corner. >> i think we're going to see them reverse if they make a bad decision, they will reverse very quickly. >> yimy? i'm looking at stocks with a lot of cash on the balance sheet because that becomes more valuable like cisco and apple. >> i'm just happy to be here, scott. thank everyone for tuning in and we'll see you again on the other side. >> because "power lunch" starts now. in one hour we could see the end to an unprecedented chapter in u.s. economic policy. >> we've never gone into tightening with growth this slow. >> if the federal reserve raises interest rates for first time in nearly a decade, the impact of that decision will be felt throughout the global economy in an instant. in the u.s. stocks could move, interest on mortgages and other loans could rise, but so could the savings accounts of millions of americans. >> the risk of not doing it exceeds the risk of doing it. >> but what if the fed leaves rates unchanged for the 56th

meeting in a row while congress and the president argue over taxes and spending? some believe the real power over the economy rests in the hands of one woman, fed chief janet yellen. it's decision day and no matter what happens, "power lunch" has you covered -- and it starts now. >> welcome to a potentially historic edition of "power lunch," every. i'm tyler mathisen outside the mariner he cannels federal reserve headquarters in washington, d.c. mandy drury is at cnbc headquarters, and it is, as i just mentioned, setting up to be a historic day. the fed likely to raise interest rates for the first time, mandy, in about a decade. >> tyler, it's less than one hour away followed by chair yellen's news conference. so what should investors look for in the fed's guidance on the part of rate hike. senior economics reporter steve liesman is live at the federal reserve. steve, i'm sure there's tension

in the air over there. >> excitement definitely building. with no rate hike in almost a decade, it will be difficult to read markets reading the statement and the press conference. here is a problem i call reading markets, reading the fed. first, ignore initial gyrations. they can go crazy as positions are adjusted and it won't show how markets are receiving the news. watch the two-year and the 2-10 spread. it shows whether it will be good for growth and inflation. third, listen for new fed goals. how will it make judgments about those goals being met. here is a guy to reading the statement and listening to gellge julen. if it's a dovish statement it could rates will rise on a gr d gradual path.

if it's neutral it will be data dependent. if it's hawkish the statement could mention normalization and it could drop the part about rates being below normal. a bit on how historic this is, guys, here are some of the numbers we've been bantering about. six years and six months since the recession end. seven years since the fed has been at zero. 11 years 6 months since the last tightening cycle. i talked with one younger person today who said she can't remember ever earning anything in a savings account. if the fed follows through today, it will be a quarter point higher which won't get her a cup of coffee in manhattan but maybe she can get a cup of coffee once the fed gets up to 1% or 2% whenevers that and that's really the real question we'll be looking for and listening for today. >> steve, i heard yesterday that something like one out of five money managers in business today have never even lived through a rising interest rate or been practicing while that was

happening. we have heard earlier today jeffrey gundlach moments ago and we'll hear it a lot this afternoon about the dot, and that is basically as i understand it the fed's projection of what it thinks interest rates will be going forward. explain that and explain why those dots are going to be so important today. >> a new innovation in fed transparency, tyler, has been that the federal reserve now tells us in aggregate and individual dots where they think interest rates will be this year, next year, 2018 and for the long run. that average, that median is the median of the federal open market committee and it tells us where they think rates are going. we expect the average or the median to come down to reflect the fact they haven't been raising this year. so we're looking for the outlook or the path of the rate hikes from the fed itself to be a little bit more dovish, but the market, by the way, is even more

dovish than that, and, in fact, over time, tyler, the fed has come more to see the world by the market's view than the market has come to see the world by the fed's view. >> very interesting point. steve, we'll be checking back with you i'm sure many times this afternoon, steve liesman, down here in d.c. with me. >> never has a dot held so much weight. let's take a look at what stocks are up to. the dow is currently holding just marginally in positive territory along with the s&p and the nasdaq but they really have lost quite a bit of steam ahead of the fed decision because the dow was up by triple digits earlier on in trade. oil is also sliding on a supply build, crude is currently down by 4%. brent crude down by 3%. treasury yields are moving higher. the two-year yield in fact ticked above that 1% mark today. it's currently just below it but nonetheless it did this morning hit its highest level since may 2010. the five-year yield is at 1.742 and the 10 year at 2.307%. those are the facts you need to

write down ahead of the big decision. >> ty? >> thanks, mandy. there are a lot of changes that need to be implemented immediately if rates do rise. hsbc's chief u.s. economist kevin lowe began here with a closer look into the mechanics of a rate hike. kevin, good to be with you. how does the fed do it? >> well, that's a very important question, particularly today for financial markets at the front end as we say, the short-term money market rates. the first thing the fed will do will announce a higher level for the interest they pay on excess bank reserves. right now it's 25 basis points. they'll move that up to 50 basis points. that's certainly the expectation. but just as importantly, the fed has a facility called the overnight reverse repo facility in which they take cash, secure it with treasury securities, and then buy back those securities the next day effectively paying interest on cash. they'll raise that rate as well.

right now it's 5 basis points. they'll probably announce a 25 basis point level for that. that effectively creates a corridor, 25 basis points at the bottom, 50 basis points at the top, a corridor for the fed funds rate which is their target. now, i think everyone in the market, particularly in the fixed income markets, understands this and knows what's going to happen. but we'll have to see how it actually plays out. the fed funds rate will move around inside that range, and where it finally settles will be important for trading at the front end of the market. >> and where do you think it will settle and where do you think it might be a year from now, kevin? >> well, we think the fed funds rate will settle in at about 3 3 basis points, 20 points higher than where it's been trading the last several days. as for a year's time, that depends on the overall thrust of policy. we expect maybe two more rate hikes next year, another 50 basis points.

that would take the rate up to 63, 64 basis points. now, that's less than the fed members themselves are projecting, and steve liesman had mentioned that. what's important today is not the rate hike. the rate hike is already built into the market. what's important today is the forward guidance. will they change their guidance, and if they do, how. what kind of conditionality will they provide or indicate will be important for them going forward? that's really what the markets are looking for today. >> so, kevin, a quick answer here, we hear about them raising the fed funds rate from 0 to 0.25, but you just said that rate will probably be something like 0.32, 0.35. why the discrepancy very quickly? >> well, right now the fed has set a range, not a point. they say 0 to 25 basis points for the fed funds rate. so it's not zero. it's actually been trading at 13 basis points for the last several months on average. >> ah-ha.

