of the market volatility. so we go into an absolutely historic meeting, guys, with pretty much historic uncertainty about the fed. my guess is that they don't do it, but they signaled they're going to be hawkish about perhaps doing it in the next month or two. if they do do it, i think the idea is that they will tell us or signal that they'll wait for a little while and see how it plays. >> i will pick it up from there. we'll be getting back to you. it's an exciting day. just to reiterate, steve was saying personally he's in the no hike camp. as for stocks, they're holding steady with minor gains ahead of the big fed decision. let's look at the numbers for you with the dow up by 24 points, the s&p up by 4, and the nasdaq gaining by 18. we saw stocks pick up after the philly fed index went negative and that maybe is adding to some

people feeling it lessens the chance of a rate hike today. let's find out what techs are up to. bertha coombs is at the nasdaq and bob pisani is on the floor of the nyse. >> it's about as steady a state as you could possibly imagine and generally the minority opinion is the fed will hike. i have been in that minority group for a while. look at the s&p 500. about an 8 point trading range, that's half of the normal day's trading range. we're essentially sitting at the highs. but this is a very narrow range. the market this is the middle of the day, you don't get a market any more steady than this one. the breadth is dead even. the volume is light to moderate. there's nothing blowing up. the volatility is essentially flat. this is a steady state market right now. in terms of the sectors, nothing is up more than a half a point or down more than a half a point. there is your health care, moderate gain this is health care and energy and financials. materials, energies, industries are on the downside at this

point. fairly steady state. take a look at the vix, the volatility index. we are at 50 on august 25th and we've been trending downward since then. let's call it sideways in the last day and a half. nobody is making any big bets right now. a lot of traders did tell me yesterday their position since there's so many divided opinions, mandy, essentially go to the sidelines. the s&p is up 2.5% in the last four or five days. a lot of people have made money, so lighten up and you've won, move to the sidelines, declare victory and see what happens after the market settles out after the fomc decision. that seems to be what a lot of people did yesterday essentially. >> potentially safer there on the sidelines. thank you very much, bob. we'll get to you as well, but dominic chu, you have a market flash. >> so here is one stock where the corporate fundamentals mat a little more than the fed story. we're talking about eli lilly hitting its best levels of day so far on new data, trial data

showing one of its type two diabetes drug was shown to redun deaths by a third from cardiovascular disease. one health care stock that's up regardless of what's going to happen with the fed. we'll see if it stays that way this afternoon. >> eli lilly up 30% this year. thank you, dom. bertha coombs at the nasdaq, what are you watching? >> let's keep on the health c e care -- dragging there. chin component maker the biggest decliner in the chip sector in reports it's in talks to be acquired by china electronics. media names though are among the biggest gainers on the nasdaq. a bit of a halo effect on that cablevision acquisition and we do have a biotech ipo braving fed day.

reje regenxbio. >> gold has been pretty steady but oil continues to be under pressure after a nice move up yesterday. jackie deangelis is at the nymex for us. >> good afternoon. oil may have gotten a little ahead of itself on some of those headlines we saw yesterday. so it's not unlikely to see some profit taking today. this sort of fits in with the pattern we've been seeing in oil's wild swings at this point, but having said that, the dollar is a little weaker and commodities would be supported by that, but they're not today and that is because all eyes are on the fed, what action it will or will not take, how that will impact the dollar and that will probably slowly start to trickle in. gold not getting a bid either. traders tell me they don't like it either way, whether we get a hike or we don't get a hike because even if we don't get it today, it's imminent, it's in the cards, and, of course, that would not be good for gold prices. back to you.

>> all right. thank you very much, jackie. our next guest thinks the fed should act right here, right now, today. he's scott mather of the bond fund jind pigiant pimco. welcome back to "power lunch." they're a siren going by. a lot of dignitaries moving about town this afternoon. you think they should move. why do you say that? >> good afternoon, tyler and mandy. we do think they should move, probably less than a 50% chance they move at this meeting. we think they should move because the economy doesn't need an emergency policy rate. we should remember we're at zero rate setting for almost seven years. meanwhile, we're almost at full employment. so, you know, you can easily make a pro-growth story out of a rate hike. it's really the best chance we have of prolonging the expansion. so beginning to normalize rates now is over the medium term certainly probably good for growth and we think it's time to begin moving. the reason not to move, of course, is because of market volatility that we've experienced in the past month or

two. but there's always market volatility. there's always episodes, always things going on elsewhere in the world, so that in and of itself cannot be a reason to perpetually put off beginning to normalize rates. >> that's it. if they wanted an excuse not to hike, i'm sure they could always find one. i'm wondering when you say things happening around the world, how much would concern about what's happening in the world's second largest economy, china, how much would that factor in thor eir decision if y do not hike. >> they're taking notice of international developments more than ever, but from our perspective and many students of the chinese economy would also admit this, chinese growth has been slowing down for years. financial markets didn't really wake up to that until we saw this massive run up, the chinese stock market bubble run up and then run down dramatically. that seemed to catch people's attention but that probably doesn't have too much to do with the underlying rate of growth in china. so our view is china has been structurally slowing. it's perhaps been as slow as low single digits for some period of

time. so once again, from the world's perspective, what that does to world growth and world demand is probably -- probably hasn't changed much. we think people are making the mistake of mapping financial market developments onto the real economy, and we would argue as we get further and further away from the financial crisis, little wobbles in the stock market, wobbles in financial markets have less and less of an impact on the real economy because they don't impact business or consumer confidence in the same way they used to and because much of the debt that was our chief concern during the financial crisis has been trimmed out and refinanced at lower levels and locked in for a long period of time. so that's another reason why we wouldn't expect a small move in interest rates to have much of an impact on the real economy or on inflation. >> so, scott, it's no secret that an awful lot of the volume of trading on any given day is driven by algorithms. my question is what do you expect the algorithms are going

to do whatever way the fed moves and what are the odds that the market throws a hissy fit either way, whether the fed moves or doesn't? what are the odds? >> well, whether they go or not, it's likely we're going to have increased volatility for some period of time. we have to get past the point where rates -- we've gone the rate hike process for volatility to settle down. and you're certainly right that a lot of the algorithmic trading, a lot of the value at risk strategies and other trend-following strategies are sort of exacerbating the market volatility. that's why it's important to look through that. that's what we're always doing here at pimco, focusing on the fundamentals and investing for the medium term, to not allow ourselves to be taken off track by the short-term developments. look at them as opportunities. >> all right. scott mather, who says fed take a hike. scott mather, the cio of pimco. thank you. >> just over 45 minutes before

the fed's decision. will we see the first hike in nine years? is the economy strong enough? former fed economist will be joining us. you're watching a special report, fed decision. do not change the channel. i'm watson. and today hundreds of companies are putting me to work. i'm teaching watson to help your vet speak dog. you're a dog, right? i'm teaching watson to help you make healthy choices. i'm teaching watson to help design a vacation around your personality.

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welcome back, everyone. we have some news concerning american airlines. the faa saying that a ground stop is in place until 2:30 p.m.

eastern time for american airlines. american confirms that they are having some issues. they say they are working to resolve technical issues impacting several airports and they're working as quickly as possible. so we don't really know exactly how widespread this is, but once again the faa saying that there is a ground stop in place for american airlines until 2:30 p.m. eastern time. hopefully it won't snarl all that much traffic, mandy, but you never know. >> you never know with these things. as we stand we're at 4392 for american airlines shares, up by 2%. thank you very much, sue. it's a big day here. jon najarian, you were actually in the hike camp until you heard something just a few moments ago that made you potentially change your mind. what's happened? >> well, mandy, what happened was a very large trade went off about six minutes ago in the tlt. this is, of course, an etf for the bonds for 20-year bond, but nonetheless, somebody put on an awful lot, 50,000 options is 5 million share equivalent. they either got very nervous

ahead of this news and decided that the fed is just going to sit or something leaked, one or the other, because this is a very big bet. it's 5 million share equivalent in the tlt. it's a big bet that the fed does not move today and rates go back down because that's why the bonds would be rallying. >> is there a way of trading this you can win either way? >> no, you can't win either way with this bet -- >> not this specific bet but are there trades you're making potentially that can help you win either way? >> no. i was basically happy with positions i had on but i did think they were going to move. based on this move now that i have just seen, i think the fed is not going to move. we'll have to see in 40 minutes. >> exactly, yes. less than 45 minutes. 43:30 to be exact. that countdown is on. >> that's a very interesting finding or observation, jon. thank you very much. the countdown is on, about 45 minutes until that fed decision. janet yellen's news conference 30 minutes after that, and we'll be there for every second of it.

will the fed raise interest rates for the first time in nine years? you saw what that options trade suggested. should they raise rates? we want to hear from you. is the economy strong enough for a rate hike. head to cnbc.com/vote and let us know what you think. and joining us now, allen blinder, former vice chairman of the federal reserve and economics professor at princeton and marty feldstein, economics professor at harvard. we got harvard, we've got princeton, and we have two gentlemen who know washington inside and out. on the one hand, you think the fed won't raise rates today and shouldn't. marty, you basically think the fed won't raise rates today but should. marty, you make the case first. >> well, the economy is certainly able to take a rate increase. we've got an unemployment rate which is what the fed regards as full employment, 5.1%. we've got the core cpi inflation rate at 1.8%, close to the 2%.

the only reason that the broader measure of inflation is much lower is that energy prices have collapsed in the last month, but if you take that as a question of whether the economy can stand it, there's no doubt that the economy can. to me the reason why it would be good for the fed to move is that interest rates have been so low that investors and lenders are taking substantial risks, risks that could lead to financial instability, and i think at some point the fed has to start normalizing rates, and now is as good a time as any. >> allen, that's an interesting argument that marty makes there, that raising rates would increase in a kind of backdoor way stability in the marketplace. you argue they shouldn't raise and won't. why do you say that?

>> well, first of all, i do want to say it's a close call, so there are definitely coherent arguments for why the fed should go right away. indeed, should have gone a while back, but there are also coherent arguments on the other side. they start with saying, yes, the economy has come a long way back but it's not quite there yet. although it's getting close for sure. secondly, inflation has been consistently below the fed's target, and i do agree we should look at core inflation, not headline inflation. nonetheless, the pce inflation rate at 2%, which is what the fed has been targeting for some time, hasn't been seen in a very long time, and there's not the slightest indication that we're heading back that way. thirdly -- >> alan -- >> do you want me to stop there? >> no, no, finish. i'm sorry. >> it could be that the economy

has considerably more running room. this period reminds me a lot of 1996 when received wisdom was telling alan greenspan we were up against the stop sign and couldn't keep growing fast and greenspan looked around and said, you know, i don't think so, and the fed held the interest rates, and the economy did, indeed grow quite a bit more. >> but there's no question about going back to the normal level of interest rates. remember the fed says a couple of years from now the fed funds rate, which today is essentially zero, should be at about 4%. so it's got to get there over a considerable period of time, move gradually, but if you're going to do that, you got to start some day. >> you do have to start some day and i think the fed is probably going it start in december, and, you know, the truth is macroeconomically there's not a lot to choose between now or

december. i think this is probably like a three-year process of normalizing interest rates, so, yeah, we do have to start sometime and i just think the fed is not quite ready to do it. >> all right. gentlemen, thank you very much. we appreciate your perspectives today. two guys who have been on the inside where these kinds of deliberations take place. we appreciate it, gentlemen. mandy? >> thank you very much, ty. let's lock in the vote. is the economy strong enough for a rate hike? 49% say yes. 51% say no. it's worth noting what's been happening in the markets over the last few minutes. we are extending gains here. let's bring up a board of the s&p 500 and show you that we're now back above 2,000. it's currently up by 7 points. was just poking its head above the 2,000 mark but it's interesting the way the market seems to be extending gains going into this decision and i do believe the major averages will have gained for the second straight week if, indeed, we keep on gaining. everything just comes down to what that interest rate decision is. we're counting down.

will they or won't they? and also, how bond traders are positioning themselves ahead of the big announcement. i'm sure you've been watching the moves in the 2-year in particular. very interest rate sensitive. that's been on the move this week. take a look at the bench mar 10-year treasury yields since the last rate hike in 2006. you can see there the yields were over 5% back then. today they're sitting at just over 2%. this is a cnbc special report. we are back in a second.

hello, everyone. welcome back. i'm sue herera with more news on american airlines. as we told you, there was a ground stop put in place and is in place for american by the faa until 2:30 p.m. eastern time. it started about quarter of 1:00 eastern time. the airline is saying it's working on some technical issues. they're trying to get it back up. it slowly is coming back up. it has to do, according to american, with the ability of people to check in. the faa now saying the ground stop is at basically nationwide and it is affecting all departing flights because people are not able to check in. you're up to date. we'll continue to follow the story which is still developing. american airlines stock though is still up on the trading session. all right. to the bond market now ahead of the fed decision and rick santelli. ricky? >> hey, sue. thank you. you know, i was just watching the options pits for the futures on interest rates, and there's a

lot of activity. i heard dr. j, dr. jon najarian talking about some big moves. the problem is i can tell you if they're buying puts, buying calls, but what i can't tell you is if there's a portfolio behind it that has a position on the other side of the card. important safety tip, whether you look at two-day of 2s, 5s, 10s, 30s, or the dollar index as you will see right now on your screen, all are inside days, meaning we have lower highs and higher lows than yesterday. so i think idling in front of the fed is an appropriate way to express the markets. how much change do i have in my pocket, people? impossible to tell? well, i think that's pretty much the case for what janet yellen and company will do, but no matter how it turns out, one thing i can tell you for sure, the pit behind me is going to get some action. mandy, back to you. >> you bet you. action is where we're at. thank you very much, ricky. about 30 minutes to go until that fed decision. janet yellen news conference 30 minutes after that. so how wall street top money managers are positioning their

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hi again.

i'm sue herera. here is the cnbc news to update. we start once again with american airlines, which is in the middle of a ground stop, a nationwide ground stop at that. the faa putting that in place until 2:30 p.m. eastern time. it has to do with departure points across the country, and it has to do with the inability of passengers to check in teat e moment. so the ground stop in effect until 2:30 p.m. eastern time. president obama personally thanking three americans who helped thwart a terrorist attack on board a train in france. u.s. army specialist alex skarlatos, u.s. air force airman spencer stone, and sacramento college student anthony sadler met with the president in the oval office earlier today. two more bodies have been found in the area of a wildfire raging north of california's napa valley wine country. that brings the death toll from two northern california blazes to five. official identifications have yet to be made. in an address at the vatican, pope francis lamented

what he called the ocean of pain in syria and iraq. he called for a nonviolent solution to the fighting there and praised lebanon and jordan and turkey for taking in millions of syrian refugees. and that is our cnbc news update this hour. tyler and mandy, back to you guys. >> thank you very much, sue. let's take a look at gold prices leading up to the fed decision. they're currently moving i think to the downside by just a little at $1,117 but this is after its biggest one-day jump in a month, that was yesterday. silver, copper, palladium, and platinum are mixed at this stage with silver and copper moving marginally higher. ty? >> all right, mandy. thank you. stocks are holding onto slight gains as we wait for the fed decision on interest rates. it will come about in half an hour or so. the dow, the s&p, and nasdaq gains for the third straight session, something that hasn't happened since, guess this, mid-july. the russell 2000 also higher. with me here in washington, a warm and sunny washington,

michael farr and jamie cox, managing partner at harris financial group. gentlemen, welcome to both of you. >> thank you. >> michael, we were speaking earlier, and you said one thing that stood out to me, and that is whatever you do as an investor, don't confuse a move by the fed, a change in the number, with a fundamental change in monetary policy. what do you mean? why do you say it? and what's the implication for me? >> i think that that's exactly the right point, tyler, and i think there are two big takeaways. one, whether they raise today or they don't, they will at some point in the future, but they really haven't changed policy. monetary policy is still very easy. they're still very accommodative, and we're not at the beginning of a great rate rise. that's the most important part. they haven't signaled that, we're going to have easy policy for a while. that's really important. >> jamie, you work with sort of mid net worth people, not the ultra high net worth.