>> so they're going to lift this range by 25 basis points. you might think the fed funds rate would go up exactly by that much. to, say, 38 basis points, an additional 25. >> right. >> we think it will trade a little bit toward the lower end of the range, closer to 33 basis points. >> interesting. >> that's not settled yet. it could be near the higher end and that will be important for where short-term rates settle. it's a difference of about five or six basis points but for people trading the front end of the market, it's quite important. >> kevin, thank you very much for taking us inside those numbers a little bit. kevin lowe began, chief u.s. economist at hsbc. >> well, bond fund titan jeff gundlach speaking with scott wapner on fast money halftime report. what did he snay. >> i think like many in the market, he is resigned to the fact the fed is going to make a move today but given that's what's happened in crude oil and

commodities and certainly high yield, he still doesn't think they should. >> what's the purpose of raising rates today with all of these kae indicators weaker than they were three months ago and you gach the reason for not raising rates primarily that these indicators were weaker. so i think the fed is raising rates because they promised they would in 2015, and they just can't do it one more time to just fail to deliver on the type of rhetoric that they've given while maintaining credibility. >> he did say, like you guys talked at the top of the program with tyler outside the fed, that the most important thing that comes out of today will be those so-called dots, where the members of the federal reserve see interest rates over the next year or two and how it intends to get to those targets. he also said he does expect the junk bond market to get worse, but importantly did not say that he sees another 2008-like crisis coming as a result of what's taking place in the junk bond

market. he has had some very strong statements over the last couple weeks about that fact, talking about that while high yield and the bond market is melting down, that the stock market is in his words whistling through the graveyard, that it's so similar to 2007 that it is scary, but that a little more in context in our interview. >> and a you spoke to leon cooperman. >> and that makes the market. he says some opportunity where others see perils. he says he sees in terms of stocks. you will see total returns of next year maybe in the 7% to 8% range and like mr. gundlach and many others he expects the fed to go today. >> okay. they kind of painted themselves into a bit of a corner. >> i think everybody has. >> thank you, scott wapner. coming up on "fast money," the new bond king, vanguard's greg davis, he will be live in a cnbc exclusive interview. he's going to be tackling the fed decision and much, much more. that's 5:00 p.m. eastern on

"fast money." so as you probably know, we're 48 minutes away and 16 seconds. the countdown is on with the fed's rate decision set to drop at 2:00 p.m. eastern. fed chair yellen's news conference is 30 minutes after that, but we're going to go inside the fed's head with former fed vice chairman alan blinder. you're watching cnbc. we're first in business worldwide on a historic day. surprise!!!!! we heard you got a job as a developer! its official, i work for ge!! what? wow... yeah! okay... guys, i'll be writing a new language for machines so planes, trains, even hospitals can work better. oh! sorry, i was trying to put it away... got it on the cake. so you're going to work on a train? not on a train...on "trains"! you're not gonna develop stuff anymore? no i am... do you know what ge is?

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welcome back to "power lunch." we're only 45 minutes away from the fed's decision on rates. how might a rate hike impact the banks? after a series of consecutive increases say when it reaches 100, bank of america says net interest income rises 11%. jpmorgan here by 7%. and here behind me, citi and morgan stanley at about 4%. interesting to know this because everyone talks about how financials would benefit from a rising interest rate environment but how much, of course, gendeps on the bank. >> as we count down to the big fed decision at the top of the hour, let's bring in alan blinder, former vice chairman of the federal reserve, also professor of economics and public affairs at princeton. mr. blinder, good to have you with us, as always. back in september, the last time we talked, you were prescient. you didn't think the fed would move and you didn't think they should move.

you were right. what do you say today? >> well, i think like everybody, i think they're almost certainly going to move the range up 25 basis points. at this point it would be a total shock if they don't. i read this morning that 90% of market people think they will. i don't know what the other 10% are thinking, to tell you the truth. >> and do you think they should? we just heard from jeffrey gundlach that he sort of thinks -- obviously a prominent voice in the bond world, in investing overall -- that they shouldn't move based on dat ta t they will move based on the fact they have promised it for so long and to back away from that would affect their credibility. >> i think there is something to this notion they were acting because they promised they would act but much more important from that from the macro economic point of view rather than from the market technical point of

view, around now is the right time. now, could that have meant last september? yeah, it could have. could that mean today? yes, i think it will. could that mean march? yes, i think it could. something in that range i think is about the right time to start this process. remember, this is just the baby step. the fed probably has something like 300 basis points to add to the funds rate starting today, and we're talking about 25 basis points. so, in fact, from the point of view of the economy, within a six-month range or something like that, the exact timing isn't really very important. >> take us inside the meeting room, alan, if you would. has the vote already been taken? was it taken this morning? was it taken yesterday? what is the nature of the voting and how important is it for this to be a unanimous decision, and do you think it will be?

>> i think the vote was probably -- let's see, it's about a quarter past. the vote was probably taken around noon or shortly thereafter, something in the noonish range. that gives time to prepare the press statement and do other things that they need to do. my guess, it's a pretty strong guess, there's always the possibility of surprise, is that this will be unanimous, and that doesn't mean everybody on the committee is of one mind and totally agreed. as you know, there are some hawks on the committee, one of whom is a voting member, jeffrey lacker who thought we should have done this long ago. there are some doves that are not too keen on the idea of going today. they'd rather wait, but i think because it is such an important event, first rate hike in nine-plus years, janet yellen will ask for and will get

unanimity, so i don't expect any dissents to be registered. >> professor blinder, thank you, as always, for being with us. alan blinder. >> the fed is expected to raise rates for the first time in about a decade today, and that decision is only 41 minutes away. could we see a sudden spike in volatility for stocks? are the exchanges ready? the head of the ni yse which jo us to answer those questions next. but i work with veterinarians. how do you do that? i help them analyse over one hundred thousand pages of medical studies. that's great... 'cause they can't exactly tell us what's wrong with them. isn't that right, rosco? rosco. who is a good boy? who is a good boy? you are. yes, you are. watson, i think you need to work on your dog voice.