michael asked you do they care about what the fed is doing and you said -- >> yes, they do care. they really want to see interest rates rise. over the last several years people with cds, savings in the bank, they feel like they've really been screwed, tyler. they want to see some return on their savings. for the first time in a while we have a legitimate chance of that happening. for rates to rise, maybe today, maybe october, but i know for one people who have retirement savings who need to draw income from their investments, there's no better thing that can happen than rates to rise. >> do they understand that if rates rise, some of their fixed income holdings are going to lose value? >> they do, but they also realize retirement is a cash flee game. the future value will be better over time. >> what's the implication for the investments markets. i asked scott mather a few minutes ago whether he expected a major spasm, the markets to throw a hissy fit one way or another, if they move or if they don't. what do you say? >> hissy fits are really unpredictable, okay?

you are never sure when the market will fully hiss, but there's an important takeaway for vefertiinvestors. what they're telling you is the fed put, tyler, is gone, okay? they're not going to be there in the same pavlovian way to support every drop and downturn. a year ago in october when we fell 10% and jim bullard from st. louis stepped in and said maybe the fed needs to do more, markets rocketed back up. august when we dropped, the fed was silent. expect more of that and expect to bear the consequence for down markets, and if you make an investment, poor investment, you're probably going to lose some money. >> do you think the market has farther to go down, jamie, or do you think we've stabilized. >> i think we sold off into what could be a rate rise today. i think we have seen probably the worst of it for this year. i don't predict we have any worse than what we have seen going into august. >> what do you think the fed will do? i know you feel basically that it's time for the fed to move

off the sort of intensive care emergency room monetary rate policy. >> and i feel that way largely because that's what the fed governors have told me. that's jim bullard's point, jeff lacker's point. look, we're not in an emergency economic condition anymore. the economy is okay but yet rates say we're in emergency conditions. so it's time to do something. it's time for the fed put to go away. it's time for moral hazard to go away and for consequence for bad decisions to return. so whether they do it today and we get a quarter of a point or anything like that, i don't think we're going to get anything is the prediction. >> michael, jamie, thank you very much. we'll see in less than a half hour's time. let's check in with phil lebeau. phil, you're going to i'm sure talk about the american story. you were earlier this week in their brand new operations center down in ft. worth. does this have anything to do with that? >> we don't know if it has to do with the new operation center, but we know they're pretty busy right now because we have a

ground stop for american flights but only at three of the hubs. those flights coming in or going out of dallas, chicago, and miami. earlier it was reported this was a nationwide ground stop. that is not true. ts not a nationwide ground stop for all american flights. only those flights going into or out of dallas, chicago, miami. it's our understanding that people are unable to check into their flights and, therefore, unable to board those flights. we've been told that perhaps, according to the faa, we could see the flights resume out of those hubs starting at 2:30 eastern time. we're in contact with american. we'll let you know a little bit more about what exactly is causing this ground stop, but, again, it's only at those three hubs. ts not nationwide. >> and certainly not hurting the stock either. we're seeing that the stock is actually marginally higher than it was, sitting up by 2.3%. so more on how the fed will impact the market. let's bring in jim paulson from wells capital management. you're an optimistic guy, very

much a glass half full guy. why are you expecting disappointment and volatility regardless of what the fed does? >> i think they've waited so long, mandy, that i think we've got an expectation distribution today that's about 50/50. i think there's probably about half the investment world thinking they might do it and half thinking not. so either way the fed goes today, if they raise it or they don't, you will have probably half of the investment community disappointed or, you know, seeing an unexpected event they weren't prepared for. i think there's going to be some volatility out of this either way they go. i also think they don't really settle much. today. if they don't raise rates, then the countdown clock to the october meeting starts immediately. just like this one was. and if they do raise rates, then the discussion about whether this is just one and done or whether this means they're going to have to do more before the year is out also starts. so i think we're starting to deal with something we're going to be dealing with for a while.

>> so whatever the decision is, it's only going to bring resolution and certainty for maybe a few hours before we start obsessing about the next thing which potentially, jim, is over the next few months how the economy responds. >> right, mandy. i think that's the really important thing here. what is new today from where we've been i think is the united states economy has reached full employment. we're going to have a four handle on the unemployment rate in a matter of months, and that's going to bring with it not only rate hikes by the fed, but it's also going to bring something we haven't had until now, pressures, negative pressures from economic growth. we're going to create wage pressures and price pressures and maybe create erosion of profit margins, and when you raise rates in inflation, you challenge the valuation level of the stock market, the pe can't be quite as high. that's all new stuff and i think this correction we're in the middle of, i believe, really

reflects we've kind of crossed over from under employment to full employment, and the environment for the financial markets gets more difficult. >> so bottom line, it feels to me like you're saying we need to find a new valuation level, we need to be less xlas secomplace maybe even the correction in stocks isn't over? >> i think so, mandy. my guess, who knows, my guess is that we're still a little too calm about this. most still look at it as a buying opportunity in an ongoing bull market. i think by the time it does bottom, we'll be very scared it's a full fledged bear market. we'll be scared it's a recession, and maybe we'll be trading more like 15 to 16 times earnings rather than 17 to 18. a market multiple that could better withstand some of the pressures we're now going to face in this country. >> do you think, very quickly, do you think there's better opportunities than with your money in international markets where there's maybe more of a tailwind from monetary stimulus, maybe more of a tailwind from lower currencies, not to mention

lower energy prices, et cetera? >> i do, mandy. i would move away from the united states in a bigger allocation. i'd still have some here but the united states is in a unique position of being one of the few economies at this full employment barrier. everyone else is still in full upside policy mode pushing financial markets higher along with their economies, and their earnings cycle is much younger in the cycle than the more mature earning cycle we have in the united states. not to mention they've underperformed the u.s. market the last three or four years. they're better values as well. so i think more of a maximal overweight outside of the united states is a good place to go as the united states faces difficult problems. >> interesting discussion. thank you so much for joining us today. jim paulson. tyler, over to you in washington. >> all right, mandy. it has been nine years since the last rate hike, way back in 2006. back then the unemployment rate was lower, 4.6%, versus 5.1%

today. the three month average job growth was 94,000. today it's much stronger, 221,000, and the labor participation rate back then much higher, 66.2% versus 62.6% today. so does the fed think today's economy is strong enough for a rate hike? we're going to get the answer in 20. you're watching cnbc, first in business worldwide. it's from daddy.

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at ally bank no branches equals great rates. it's a fact. kind of like mute buttons equal danger. ...that sound good? not being on this phone call sounds good. it's not muted. was that you jason? it was geoffrey! it was jason. it could've been brenda. ahead of the big fed decision just minutes away from now, the s&p 500 back above 2,000 for the first time since august 21st, at least on an intraday basis. some of the biggest winners, boeing. american airlines experiencing a ground stop in dallas, chicago, and miami. the carrier says there's a technical problem with check-ins and departures. and if you missed any of the big

stories in the last hour, you can go visit the site at powerlunch.cnbc.com. and by the way, in less than an hour, of course, we'll know what the fed is doing. so the question today is, you know, how are you trading all of this ahead of the fed? are you buying, selling, or holding? 21% say they are buying. 14% say they're selling. 65% say they are holding, the vast majority by far, tyler. >> all right, mandy. the building behind me -- does that look like a federal central bank ought to look. you want marble, you want eagles, you want that stuff. we don't want any glass houses like the ecb in frankfurt. they're deciding in there, they probably pli decided already on whether to raise rates and they will share that decision with the rest of us in less than 15 minutes. the markets holding steady and holding on to slight gains ahead of that announcement. more on this special report,

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stocks are marginally higher ahead of the fed decision on interest rates. we will get that decision in about 12 minutes' time.

does a rate hike really matter? joining me to discuss that, andrew par meant yea. always good to have you with us. is a quarter point consequential to the broad picture of the economy? >> i think what a rate increase or not tells us is what the fed's reaction function is, right? so china has been easing its currency. they said they would continue to do so until the end of the year. this will tell us whether the fed believes they're going to or not. a nonaction i think sends a different type of signal to the market that maybe it's worried about some exogenous events, and so, yeah, i think it matters for that reason, and you only get one chance to raise rates, to come off the bottom, and timing is everything. >> let's leap forward past today to the next washington topic that's out there, and that is the possibility, it came up in the debate last night, of a

government shutdown tied perhaps to funding for planned parenthood. what are the odds of that happening, and this is a movie we've seen before, and it doesn't seem to have a tremendous amount of consequence for the economy or the markets. >> right. we just keep, you know, rolling from kind of fy si crisis to manufactured crisis. i don't think they'll shut down the government over planned patienthood, which is a good thing but it also speaks to where congress' priorities. you heard a bunch of people talking about a flat tax or a fair tax or a consumption tax. when the fed met in july, we've hit their labor target. what we haven't hit is the inflation target, so what can congress do on that front to create jobs and tax reform? we're talking about shutting down the government over planned parenthood, but where is the substance that really can kind of get the economy going? that's what's disappointing in this whole discussion. >> if there's a subtext to me in the discussion over monetary

policy, all of the experts that we talk to, they basically say we're past the emergency point. we need to rely less on monetary policy and more on structural reforms and the traditional tools of managing the economy, which is fiscal policy, but congress doesn't seem to be in any position to really take that job on. >> they're not, and, you know, our headquarters is a couple blocks from here, and, you know, we're talking to clients about corporate inversions and tax-free spinoffs that impact yahoo! and alibaba and caesar's and the government is -- the agencies are acting, the fed is doing what it can, and congress just does nothing, and to get the inflation you want in a healthy economy, congress has got to be focused on stimulative things, be it infrastructure, some kind of job creation, and they're just falling down and maybe it's to be expected because we're going into a presidential election. >> before i let you go, let's talk a little bit about the debate.

last night once in that first 45 minutes they got past the discussion about who had a beautiful face and who didn't, there wasn't a tremendous amount of discussion about the economy. do you expect that to change? >> i think that it has to change. i was surprised that the fed didn't come up. i was surprised corporate incompetent versio inversions didn't come up because these are big topics with big pension funds. carly fiorina knocked it out of the park last night, and i think marco rubio did a great job. i expect to see both of those candidates kind of rise and donald trump, you know -- >> to me for quor fiori know wa girl in class who outstudied the guys. thank you very much. folks, that will wrap it up from here. mandy? >> we're literally only minutes away, eight minutes and 22 seconds to be exact from the most anticipated fed statement

in a very, very long time. and, of course, the decision, will or won't they raise rates? we will know at the top of 2:00 p.m. eastern. the markets right now, the dow is currently sitting at 16,779. it is up by 39 points. the s&p is sitting above 2,000, and the nasdaq is sitting there in the black as well. here are how the sectors are faring. utilities and health care are leading. utilities and energy. you have in the red telecom and technology. do not go away. you're watching cnbc, first in business worldwide.

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hello, every. i'm brian sullivan along with melissa lee on set. we are beginning our show a little earlier because ts a big one. in a few minutes the federal reserve will make its most highly anticipated rate decision in years. we could see the first increase of the benchmark borrowing rate in more than nine years. the market is split on whether that will happen. everything is on hold until exactly 2:00 eastern time. you've got the dow up fractionally, about 40 points right now, but that could all change in just a matter of minutes. all right. so we've got our all-star fed panel ahead of it, of course. the panel and full market reaction once we get that decision at 2:00 p.m. eastern.

bob dahl, david kelly. bob, if, and it's a big if, if the fed raises rates, what will you advise your clients to do? >> i think it's good news for the equity market assuming they have some dovish language and assuming the dollar doesn't go noticeably higher. i hope they do it. we got to get this first one behind us. don't forget, we're starting at zero. it's not like we're some high number going higher. we are at zero. let's get on with it. >> david, what's the best case scenario for stocks and worst case? >> best case is they tighten and then reassure markets they're going to take it slowly from here. the big advantage is you will reduce uncertainty. they have laid out a road map on the criteria under which they will tighten. if they follow that road map, that reduces uncertainty. >> it's funny because both of

you think the best case scenario involves a rate hike. is there any chance the central bank in the united states will fall into the same trap of raising rates too early and later having to reel that back? >> i don't think so. you know, the employment markets have improved very noticeably in lots of ways, shapes, and forms. we're beginning to see some wage rate growth. i think there's more behind us as the unemployment rate continues to fall. so, look, the inflation is the question, and overseas is the question, and they're legitimate questions, but i come back to its a long time now -- we are, we got to zero when the economy was falling apart and we weren't sure what was next. our economy is up on its own two feet. i think it's time for the fed to begin the normalization process. >> there's a school of thought, david, that if the fed does not raise rates today, it means that they may be concerned about something because almost all their other metrics are being met. we have inflation target of 1.9% next year so it's right there at

the 2%. they are worried perhaps about china, maybe more than we think. do you buy into that school of thought? >> well, that's probably the only rationalization you could give to it, but think about what a hopeless rationalization that is. china is big and mysterious. its problems are not going away. sto so if china stops them from raising rates from now how can we know the problems will go away? that's why they have to focus on the u.s. economy. i'm not worried they're going to have to pull it back. when we've had for example the ecb move away from rate increases, it wasn't because the rate increases were harming the european economy. that was because of the sovereign debt crisis which came from a completely different direction. i don't think a rate increase will hurt the economy. i think it will help financial markets. >> if that's the case then, so we do not get an interest rate hike, let's say that happens, does that mean your clients for jpmorgan funds or you guys will get rid, sell, dump, get rid of

everything chinese related? >> no. chinese stocks are down quite a bit anyway, but i'm certainly not going to say that the judgment of these members of the federal reserve on the china issue is the final say in this. we would obviously look at what our analysts over in hong kong are saying about what's going on in the chinese economy, but what the fed does today won't change our view on what's actually going on in the chinese economy. >> what might be more terrifying is the notion that maybe the fed is going to hike rates so that it has more bullet this is the chamber because they foresee something potentially on the horizon. i hate to sort of play the contrarian here but we have to look at it on all sides. is that a concern on your part that the fed is hiking because there could be something down the road? >> i think if they saw something down the road, they wouldn't hike. i think that having some ammunition should they raise them is certainly a plus, but i don't think they'd do it for that reason. they're going to do it because the economy is doing okay and

it's time to get on with the normalization. >> bob and david, sit tight. we're going to find out here. we have about ten seconds. the dow is up 46. we'll see if the fed raises rates for the first time since june of 2006. steve liesman now. >> the federal reserve leaving interest rates unchanged. the federal reserve leaves interest rates unchanged. no rate hike from the federal reserve. the fed citing concerns over global economic and financial developments leaves the funds rate unchanged in a range of 0 to a quarter percent. it cites global weakness saying it could reduce inflation near term and specifically makes a point of saying they're monitoring developments abroad. jeff lacker dissented saying he preferred a quarter point rate hike. a lot of action from the forecast that kind of tells us what the thinking is of the federal reserve. four fomc members see a hike after 2015.