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. welcome back to "power lunch." i'm tyler mathisen in washington, d.c. beautiful day for a rate hike, folks. wow, i'm telling you. or not. i'm outside the federal reserve headquarters gearing up to be a historic moment. policymakers are expected to raise rates for the first time in almost ten years. we'll know in just over 30 minutes when they do release their latest decision followed by fed chair yellen's news conference about a half hour after that. let's see how the bond market is setting up for it. rick santelli is out at thec me. hi, rick. >> hi, tyler. we see all rates are a bit higher. here is the chart. i think 5s are what you want to watch. the high yield for the year around 178. that's key. the same point for 10s on the same day the 10th of june is 248. further away but still pay attention, and if we look at the

jnk, jeff gundlach was talking about how can the fed raise? he's right. look at the jn ksmk, lowest lev since may of 2009. but why is junk down there? because of the fed. they caused it. this is the reason they're rating. there's a lot of room above 100 and there's a lot of consolidation under 95. consider that after the rate announcement. mandy, back to you. >> bubblicious is our word of the day. thank you very much. of course, we're about 36 minutes away from the possibility of serious volatility for stokcks. is the nyse ready for it. bob pisani is with the head of the exchange tom farley. >> here is the man in charge, mr. farley himself. we're expecting a lot of volume on the fed and on quadruple witching. it will be a confluence of big volume. is the nyse ready?

>> absolutely we're ready. it's an eerie calm before the storm. today's volume is average if that but certainly we're expecting more volume after the announcement and in the next few day approximates. >> is there anything special you do in anticipation of this? this is a little bit unusual to have a fed meeting and a quadruple witch. there's some expectations depending how the fed gives their opinion, volume could be very, very heavy. >> we've been in a heavy volume environment really going back to august. we've had a couple 9 billion share industrywide. it's important to put it in context. that's far fewer than traded during the height of the financial crisis. we work with our customers, we're well prepared. >> i know you're not a pundit on the fed but you speak with ceos every day, you bring them down on the floor. what do you think corporate america wants to hear from the federal reserve today? >> i think it's simple. they want certainty. we've been in a very long period of uncertainty and we keep looking at are they going to raise rates in september, are

they going to raise rates in december and what is the glide path going to look at? when you talk to ceos they say give us certainty. a ray of sunshine is we'll have a good deal more certainty in several respects next week than we did this week. we had more certainty about oil exports. it looks like there's an agreement to make sure the federal reserve doesn't shut down at least until next september, and now with today's announcement hopefully what executives want for, which is certainty, or wish for, they will have that. >> assuming we get some kind of certainty, what do you anticipate will be happening in the markets at the end of the year. i know you're not a stock market prognosticator but you watch the markets like i do. we've had a lot of discussions about them. where do you see markets after the fed. >> there's actually a lot of good tames. traditionally in a rate tightening environment you see volatility. we've already seen that since august and i see some really positive signs. our pipeline going into 2016 is really quite good. we had 20 ipos that pushed or

delayed in the fourth quarter and many -- most of those are lining up to go -- >> if the markets improve towards the end of year, we know it was a lousy end to the ipo market. are you saying you have companies potentially ready to go public, maybe see a pickup in the beginning of the year. >> i am, and i am saying it was a lousy end. the fourth quarter ipos were the fewest number we have seen in a decade excluding the 2008 when the whole world was falling apart. that notwithstanding, if you look over the whole course of the year, it was a decent ipo world. we led the world in capital raising. 8 of the top 10 tech ipos but the fourth quarter things really shut down. >> you heard it from tom farley, the man in charge. he's ready for the volume around thinks we might see a pickup in the ipo business in 2016. tyler, back to you. thanks very much, tom. >> thanks, bob. >> all right. thanks very much, bob. the countdown is on. the fed expected to raise rates for the first time in almost a decade. we are now minutes away from that big fed decision. what is your investing strategy

now. we'll tell you about the etf way to play rising rates. that and more when "power lunch" returns to beautiful d.c. in two minutes.

hi, every. i'm sue herera. here is your cnbc news update for this hour. at a rally in omaha with warren buffett, democratic presidential candidate hillary clinton proposed expanding the buffett rule to raise tax rates on the wealthy. the buffett rule says millionaires should pay at least -- the white house reacting positively to a deal to fund the government saying it met president obama's priorities without including hundreds of needless ideological riders, end quote. gop presidential candidate marco rubio campaigning in iowa giving a stump speech near des moines. he warned that americans expect rigorous monitoring to stop terrorist plots and he will continue his campaign in new hampshire later today. and "star wars" fans in london gathering this morning to see their favorite stars walk the red carpet. the london premiere of the movie bringing fans from all over the

country. the new movie is the seventh in the series and the first in the new sequel trilogy. it premieres in the u.s. on friday. may the force be with us. that's the news update at this hour. mandy, back to you. >> the bar is so high for that one. i'm really worried. it could be a flop. i shouldn't say that. sorry. all those fans out there. thanks, sue. we're just half an hour away, less than half an hour away from what many people expect will be the first fed rate hike in nine years. let's take a look at the stock market first of all with the dow, the nasdaq and the s&p moving marginally higher. the dow was up by 165 earlier on in the trading day. and among the best performers on the dow are goldman sachs, nike, and ibm. let's look at the financial spdr spdr xlf moving up half a percent. a lot of focus lately on the high yield bonds and the two etfs that track that. they are both just very slightly

higher as we speak. oil is giving back some the ground it picked up over the past two days after bigger than expected increase in inventories. that data came out this morning. the wti is down 4% at $35.93. gold prices are closing right now. gold is managing to move higher by 15 bucks. it has fallen about 9% though year-to-date and, in fact, this month has been plumbing six-year lows. let's show you some of the other metals. silver, copper, palladium and platinum are all moving higher. the dollar is on the back foot. >> the slide in oil eating in the market rally but a rate hike mi support crude prices. joining me is jamie foxx and michael farr. gentlemen, great, as always, to see you. i know that you both agree that you think the fed will move.