that's up from two. three in 2016, one in 201 seeing the first hike there. they lowered the long run outlook for the funds rate. they're more pessimistic on hitting inflation target and more pessimistic on growth. i want to just tell you a little bit about the talk about the economy. they're saying the economy expanded at a moderate pace, that household spending increased moderately, and housing improved further. let me get now to some of the information in the forecast here. three in 2016 and one in 2017. so four now beyond 2015 for that first rate hike. and really in the statement there's no hawkish side of this that many expected if they didn't hike. it's still really ultimately a very dovish statement. on the outlook for the funds rate, they lowered it by 0.2% in 2015 and '16 and by 0.3% by 2017. the long run rate now 3.5%. they brought that down by 0.3 of

a point. they brought down the unemployment rate and they also are not hitting their 2% inflation target until it looks like 2018, brian. i'm just going to leave it there. i think it kind of speaks for itself. the federal reserve did not hike. really citing and adding the new information about global economic and financial developments and we'll have to ask the fed chair, janet yellen, when those markets -- when she sees those markets or those concerns clearing because clearly there's not much concern in this statement about the u.s. economy. brian? >> all right. steve liesman, wow, the news there, the federal reserve to reiterate not raising rates. citing global concerns. there is likely your china fears. by the way, the market not reacting at all, believe it or not. the dow is up 68. it was up 50 or so -- >> keep in mind going into the decision we had an s&p up 35 points. we had a russell 2000 which would be most impacted by rate increases and that was up 2% prior to the decision.

some might argue the reaction was already built into the stock market in previous sessions here. >> eurodollar at 114. we're seeing the dollar weaken. basically where it was before the decision came down. let's go back to david. let's go back to bob. bob, are you surprised? are you disappointed by the fed? >> i'm surprised at the language that the absence of notable improvement in the employment situation in the united states and so much focus overseas, not that that's illegitimate. it is definitely legitimate. they go there. i'm not surprised they didn't raise. i said before the decision i hoped they would raise them. now we start again. uncertainty, when are they going to raise rates. >> and, bob, this is the issue, okay, i want to say i was wrong. i blew it, fine, whatever. here is the problem. the fed keeps citing uncertainty. is the fed itself the greatest uncertainty? >> no question about it. i think if you make a list of the reasons that we had

consternation in the capital markets in august, you have to put uncertainty around the fed. you'd have one fed governor said we'd probably raise them, the next speech was, no, not really and all that back and forth. so, yeah, the uncertainty the fed is on the negative list without question. >> let's bring in anika khan. what do you make of the decision and how the decision came out because we don't have a unanimous decision. >> it's clearly surprising. we were on the end where we thought the fed was going to hike 25 basis points today. there were a whole host of reasons why we think the fed was going to move. listen, these are academic economists who have put forward a framework that starts with cumulative labor market progress and wage growth, and we've seen some of that. but clearly inflation is the largest part, and now we are hearing about the uncertainty overseas, which definitely plays

a role. and so, yes, we are a bit surprised, but it is a risk if the fed moves early. >> you know, anika, when we look at the previous statement from the july meeting, the world global was not used once. steve liesman talking about global concerns. does this mean in a way that our financial markets or at least the federal reserve and the benchmark lending rate is going to now be held hostage to china? >> you know, it is an excellent question because if you look at the direct effects of china and it's impact on u.s. real gdp, where the fed's mandate is, labor market conditions and inflation stability, you see that there should be a very little amount that we should be placing on china. this opens pandora's box to a whole host of other questions. is there something else that we don't know about that could potentially lead us into this?

now, here is the point i want to make overall. moving in a low inflation environment is not unprecedented. however, these global issues is something that we've not heard to date. of course, back in june '99, we saw the fed move in a low interest rate environment, so that's not the problem. all of the weight, of course, is on the global economy. >> right. all right, guys. stay put there. we do want to get full market reaction here and visit the trading floors at this point. bob pisani, want to go to you first because what's interesting about the statement is that you don't have a hike, which is good for stocks. at the same time you don't have a hawkish statement which may mean that there could be trobl ahead in the eyes of the fed. >> yes. and what's happening is the markets are weakening a little bit here and one of the arguments was if the fed doesn't hike, then it implies that they are actually concerned about global growth and what everybody down here is talking about is the sentence that's in here which they never had before,

recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. recent global, global is the word that people are talking about here. so if you put up the s&p 500, we've actually come down a bit. we are up about nine points. we've come down about 11 points. let's take a look at some interest-rate sensitive groups, for example. lower rates. dollar has been a little weaker here. if you put up the bank index, kbe, there's the dollar index. the dollar has weakened. there's the bank stocks, interest-rate sensitive group. all the major banks are down. that would be understandable. less chance of a rate hike not good for banks. interestingly, reits went up initially and have now come off the highs. that's kind of interesting. counterintuitive here. no hike implies a little worries on china, so you might want to look at some of the global material names. put up freeport-mcmoran for example. initially we didn't have much of

a move, now a small move to the downside. big copper and gold player. how about big global industrials, general electrics of the world, ge was rising going into the report at 2:00. as you can see here, it's come off since that number happened at 2:00. finally, the vix, which had been trending downward ever since it hit over 50 on the 25th, the vix has now dropped to essentially 20 which is an area where a lot of people sort of think it's neutral. 20 is the historic range for the vix over the last 10 or 15 years. 15 or 16 we've seen recently is a bit of an anomaly. overall the markets are slightly lower. melissa? >> thanks, bob. >> let's go now to dom chu. dom, you just tweeted out the markets are not panicking probably because we're basically in the same place we were 30 minutes ago. >> we were. and there are a lot of traders out there who have argued we have been positioning kind of ahead of this for a while. we talked all week about this

idea that the interest rate sensitive sectors like utilities, like the reits that bob was just talking about, that they had been showing some signs of life. so they've been in down trends for a while but all of a sudden you started to see them getting bought up a little bit over the past few days. a lot of positioning, perhaps hedging in some ways, but let's take a look. you can see what the dow jones jones industrial average, we are negative right now. we were going higher after the decision. we came back down. the range may appear volatile based upon the chart you're seeing, but overall it hasn't been a massive move. traders are absorbing this information right now and who knows how much of this is algorithmically or computer driven as well. you can see what happened to the 10-year note and the 2-year note. interest rates did tick lower here, again moving lower rather sharply. so people buying up treasury bonds now that the threat perhaps at least for the time being of those higher rates has been taken off the table temporarily. and then, of course, you want to see what's happening with the tlt, the etf that tracks the longer end of the treasury

curve. that's 20-plus year maturities. those bonds are getting bought up. that etf is ticking higher as well. those are some of the trades we were watching right now to see how they play out. the first few moments after these announcements, a lot of positioning is getting done and undone. >> and on that tlt, we're 30 cents off the session highs. on that note let's check in with rick santelli on the floor of the merc. >> the one market i would have on my korescreen is the dollar. the dollar index is taking a bit of a hit here. it's down 2/3 of a cent. dom was spot on, even before the announcement we saw rates volatile but mostly to the downside and that continues and, yes, the moves are not huge. here is the surprise that i have, china. when i think china, i think cumbersome, slow moving.

i think for the committee to cite international issues, do they think they're going to change the next meeting or two meetings from now? do you think the battleship china is going to do a full turnaround anytime soon? the guide path of global economy is a glide path that's of a long-term nature. so to me there's a 50/50 call on the fed for the next meeting, the meeting after that. not about whether they raise or don't raise, as to whether they raise or they do qe first. that would be my 50/50 call and are we trading markets? i think a better analogy would be a black jack table. we have the fed on one side, hedge funds and computer traders on the other side. back to you. >> all right. rick, thank you very much. let's go back to steve liesman. steve, they're citing these global concerns. one most read into that china. we've talked about it a lot the last ten minutes or so. do you believe based on what you know about the fed and some of the federal reserve officials that you have talked to, are they more concerned about china exporting deflation or do you

think they might be more concerned about simply the upheaval in the chinese market? because that would seem outside the fed's mandate. >> i think china is a piece of what they're worried about when it comes to global economic developments but i want to kind of echo what rick was just saying and this notion of global economic developments. how long will it take for them to work through the system? their concern when you look at the language about the effect on inflation and possible slowing economic activity, restraining economic activity is the term they use. look at the rate forecast. they're looking at 40 basis points for 2015, down two ticks. 1.4 for 2016, 140 basis points. 260 for -- they brought it down all along and then take a look at the inflation forecast. they brought that down as well. so i think this notion of it being 50/50 for this year, notice they don't hit their 2% target now until 2018.

so that's important. and then you have those two other members saying no rate hike in 2015. now, maybe global develops were to change quickly, but still what the fed i think is going to do is to watch and see how the global developments play their way through the u.s. economic data. >> i want to ask you this because dom chu was making the point that perhaps we're no worse, we're no better off than we were 30 minutes ago. at the same time now all of a sudden rate hikes for the rest of the year are 50/50 because that statement came out pretty dovish. are we, in fact, no better off, no worse off than 30 minutes ago or do things look worse because now it looks like the global economy could impact what's going on here for the u.s. stock market? >> it means the uncertainty is prolonged and uncertainty is not good news. i'd say two things for the equity market. one, it reinforces, i think there's going to be a longer period here where u.s.-based

earnings are to be rewarded and the multinationals continue to struggle. the fed has kind of put their stamp of approval on that. the second thing i would say is we've had a pretty powerful 7% move off the august panic low. maybe this is going to mark the end of that little rally and we go back and continue to heal as a result of what we just talked about. >> all right. bob dahl, thank you. thank you all very much. up next, bill gross is going to join us. we'll give us his take on today's decision. just a reminder, the fed day show is nowhere near being over. in just 15 minutes we will hear from janet yellen herself, perhaps get more insight into why they made this decision. is china really that big of a concern for the fed? should it be? the news conference begins in just 15 minutes. a reminder also the next fed decision comes on october 28th. that's a special day for us because it is also the day that cnbc will host the republican

debate on the economy. something that was barely touched last night. we're going to bring you that the moment that it happens, of course. a lot more to do. bill gross next. the dow barely moving. we're back after this. level of , and there's no going back. lease the 2015 gs 350 with complimentary navigation system for these terms. see your lexus dealer. it's from daddy. sfx: dad's voice i love you baby girl.

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from hearing from fed chair janet yellen, right, brian? >> we certainly are. we're going to brick that yng y news conference the moment it brings. let's bring in jeff rosen. your response and reaction to the federal reserve? >> the biggest headline off of this is the acknowledgment of the global conditions, and really it met a lot of market expectations that the fed was going to be very sensitive to the market developments, but it has opened up a lot more uncertainty here as to how do they proceed going forward if the external international developments have this much influence. the fed doesn't have much influence over those. the bond market action is just a big movement in yields in the front end of the yield curve and a lot of that is also relating to bringing down the dots plot market -- fomc participants' expectations for where fed

policy will be. this is not only a pause in terms of not tightening but a very dovish pause, and i think that's a bit of a surprise to the market at least in the bond market why you're seeing such an aggressive move in shorter interest rates. >> does it make you rethink what you think of the u.s. economy and where we are in the recovery? >> it doesn't. if you look -- >> why not? the fed is basically saying we're going to be on hold because of things going on overseas. we're worried about how that might impacts us here so we're going to hold off. why wouldn't it make you think, you know what? maybe it will have an impact because janet yellen is essentially acknowledging it could. >> what i was going to say is the domestic economy analysis looks pretty good. what we have always talked about is the international risks to that is not so much from the economy linkages. i think one of your earlier guests highlighted what's the linkage to the u.s. from china. it's through the financial market linkages. one of the crucial linkages to the fed is the fed raising rates raises the value of the dollar

and a higher value dollar makes it very difficult not just for china but for all emerging markets to service their dollar denominated credit, and that's really the concern here. so it's not so much the economic analysis that's being impacted. that's actually the labor markets. that's relatively robust. it's the financial market conditions and the financial market conditions tightening. that's what they basically highlighted as to why they held off. >> i will be a bit of a conspira conspiracy theorist. it's going to set off some alarm bells. do you think people were placing bets on the fed or did they become very convinced just minutes before that decision? >> yeah, i saw that as well. the two-year had a big move lower after the statement. we'll see. there's certainly been problems in the past in some of the other economic releases, not really so much the fed. it may just be that the market was positioning in front of expectations. two-year had moved up quite aggressively, so it was a little

more vulnerable to a potential dovish pause here which is what we ended up getting. but whether that was a problem in terms of communications or not, now we have the communications out and it's very clear that is what we got and i think the market reaction in the front end of the curve makes sense for a dovish pause. >> thank you very much for joining us. we'll let you get back to the desk. just a reminder, we are minutes away from hearing from fed chair janet yellen herself. that news conference kicks off to 2:30. a surprise to some, not that they didn't raise rates, just that global concerns really are carrying the day. we're going to carry that news conference live the second it gibbs. let's get another check as we head to break on the markets ahead of janet yellen, and we are seeing a dow that's effectively where it was exactly before the fed decision. the 10-year note moving a little bit but it started moving before the fed. bill gross is yours big guest

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welcome back to cnbc. i'm phil lebeau with an update on american airlines. the ground stop impacting flights in and out of dallas, chicago, and miami, that issue has been resolved. american telling cnbc the connectivity issues that were not allowing people to check in for their flights at those airports and then board those flights, all of those issues have now been resolved, and, again, american flights are back or at least getting back in the air shortly at those three airports, dallas, chicago, and miami. guys, back to you. >> good news for those flyers there. we are a few minutes away from janet yellen but let's bring in bill gross, manager of the janus global unconstrained bond fund. here is my concern about this global worry, if china stays volatile or slows down for months, quarters, or years, does that mean the federal reserve has whiffed and missed its chance because they just said effectively we are beholden to china. >> well, they've gone global,

have they not, brian? you know, global conditions used to be number four on their list, you know, behind domestic inflation, behind domestic growth, behind financial conditions, and now it seems to be global market conditions, not just china, i know you have talked about that in the last few minutes, but emerging markets in general and the strength of the dollar which has basically put pressure on those global economies which reverberates back into the u.s. one of the reasons for not hiking i think was they didn't want to continue increasing the strength of the dollar. remember, industrial production in the united states because of a strong dollar basically has been negative for four to five of the last seven or eight months, and so the u.s. may be doing fine in terms of services, but because of the strong dollar, you know, i think the fed has hesitated.

>> we need punxsutawney phil, we need a groundhog, bauecause i suspect we're all in groundhog day and are going to ask the same question. are we going to get a rate hike in october or december? >> well, depends on global conditions and financial market conditions, what the stock market does. i think so. they've been itching to go for so long and they've basically promised 2015, so i would say yes. what they want to do is start to renormalize to prove that the united states and perhaps the global economy is standing on wobbly two legs but standing nonetheless. so i think they're going to go. what i think is important though is they're not going to go very fast and very far. you know, the fed has brought down its projection for two years from now for fed funds around 2 5/8. i think it will be around 1 1/2 or 1 3/8. the fed to my way of thinking has some realistic thinking to go in terms of where the new

neutral interest rate is going to be two or three years out, and i don't think it's going to be 2.5% like they do. >> the fed does seem to be sort of dovish when it comes to the remainder of the year. a lot will defend on this news conversation that gets under way in a couple minutes. when you take a look at the bond market, do you get the all-clear signal at least for now when it comes to, i don't know, the treasury -- u.s. treasury market, junk market, emerging market debt? where do you go here? >> well, i think the u.s. treasury, the 10-year at 2.20, there's not much there. i think, melissa, all asset prices are over inflated and so where does an investor go? i talked about this, you know, last week with my younger son and with people at a country club lunch yesterday. they said, well, you have to do something with your money. why would investors risk money for 2% to 3% to 4% returns which i think is what is going to

happen over the next five to ten years? i think you can go into relatively safe arbitrageable situations. let's look at berkshire hathaway and warren buffett in terms of precision cast parts. there's a 4%, six or seven month arbitrageable type of spread. i believe in warren buffett. i believe he's going to complete the deal. these situations that offer not 10 or 20 but 3 or 4 that are basically the safe types of deals i think is where an investor has to go, and more importantly the investor has to believe the double digit returns of yesteryear are away. >> are we hearing the bond king is move into berkshire hathaway stocks or buying convertible r bonds? it's an unconstrained fund. you look at an arbitrageable situation -- >> we've got to -- >> precision cast parts at -- >> bill, i'm sorry.