i know that you both agree that more important than whether it moves today, it's all about that pace, about that pace, no treble. what do they do going forward? but let's focus on what you think the market will do by way of reaction this afternoon. >> i think that you probably see a little bit of volatility. we've seen the market go up a great deal coming into this meeting, coming into this news. we were up strongly this morning and have come back to about flat. now, i think that's more oil than the fed, but as these fed minutes are released, the telling signs i'm looking for are going to be that scatter gram chart. those dots of the fed governors' expectations for rates a year out. i expect them to come down, which is going to indicate a further dovish tone, and if there are any dissents on this vote, that's more dovishness. i think that leads to a rally. >> what do you think the market would like to see or hear this afternoon, jamie, from the fed chief? >> i think just getting the initial rate hike complete is very good for the market, just to get that out of the way.

we have been dealing with are they going to raise or not going to raise all year long, so that's very positive. if you look at the 13 times interest rates have started to rise since the 1950s, if you look at the market over the next 12 months, it's actually up about 9%. if you go out to over 24 months, the market is up 15%. no matter what happens in the immediate aftermath of the decision today, markets are actually poised to go up over the next 18 months. >> yet a tightening cycle typically does underperform an easing cycle. we don't want to celebrate too much here. >> yeah. if -- do you both think that the market will be higher a year from now, the stock market that is, higher a year from now than it is today? >> a little. >> not meaningfully higher but definitely higher, maybe 5% to 6%. >> so let's zero in on a couple of the sectors that you like, jamie. i know you like health care and some others, and you have some defensive choices as well. go ahead. >> i like health care. if you look at the times that

interest rates have risen, health care has tended to outperform. financials are the obvious choice. interest rates going up helps banks and financial institutions. one of the things you can look at are energy. if you look at energy prices over the last year they can declined precipitously. however if you look at the companies, exxonmobil or chevron, they are trading at lows not seen since the 1990s. there's a lot more to go and the prices of the sox have overshot to the downside. they're definitely worth a look at this point and the difficult dinds a dividends are safe. >> i like health care. i like some of the consumer staple stocks. i like some of the technology stocks. even some of the industrials that have been beaten up. when you see leadership become this narrow, everybody talking about the f.a.n.g. stocks, the top 20 stocks are up an average of 59% the past year. the other 480 are down 3%.

so when you see a change and a shift, we should see leadership broaden and we should see those f.a.n.g. stocks come lower. >> let me get to another timely point and that is high yield. we've been hearing a lot about it. there's been a crisis in the high yield marketplace. you say the fed does not bear responsibility for that. you dissent a little bit, explain your poe positions. >> i think it would have been easy to blame the fed if they had gone in september. they raised in september, immediately we had a high yield failure, and that didn't happen. there's been a problem at high yield. we're at the end of a credit cycle and that is change is going to have with it some trouble. high yield bonds won't disintegrate all at once. it will be limited to the bonds issued in the -- >> and your view is by keeping rates so slow for so long, that drove investors into high yield and that the market got frothy as a result. >> yeah. basically i agree with you, but

i think it was the cheap dollars and the ample fed dollars that fueled a lot of those excessive kind of junk bonds deals. a lot of the companies, particularly in the energy space were able to fund growth and opportunities because of the low rates. they did, and then when the energy prices have come down and some of those businesses are drying up now and having trouble, struggling to perform, you're seeing a lot of credit pressure. inability to meet coupon payments. >> even at those low rates. >> if your revenue stream goes away -- >> you have a problem. you lose your job, you're going to have a hard time paying a mortgage. >> there you go. >> i got it. gentlemen, thanks very much. >> thank you, tyler. >> appreciate it, jamie and michael. go to powerlunch.cnbc.com to see the sectors that michael is avoiding right now. that's powerlunch.cnbc.com. let's take a look at u.s.

treasuries. yields are higher ahead of the big fed decision. how should fixed income investors position themselves in a potential rising interest rate environment? mandy, over to you. >> let's bring in jeff rosenberg from blackrock. good of you to join us on this big day. i think we're all feeling it's not so much about the hike today. it's more about what the fed signals for down the path and essentially taking the sting out of any hike they do. how high is the risk for miscommunication, that the market could misread or latch onto the wrong thing. >> that's a great question, mandy. we've seen many fed meetings where communication mistakes have been made, and this is a situation where the fed has to tread a very narrow path between justifying its movement off of zero interest rates, celebrating the recovery in the economy, but still not signaling so much confidence that they threaten a

faster or more hawkish signal of faster increases in interest rates than the market expects. so that's a pretty difficult communication challenge. we've certainly seems times in the past where the fed has failed in that communications challenge. so that's going to be really the key issue coming out of the meeting, really left of the statement and ep the statement of economic projections and the dots plots. everybody expects the dots plots to go lower. it's really going to be what happens during the press conference and how does she field the questions. what are her concerns about the outlook. how bullish on the economy is she. where does she stand with respect to her past statements on the labor market. have any of those things evolved, and does she emphasize her concerns around financial market conditions, around the issues that you highlighted earlier around the high yield bond market. >> right. >> any of those kind of concerns that get greater play and greater focus will highlight her dovishness and that will ease the market's concern.