i apologize. >> as you know from our policy statement released a short time ago, the federal open market committee reaffirmed the current 0 to quarter percent target range for the federal funds rate. since the committee met in july, the pace of job gains has been solid. the unemployment rate has declined, and overall labor market conditions have continued to improve. inflation, however, has continued to run below our longer run objective, partly reflecting declines in energy and import prices. while we still expect the downward pressure on inflation will fate over time, recent global economic and financial developments are likely to put further downward pressure on inflation in the near term. these developments may also restrain u.s. activities

somewhat but have not led at this point to a significant change in the committee's outlook for the u.s. economy. the committee continues to anticipate that the first increase in the federal funds rate will be appropriate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term. it remains the case that the committee will determine the timing of the initial increase based on its assessment of the implications of incoming information for the economic outlook. i will note that the importance of the initial increase should not be overstated. the stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate in order to support continued progress toward our objectives of maximum employment and 2%

inflation. i will come back to today's policy decision in a few moments, but first i'd like to review recent economic developments in the outlook. smoothing through the quarterly volatility, u.s. real gross domestic product is estimated to have expanded at a 2.25% pace in the first half of the year. a notably stronger outcome than expected in june when committee participants had submitted economic projections. continued job gains and increases in real disposable income have supported household spending. growth in business fixed investment was moderate held down in part by a significant contraction in oil drilling activity as a result of the large drop in oil prices over the past year. moreover, net exports were substantial drag on gdp growth

during the first half of the year reflecting the earlier appreciation of the dollar and weaker foreign demand. the committee continues to expect a moderate pace of overall gdp growth even though the restraint from net exports is likely to persist for a time. the labor market has shown further progress so far this year toward our objective of maximum employment. other the past three months, job gains average 220,000 per month. the unemployment rate at 5.1% in august was down 0.4% from the latest reading available at the time of our june meeting. although that decline was accompanied by some reduction in the labor force participation rate over the same period. a broader measure of unemployment that includes individuals who want and are available to work but have not

actively searched recently and people who are working part time but would rather work full time has continued to improve. that said, some cyclical weakness likely remains. while the unemployment rate is close to most fomc participants' estimates of the longer run normal level, the participation rate is still below estimates of its underlying trend. involuntary part-time employment remains elevated and wage growth remains subdued. inflation has continued to run below our 2% objective. partly reflecting declines in energy and import prices. my colleagues and i continue to expect that the effects of these factors on inflation will be transito transitory. however, the recent additional decline in oil prices and further appreciation of the dollar mean that it will take a bit more time for these effects

to fully dissipate. accordingly, the committee anticipates that inflation will remain quite low in the coming months. as these temporary effects fade, and importantly as the labor market improves further, we expect inflation to move gradually back toward our 2% objective. survey-based measures of longer term inflation expectations have remained stable. however, the committee has taken note of recent declines in market-based measures of inflation compensation and will continue to monitor inflation developments carefully. this assessment of the outlook is reflected in the individual economic projections submitted for this meeting by fomc participants which now extend through 2018. as announced in the minutes from our july meeting, we are also introducing a modest enhancement

to the summary of economic projections by publishing the median projection across fomc participants. these medians provide a concise summary statistic of participants' perspectives. they should not, however, be interpreted as a collective view or a committee forecast. as always, each participant's projections are conditioned on his or her own view of appropriate monetary policy. reflecting upward revisions for the first half of the year, participants increased their projections for economic growth this year. compared with the projections made in conjunction with the june fomc meeting. the median growth projection is 2.1% for this year and rises to 2.3% in 2016. somewhat above the median estimate of the longer run normal growth rate.

thereafter the median growth projection declines toward its longer run rate. the unemployment rate projections are a bit lower than in june. at the end of this year the median unemployment rate projection stands at 5%, down 0.3% from june and close to the median estimate of the longer run normal unemployment rate. committee participants generally see the unemployment rate declining a little further next year and then leveling out. finally, fomc participants project inflation to be very low this year, largely reflecting lower energy and nonenergy import prices. as the transitory factors holding down inflation abate and labor market conditions continue to firm, the median inflation projection rises from just 0.4% this year to 1.7% next year and

reaches 2% in 2018. the path of the median inflation projections is a bit lower than in june. the outlook abroad appears to have become more uncertain of late. and heightened concerns about growth in china and other emerging market economies have led to notable volatility in financial markets. developments since our july meeting including the drop in equity prices, the further appreciation of the dollar, and a widening in risk spreads have tightened overall financial conditions to some extent. these developments may restrain u.s. economic activity somewhat and are likely to put further downward pressure on inflation in the near term. given the significant economic and financial interconnections

between the united states and the rest of the world, the situation abroad bears close watching. returning to monetary policy, we recognize that there has been a great deal of focus on today's policy decision. the recovery from the great recession has advanced sufficiently far and domestic spending appears sufficiently robust that an argument can be made for a rise in interest rates at this time. we discussed this possible ilitt our meeting. however in light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2% in the

medium term. now, i do not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook. the economy has been performing well and we expect it to continue to do so. as i noted earlier, it remains the case that the timing of the initial increase in the federal funds rate will depend on the committee's assessment of the implications of incoming information for the economic outlook. to be clear, our decision will not hinge on any particular data release or on day-to-day movements in financial markets. instead, the decision will depend on a wide range of economic and financial indicators and our assessment of their cumulative implications for actual and expected progress toward our objectives. let me again emphasize that the

specific timing of the initial increase in the target range for the federal funds rate is far less important for the economy than the entire expected path of interest rates, and once we begin to remove policy accommodation, we continue to expect that economic conditions will evolve in a manner that will warrant only gradual increases in the target federal funds rate. compared with the projections made in june, many fomc participants lowered somewhat their paths for the federal funds rate, including estimates of the longer run normal level. most participants continue to expect that economic conditions will make it appropriate to raise the target range for the federal funds rate later this year. although four participants now expect that such conditions will not be seen until next year or later.

the median projection for the federal funds rate rises to about 1.5% in late 2016, 2.5% in late 2017, and 3.5% in 2018. in 2016 and 2017 the medians are about a quarter percentage point below those projected in june. the median projected rate in 2017 remains below the rate that most participants expect to prevail in the longer run despite the fact that the median projection has the unemployment rate slightly below its longer run normal level and inflation close to our 2% objective. participants provided a number of explanations for their low federal funds rate projectioningprojections. these included the residual effects of the financial crisis which are likely to continue to

constrain spending for some time as well as headwinds from abroad. but the restraining influence of these factors on real activity -- as the restraining influence of these factors on that activity dissipates further, most participants expect the federal funds rate to move to its longer run level by the end of 2018. i'd like to underscore that the forecasts of the appropriate path of the federal fund rate, as usual, are conditional on participants' individual projections of the most likely outcomes for economic growth, employment, inflation, and other factors, but our actual policy actions over time will depend on how economic conditions evolve, which is quite uncertain. if the expansion proves to be more vigorous than currently anticipated and inflation moves

higher than expected, then the appropriate path would likely follow a steeper and higher trajectory. conversely, if conditions were to prove weaker, then the appropriate trajectory would be lower and less steep. finally, the committee will continue its policy of reinvesting proceeds from maturing treasury securities and principle payments from agency debt and mortgage backed securities. the committee's sizable holdings of longer term securities should help maintain accommodative financial conditions and promote further progress toward our objectives. thank you. let me stop there. i'll be happy to take your questions. >> steve liesman, cnbc. madam chair, this notion of uncertainty and economic global developments, is it fair to say that it could be many months

before those global developments work their way through the u.s. economic data and that you would not have the certainty that you're looking for to raise interest rates for many months and perhaps well into next year? >> well, steve, i think you can see from the s.e.p. projections that most participants continue to think that economic conditions will call for or make appropriate an increase in the federal funds rate by the end of this year. four participants moved their projections into 2016 or later, but the great majority of participants continue to hold that view, and of course there will always be uncertainty. we can't expect that uncertainty to be fully resolved, but in light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to

evaluate the likely impacts on the united states, and as i mentioned, the inflation outlook has softened slightly. we've had some further developments, namely lower oil prices and a further appreciation of the dollar, that have put some downward pressure in the near term on inflation. now, we fully expect those further effects like the earlier moves to the dollar and in oil prices to be transitory, but there is a little bit of downward pressure on inflation, and we would like to see some further developments, and this importantly could include -- is likely to include further improvements in the labor market that would bolster our confidence that inflation will move back to 2% over the medium term.