>> it sort of sounds like we're wanting a dovish tightening which is a bit of an oxymoron but what could be the best case scenario for the bonds? >> i think the best case scenario is the fed delivers on expectations. where markets have been disappointed, where there's been greater volatility, the taper tantrum, a couple years ago the issue was the surprise. markets hate surprises. so the market has built in expectations for the dovish hike, and if the fed can deliver on the dovish hike, that's going to be the best outcome for both bonds and risky assets in the fixed income market as well as in stocks. >> a quick word on the high yield market, it's not just the high yield market that is spreading. we're seeing some pressure in the investment grade corporate bond market as well. what's your feeling on this and how it could shape up? >> well, it is a much broader issue, and, you know, the market, the media can only focus on one thing at one time. one thing i haven't seen anybody talk about today which we're talking about in the market is the downgrade to brazil, below

investment grade. at the end of the year with the significant amount of debt outstanding, this is another big issue. what it highlights is the issue that is face the credit market and fixed income investors, the outlook for 2016 is a much bigger thing than just one focused issued around commodity-sensitive issuers in the high yield market. this is a much bigger story. the story is the implications of the xlacollapse in the commodit price bubble. it's a longer run story and certainly those questions, if they come up and how she addresses them, will be critical to the dovish tilt the market is expecting. >> certainly not an isolated issue. jeff rosenberg with black rock, thank you for joining us. how can you invest and make money while interest rates are going up? there's actually on etf that does just that. the ticker symbol is rise. we'll talk to the man who run it is. as we countdown to the fed decision, we're 18 minutes and 29 seconds away.

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if you've been watching cnbc, you would know there is one stock we've been watching keenly and that is chipotle. the shares are down more than 20% since its e. coli crisis began in october. today it's up by 0.7%. but tonight on "mad money" jim cramer will be speaking with chipotle's co-ceos. >> after years of holding short-term rates near zero, the fed is widely expected to start raising them today and not surprisingly there are a handful of etfs out there that offer bond portfolios, a buffer against rising rates. generally when rates go up, the price of bonds and those bond fund shares go down. it is including the aptly named rise etf run by our next guest, bryce doty. welcome to "power lunch," mr. doty. good to have you with us.

>> thank you. >> how does your fund make money in bonds when most bond funds don't as rates rise? >> rise is specifically designed to make money as the yield curve flattens. with the 2 and 5 year yield rising it will do the best. the reason we've structured it that way is because that's what we expect the yield curve to most likely do when the fed raises rates. so a lot of our clients when they said they're worried about rates going up, they're really worried about an increase in fed funds rate by the fed. the 2 and 5-year yield move the most typically when the fed changes fed policy so that's why we focused on that part of the curve. >> and you achieve that negative correlation by doing what? investing in what kinds of security? >> we're specifically primarily shorting 2 and 5-year treasury futures contracts.

so as the value of bonds go down as rates go up, sings we'ce we' shorting the futures contract, the fund will appreciate as rates go up, and we do that enough times in order to achieve a negative 10-year duration on the fund. so for very small allocation of a traditional bond portfolio into rise, you can significantly reduce your overall interest rate risk. just as a rule of thumb, it only takes about a 15% allocation to rise to cut your interest rate risk about in half. >> that kind of answers my question. i was going to ask how does it fit into a broader bonds allocation strategy, bryce? >> right. if you look at the -- right on the home page of the website of rising rate etf.com, it has a little calculator on there, which is a useful tool for bond investors to see just what can happen to their bond portfolio when rates rise. you simply put in the yield and the duration of your portfolio,

and then you can put in whatever percent you want to allocate to rise and see the difference. you can quickly see how much your duration declines, how much interest rate risk you're hedging. >> this is a brand new fund, isn't it, bryce? it has not really been tested in the marketplace. but i assume you have been doing back testing to assure it will work. thank you for blowing the horn out there. go ahead. >> we started a strategy for institutional clients over three years ago, and so it survived the rating downgrade by the government and the taper tantrum, so it's been vetted and it's been through some cycles, but you're correct we just recently wrapped that strategy into an etf to be used for a broader audience of investors. a lot of people can't do directly into a futures brokerage account, so here they have another avenue to get that same kind of protection or insurance against their portfolio. a big reason for why we started

doing it three years ago was because bond investors hate volatility. they might be down 5% or even 10% and be fine but if they're down just 1% in bonds, it's a problem. here by adding a little bit of insurance it gives them some peace of mind. it's going to be a very -- >> interesting idea. >> it's a different way to think about investing in bonds with rates going up. >> we've got to leave it there. >> sure. >> thank you very much for joining us, bryce doty. very interesting. ty? >> all right. the final countdown is on, mandy. just minutes away of course from the federal reserve's decision on interest rates. it happens right at 2:00 p.m. eastern time. don't miss it. "power lunch" will be right back. t the td ameritrade trader offices. ahh... steve, other than making me move stuff, what are you working on? let me show you. okay. our thinkorswim trading platform aggregates all the options data you need in one place that lets you visualize that information for any options series. okay, cool.

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welcome back to "power lunch." we're only about 8.5 minutes away from what could be a very historic first rate rise in many, many years. in fact, brian and ty here, here is the interesting thing. another factoid. it's also the seventh anniversary to the fed's move to the zero bound back on december 16th, 2008. how is that for rounding things out? over to you, brian.

>> yeah. listen, it's been nearly 80 fed meetings, about 60% gain on the dow jones industrial average. by the way, a 55% decline in the yield on the 10-year note, tyler. not to make it too personal, my daughter was two years away from kindergarten the last time fed raised rates. she's now in middle school. >> yeah, incredible. we're only ten seconds away. >> my son was barely born. >> on that note, brian, take it away. >> all right. tyler, mandy, thank you very much. all right. we're going to take a very short break and we are going to be back with a huge fed show. could we get the first fed rate increase in 9 1/2 years? we'll know in five minutes time. we'll be back with more right here on cnbc. ♪

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after 9 1/2 years and nearly 80 meetings, the day may finally be here in minutes. the federal reserve may raise interest rates for the first time since june of 2006. hello, everybody, and welcome to this fed special show. we are less than five minutes away from the fed decision and wall street is betting there's an 80% chance we will get an

interest rate increase. the key question, how will the markets react if we do? and how will the markets react if we don't? melissa lee is with us. we have a full line yaup, as always, folks, and here is how markets are acteding ahead of the fed. the dow jones in a holding pattern as you might expect. we're up 60 points right now. the markets on hold waiting to see what the fed will do. the s&p and nasdaq are up by 0.4%. with us bob daul, kevin kelley, on set with us we're pleased to have scott minerd from guggenheim partners. in the green room you told me you thought this was the most important fed meeting in a decade. why and what do you expect? >> we're finally going to move off the zero bound. the fed is in uncharted water. the amount of reserves will have to be taken out of the banking system. we have never attempted anything

like this in the history of monetary policy, and so the events that are about to unfold in the coming weeks and months are going to tell us whether we can actually pull this off successfully or that the fed will create some sort of additional problem in the economy. >> so your point is this is not just an interest rate hike if we get one as we have had in the past because we've never had a fed balance sheet this big. >> right. at the end of qe2, interest rates were at zero. at the end of qe31.5 trillion of asset reserves later, the interest trait was at zero. will we have to pull out a trillion or $2 trillion of reserves and we've never done that. >> bob, your expectation for the fed today? >> with the 80%, maybe it's 90% or more. let's put it this way. if the fed doesn't raise rates, they have massive credibility

problems. we had a taste of that a little bit in september. look, we know in the 12 months following the first fed rate increase stocks usually go up and interest rates usually go up and bonds, therefore, go down. i know this cycle scott just reviewed is very different, but i suspect we will see some similar reaction. >> david, with he have this -- we have this magical pocket of time between the statement and the news conference. what are you going to be scouring the statement for, what are the risk statements in the statement? >> it's not so much the statement as the dot plot. the key question is will the members of the fomc still see four rate hikes next year. that would be an extraordinary slow pace of tightening. usually you raise 2.5% per year on average. this would be 1% per year and the question is does the fom kc have the nerve to stick even to that. if they say four rate hikes, i think you will get a positive

market reaction because we have some certainty but i think the other thing is that janet yellen will probably be very cautious in her remarks, and so that will cause people to doubt whatever the fed -- it looks like the fed is planning to do. i think there will be a lot of qualifiers in what she says this afternoon. >> david, this is scott. you know, i agree with you. i think that anything that in the statement that indicates that the fed is going to go slow is going to be good for the markets, but, you know, i do think that the pace of rate increases could actually be slower. we anticipate next year that we'll probably get only three increases in the fed funds rate. so if that's the case and the market expects something slower, then i think we have a lot of room to go up. >> very quickly, scott, normally if the fed hasn't raised rates that's seen as accommodative and loose policy and good news and stocks have gone up. if we don't get one in 30 seconds is it bad news because the fed sees something that makes them nervous? >> i think so, absolutely. it's basically along the lines that bob indicated.

if we don't get a rate increase then that's a signal that the fed is concerned about something, and they've told us they're not concerned. >> okay. there you go. all right. we are just ten seconds away. the dow is up 76. we've got the ten-year yielding 2.3%. oil always in focus here. let's get right now to steve liesman with this historic fed decision. >> the federal reserve raises interest rates by one quarter point. the fed raising interest rates by one quarter point. the new range of the fed funds rate rises to 25 to 50 basis points from 0 to 25 basis points in what was a unanimous decision. i'll read you directly from the statement where the fed said the committee judges there has been considerable improvement in labor market conditions this year and it is reasonably confident that inflation will rise over the medium term to its 2% objective. given the economic outlook and recognizing that it takes time for policy access to affect future economic outcomes, the committee decided to raise the target range for the federal

funds rate to one quarter to one half percent. it said twice in the statement that it expects only gradual increases, that key word "gradual" is in there twice. in the first instance it said the committee expects that economic conditions will evolve in a manner that will warrant only gradual increases. the second time it said the committee currently expects that with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace. the committee says even after this rate hike, it considers monetary policy to be accommodative. now, new language entirely on how to determine future rate hikes from the old confidence that inflation will return to 2%. we have new language. in determining the timing and size of future adjustments to the target range for the federal funds rate, the committee will assess, realize and expected economic conditions relative to the objective of maximum plo employment and 2% inflation. a whole bunch of fact yors

international develop, measurements of labor market. a more complicated language around future rate hikes. on inflation it uses a new phrase which suggests more concern saying in light of current shortfall of inflation from 2%, the committee will carefully monitor. other aspects, it added that the funds rate is likely to remain for some time at low levels expected to reveal in the longer run. that's a dovish outlook. new language on the balance sheet where they expect it to remain at the current level which is to reinvest principle, quote, until normalization of the funds rate is well under way. this is amounting to a very dovish statement here at the same time while the fed is hiking. a couple things on the economic outlook. they say economic activity expanded at a moderate pace. consumer spending, business fixed investment, increasing at a solid pace. housing improved further. net exports are soft and more robust language on jobs saying

there's been further improvement. last time it said held steady. finally it talks about market-based measures of inflation edging lower. more concern about inflation in this thing but, again, confidence is going to move back up. that's just about it except for they did change the dots. i don't know if they have that chart ready for us in the back. the 2017 is down by a quarter point. 2018 fell by an eighth. so 2017 is 2.375 and the long run remains unchanged at 3.5%. the first rate hike since june 2006 with attempts to make it a more dovish outlook for gradual rate hikes in the future. there's that chart right there. >> steve liesman, thank you very much. folks, that historic interest rate decision. let's get market reaction. we've got bob pisani on the floor of the nyse, rick santelli in chicago. obviously the markets have been

well prepped and they appear to be reacting stably to this interest rate increase. >> stable is the key word. you may or may not agree with the fed's decision, but this is precisely where the consensus was, not just on the quarter point raise but, remember, this was a very crowded trade, what we call the crowded dove fed trade. everyone was anticipating that the wording would be dovish and they delivered on that in spades. let's take a look at the s&p 500. we were up about 11, maybe 12 points as the fed announcement was made. you can see we're slightly above that right now but not dramatically so. if you look at other indicators, let's look at bank stocks, for example, they are also modestly higher here. just in the last 30 seconds or so they've moved to the upside a little bit. volatility generally has been down, lower. if you take a look here, the vix, we were at 19 and change and now you can see that's moved down a little bit and it's lower today in general. so bear in mind that 10%

decline, we were notably lower throughout the day. and high yield is behaving today as it was yesterday and not moving that much here in the middle of the day. so the key point here, the key sentence here comes in the fourth paragraph. the committee expects economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate and that's the key word. gradual is perceived to be dovish down here and a lot of people anticipating that word may be in there. bottom line is they delivered the consensus of the markets and you're getting that kind of response. brian, back to you. >> i'll take it, bob. just a couple other pockets of market reaction it is worth pointing out the home builders also seeing a spike on this dovish fed statement and look at the russell 2000. the small caps outperforming the broader markets. let's get straight to rick santelli in chicago with reaction from there. rick? >> well, there is some action, but not a huge amount of action. now, let's start with the dollar index.