>> sam fleming from "the financial times." could i ask about the next meeting which is in october. do you view that as a live meeting even though there isn't going to be a scheduled press conference at that time? and what kind of developments would you need to see to be confident in moving in the near term? is it more important the financial markets or more to do with the upcoming data. thanks very much. >> so as i have said before, every meeting is a live meeting where the committee can make a decision to move to change our target for the federal funds rate. that certainly includes october. as you know and i have stressed previously, were we to decide to do that, we would call a press briefing and you've participated in an exercise to make sure that you would know how to participate in that press briefing should it happen.

so, yes, october remains a possibility. and we will be looking at incoming developments both financial and economic to try to make sure we feel really that the u.s. economy is doing well. you know, i want to emphasize domestic developments have been strong. we see domestic demand growing at a solid pace, the labor market continuing to improve. of course, we will watch incoming data to confirm our expectation that that will continue, and we, of course, will watch global financial and economic developments. i can't give you a recipe for exactly what we're looking to see, but as we say, we want to see continued improvement in the labor market, and we would like

to bolster our confidence that inflation will move back to 2%. and, of course, further improvement in the labor market does serve that purpose. there could be other things we would see that could bolster that confidence, but further improvement in the labor market will serve to do that. >> jim from "the l.a. times." there were a group of protesters out here before your meeting. there was a similar group at jackson hole. they and others have warned the fed not to raise the rate because -- out of concern that the labor market is not fully healed, wages haven't risen fast enough. what impact, if any, has that had on you and your colleagues in your decision today? >> so we have been receiving advice from a large number of economists and interested groups, and that's, of course, appropriate, and we value

hearing the opinions of many different groups and individuals with different perspectives, but, look, at the end of the day, it's the committee's job tr to analyze the data that we have on the economy to decide how it affects the outlook and to try to deliberate and arrive at a committee judgment about the appropriate path of policy and that's what we did today. as i said, although we're close to many participants and the median estimate of the longer than normal rate of unemployment, at least my own judgment, and this has been true for a long time, is that there are additional margins of slack, particularly relating to very high levels of part-time and

voluntary employment and labor force participation that suggests that at least to some extent the standard unemployment rate understates the degree of slack in the labor market, but we are getting closer, the labor market has improved and, as i've said in the past, we don't want to wait until we're fully met both of our objectives to begin the process of tightening policy given the lags in the operation of monetary policy. >> thank you, kate davidson from the wall street journal. madam chair, do you think over the past two months since your last meeting that you have gotten closer to or further away from the fed's inflation goals? and then separately, you've received a congressional subpoena relating to the disclosure of information from the feds september 2012 policy meeting. are you any closer to complying with that? have you turned over any new

information to congress? >> so your first question was have we come closer or moved further away from our inflation goal. so we've used the same language, which is what we expect to achieve our 2% goal over the median term and i would say although as we say in our statement recent developments seem likely to put some downward pressure we are after all way glow our inflation target, but an important reason for that is that declines in import prices reflecting the appreciation of the dollar and declines in energy price right side holding down inflation well below our target and well below core inflation. we expect those affects to be transitory and with well anchored inflation expectations we expect inflation to move back

to 2%. now, in the intervening period we have seen some further appreciation of the dollar and some further downward pressure on energy prices and that creates a bit of further drag on inflation that i would view as transitory, as very likely to be transitory. so i continue and the committee continues to expect that inflation will move back to 2%. so this should be a small thing. and in the meantime the labor market has continued to improve. so a tighter labor market, a labor market moving toward full employment is one that historically has generated upward pressure on inflation. so that bolsters my confidence in inflation. on the other hand, we have had a long period in which inflation

has been running below our objective. i consider it and the committee does very important that we -- we achieve our inflation objective and defend against inflation that is persistently above our inflation objective and also persistently below our inflation objective. we want to have not only an expectation but a good degree of confidence that that will occur. we did take note in the statement of a decline in inflation compensation and it's hard to get a direct read on inflation expectations out of these measures. they can be pushed down by factors pertaining to liquidity in the treasury and the tips market and other issues pertaining to risk premium, but we have taken note of that and i would say that's something that

has caught our attention and is a factor that we're watching. we would like to have a little bit more confidence, but i would not interpret developments during the intervening period as significantly undermining confidence. and the labor market is really important that as it continues to improve, it has and we want to see it improve further, that serves to bolster confidence. >> and i asked a second question. >> i'm sorry. you asked about the september 2012 leak. we are working very closely with hess financial services committee that has requested information to satisfy their request. we're working very closely with the them. >> "the new york times." the economic projections that you all released today show that committee members expect roughly a three-year period in which the

unemployment rate will be at its lowest sustainable level and yet inflation will not rise above 2%. that seems extraordinary. could you talk about why as a moment ago you said we would expect inflationary pressures when unemployment is at a low level, why is inflation going to be so weak for so long under those circumstances? and does it indicate when you are projecting that basically much of a decade will have passed without the fed reaching its inflation target, does it indicate that you have failed to do enough to revive this economy in recent years? >> well, we've been very focused on doing everything we can to revive this economy and to achieve our maximum employment objective and after we took the funds rate down to zero, as you know, we put in place a number of other extraordinary measures, including forward guidance and large scale asset purchases in

order to speed the recovery and attain both our inflation objective and our maximum employment objective. and, i mean, when you look at the projection you see, as you mentioned that we see sufficient growth to push the unemployment rate -- it's already very close to participants estimates of its longer run normal level. we expect the unemployment rate to fall slightly or at least pa 'tis pants project that it will fall slightly below that level. as that occurs we would expect labor force participation, the cyclical component of that to diminish over time and we would hope to see some decline in the portion of slack that's reflected in high levels of

part-time involuntary employment. now, inflation is going back in our projection to 2%, it takes until 2018 to get there, it's awfully close in 2017 and it's not terribly as far away even next year. we have very large drags from import prices and energy prices and over the next year or so those things should dissipate and the behavior of inflation should mainly if we -- if our understanding of the inflationary process is correct and if inflation expectations are well anchored at 2, which i believe they have, as the labor market heals and as that healing progresses we will see further upward pressure on inflation. that's what we expect. now, it's a slow process, it's

characterized by lags and that's why it takes a few years as the inflation -- as the unemployment rate falls and even overshoots its longer than normal level, it just takes some time for inflation to get back to 2%, but the overshooting helps it get back faster than it worth jies would and it certainly is important for us and i think our credibility hinges on defending our inflation target not only from threats that it rises above, but also that we not have over the medium term that we want to see inflation get back to 2% and we believe the policies we're following are designed to accomplish that and we will do so. >> hi, thanks. elan from the "washington post."

i want to bring up the old thresholds of 6.5% unemployment and 2.5% inflation as the period during which the fed promised to keep interest rates low. that has sort of assumed, i guess sort of suggested that the fed was comfortable with inflation rises above 2% but you just said moments ago that you don't want to wait until inflation actually hits your target before you are ready to lift off. i wonder if you could explain that a little bit. is there a shift in how much inflation the fed is actually willing to accept? >> so let me be clear. 2% it our objective. we want to see inflation go back to 2%. 2% is not a ceiling on inflation. so we're not trying to push the inflation rate above 2, it's always our objective to get back to 2, but 2% is not -- is not a ceiling and if it were a ceiling