it was down a bit, about a quarter of a cent or so, and it's been up as high as up a third of a cent. you see the chart there. it's still holding its gain. now, the rest of the curve, very fascinating. basically 98, 99 going in. they're trading at 100 basis points right now. if you look at 3s, very similar. 5s, i still think 5s are the key. and the key would have been if we took out 178 yield. that was a high closing yield a year from june '10. snugged right up against it and stopped. 10s and 30s right now are basically a little bit lower in yield than they were or close to it. 230. it was 229 and we were right around 302. we're now at 3301 in 30s. so how can we synthesize all this into something simple? i think you're going to get a whole lot more action, but i think we're going to go through the press conference. many like to look at the dots. they make the markets move in between meetings. they're not really accurate when you get to the next set of dots,

but if you're a manager, you want volatility. but i still say the key is how markets look around the rest of the world and when this simmers, how long is the glide path going to be? the notion of one and done being dovish doesn't seem to correlate in my opinion with the timing of the tightening. timing of the tightening really wasn't about strong data. it's about a lot of markets that just -- credit was priced incorrectly as evidenced by jnk, the spread, and libor which over time will be affected as well. the issue is that volatility in those markets is probably the reason they did tighten. zero interest rate policy has consequences, and last week's volatility are those consequences. back to you. >> rick santelli in chicago. rick, thank you very much. folks, just a reminder, janet yellen will explain more about this decision at their live press conference. we'll take that here in about 22 minutes. right now let's get back to our panel. joining us still bob dahl, scott

minerd, anika khan joining us as well. scott minerd, your reaction? >> this statement i think is more dovish than i would have expected. the fed clearly opened up the door that they're looking at things other than employment and inflation. they're acknowledging they're going to take other factors into account, which is telling me they're concerned about the credit markets and what's going on, and they're trying to give themselves flexibility. the other thing, brian, was the fact that they committed to keeping the balance sheet at the same size for a period of time well into tightening. so i think this is a very dovish statement. >> anika khan, welcome. do you think the fed in doing what scott just referenced is suggesting that perhaps they are less data dependent than they were? >> no. this is a moment we've all been waiting for, and we finally got a move off of the zero lower bound, but we have to remember that this fed and monetary

policy is still very accommodative, and so when we look at the data dependency, the gradual language lends itself to more data dependency. even if the fed is looking at financial markets, of course, the high yield volatility we've seen, they'll keep their eye on it, but they still are very accommodative. >> bob dahl, we should note we are just off session highs in the s&p 500 and the nasdaq. how does the statement, how did the dot plots provide more visibility for investing for 2016? >> i think the fed prepared us for this well. they delivered. i think the statement is pretty much as i would have expected. listening to steve read it, the couple of references to inflation and watching that and we know that a lot of labor rate numbers are moving at two-plus percent clip. if we get some moderation in the commodity prices, you know, 2% inflation could quickly be in

the rear-view mirror, not out the windshield, and that will keep the fed on watch. i would also finally point out that as the fed continues down their path with monetary policy, with he now have fiscal policy taking a different turn having been fiscal austerity in d.c. for some time. that has ended now and they're going to spend some more money to pick up the slack. >> you know, david kelly, from an investment perspective what's interesting is people thought when the fed goes up, it's good for financials but maybe bad for utilities and reits and those who way a dividend yield. i'm looking at one of the most traded reit index, the vnq, it's up over 1% right now. does this not necessarily mean then the end of dividend-based investing? >> well, i don't think it's going to be the end of dividend-based investing, but i do think that the reality of the fed is going toim plement next year is going to be more hawkish than the message they're trying to send today. what they tried to do today both

in emphasizing they're going to wait until we have much further toward rate normalization before they attack the balance sheet, why did they say that? because they want to keep long rates down. and that's also why they put in all this dependency, not just on economic data, but all these other factors in the statement. if you look at the four dots, they still have four rate hikes next year. more than the market is pricing in right now. when i look at what bob was just saying about fiscal stimulus and the way i believe the first few rate hikes stimulate the economy, i believe the economy will tighten enough to keep them on that track which is more aggressive than pricing to the market. long rates may hold down in an initial reaction but i think we will see some backup in long rights as people realize this is a lot about what the fed is trying to lead the market towards or a statement they're making but, in fact, the reality of implementation will be more hawkish than the language today. >> how big of an asterisk or asterisks, plural, do you think these dot plots have next to

them right now? >> i don't agree with david on that because the dot plots have been proven to be wrong essentially. the fed has come towards the market. i want to make one point. the statement is dovish and that's what i said is my initial reaction, but it's not crazy, lunatic over the top dovish. let's not get carried away. it talks about additional rate hikes. it doesn't say when. it talks about gradual rate hik hikes. even uses the word normalization. and jeff lacker who dissented last time, he's on board with this right now. so just don't be the frog that's boiling in the very gradually rising water -- rising temperature of the water here. the fed is going to be raising rates and we don't know how far. we expect it's going to be slow and shallow and the fed will remain accommodative but it's not one and done which was the most dovish scenario possible out there. >> steve, this is scott. do you agree with me that the fact that the fed opened the door to looking at more than

just prices and inflation and that they're going to take other factors into consideration and they telegraphed this ahead of time, don't you think this shows that they have some concerns and that they may actually want to have more flexibility than they've had in the past? >> guys, before i go on, wells fargo just raised the prime rate to 3.5%. is that correct? just double-checking. >> yeah. >> scott, i want to answer your question which is i think the fed wrote what i consider to be sort of a confused paragraph on what the next test is for raising rates, and i think it's something i kind of expected, and i believe over time they're going to refine that through statements and through future statements and get more precise about what it will take for the next rate hike. we're going to try to get a little more precision from janet yellen in the press conference. i believe the fed has always taken a wide range of factors into account but i do agree with you on that last bit which is that the fact there is more in there suggests that it's going to be looking at a wide range of

things. i just think it's not quite there yet in terms of explaining with some precision the way it did before what the criteria will be for the next rate hike. >> but, steve, isn't it just messaging? because the one thing -- >> it's all messaging. >> but they didn't want to see long rates bounce up. >> exactly. >> are they -- exactly. but are they really worried that the u.s. economy is going to slide into some real problem next year or do they just want to make sure that -- >> you bet they are. >> guys -- they reference energy prices. couldn't the fed be saying we're not going to hitch our rate hike wagon to oil because oil could stay low for a number of years. real inflation -- >> but the answer -- >> most americans are paying for more most things except for gas and the fed doesn't want to be tied to the 2% inflation numbers because the official numbers may not hit it. >> the answer to david's question is very important in that people need to understand the fed is deathly afraid of a mistake. they have looked back at the history of central banking. they know it better than anybody. we looked at 1937, looked at japan, they see nobody has been

successfully able to leave the zero lower bound. they do not want to go back to zero. so you bet, david, they are very afraid and that's why they're going to move gradually. >> we'll get more on this concept in a second. right now we have to get to breaking news from kayla tausche. kayla? all right we're going to get to tay kayla in one second. i hear what steve is saying, they don't want to make a mistake but there has to be a down side to leaving rates low forever. otherwise the fed should say for the rest of human kind we'll have a zero interest rate policy and everything will be fine. there's a downside to the downside if that made any sense at all. >> look, brian, i think the thing you're pointing to is that the concept of malinvestment or the fact that you keep rates low too long and it encourages people to invest in projects and put capital into things which are going to have lower returns

over the long run which really in the long run affects all of our standards of living. and so, yeah, i think there is a massive downside to keeping rates too low for too long. but i would be curious to steve's point, when i talk to people at the fed, you know, it's pretty much acknowledged that this process that we're going through here in terms of reducing reserves is uncharted water, and the possibility of a mistakes is very high and, steve, i'd be curious what you think about this. >> great question. can i get one thing in there before that? thank you, scott. anika khan, are you still with us? >> i'm still here. >> great. well, guess what? your company, wells fargo just raised their prime rate to 3.5%. why and what does it mean for ou viewers and listeners? >> well, you know i'm an economist, so what i want to do is weigh more on the conversation that's currently on

the table, and more specifically around the number of factors that the fed added to the recent statement. one thing that we haven't discussed yet is monetary policy divergence. and the likelihood that we could see additional capital inflows and some additional increase in dollar price appreciation. that could be something that the fed is worried about. again, we haven't seen the bottom yet in oil prices, and we continue to see financial market volatility, which was largely expected. and so there are a confluence of factor that is the fed will continue to be looking at. >> anika, i tried and i failed but you can't blame me for trying to ask about that prime rate. >> you tried. we're friends so that's okay. >> anika khan of wells fargo, bob dahl, david kelly, thank you. everybody else, thank you. scott, stick around.

you will be with us the rest of the half hour. bill gross of janus capital -- bill gross, are you there? >> i'm here, brian. >> we heard you but we couldn't see you. now we can see you. fantastic. all right. you tweeted out the other day and you said to us on monday you thought the fed would be dovish with a capital "d." scott minerd saying maybe they were more dovish than he thought. what about you? >> i think so, too. they brought back in international develops, which speaks to currency. they don't want to mention currency, but that's basically what it means. and they talked about in terms of the reinvestment program going forward, the exact words were while the process of raising rates is well under way. so i think that's pretty dovish. we're going to hear more from janet yellen, but she does have to be careful in terms of raising interest rates in order to salvage a 2% growth economy. >> and i don't know if you have been patched in, the question i

asked scott a couple minutes ago is i hear your point, bill, about being too aggressive on the hawkish side, but is there also a negative if the fed goes the other way and remains too accommodative for too long? you'ved talk about it many times over the years for us. >> for 12, 18, 24 months at least. sure, there are negatives. i speak to it in terms of perpetuating zombie corporations or, you know, letting certain corporations such as those involved in fracking get cheap financing and over produce. that's one potential negative. the second has to do with basically with saving itself. households are savers and need to be savers going forward for the next 10 to 20 years for retirement, for education, for health care, and to the extent that fed funds are at 0%, it is very negative for capitalism as a whole. insurance companies, banks, pension funds are all belabored

by a 0% interest rate. the fed in my opinion should never have gone there. where should they go now in order to give both sides an even break? i think it's close to 2% in terms of a nominal rate. it is perhaps up to dispute in terms of the green dots. the green dots show higher, something closer to 3.5%, but 2% to my way of think something a neutral feds fund rate and the question is how quickly do we get there. >> and, bill, let's just back it up a bit. we keep talking about dots and dot plots. i feel like we're at the ice cream shop. explain to our viewers what it means to them. if they're not financial pros, why do they care about the fed "dots." >> they do tend to affect the market on a short-term basis perhaps as we speak. the dots basically are the votes or the forecast of each individual fed member in terms

of where they think fed funds will be 12, 24, 36 months in the future and on a longer term basis. that's critical because fed funds, the short-term rate, determines 5, 10, and 30-year rates and ultimately mortgage rates as well. so we want to know what the fed thinks. it's important to note, and i think others have noted already, that they lowered their dots by 25 basis points in 2017, so that's a more dovish type of forecast but still the market is forecasting much lower, and i think 2% as opposed to what the fed thinks with their average green dots of something like 3.5% or 3.25% is where we rest. >> you know, brian, i couldn't agree with bill more. look, 2% i think is a reasonable number here on the long-term funds rate or the equilibrium rate.

our work shows if you get short-term rates, you know, much above 2.5% that given the amount of debt on corporate balance sheets, that you basically absorb all the free cash flow in corporate america, and so we cannot tolerate is 3% rate. >> do you agree with that, bill? >> yeah, i think that's the key, brian. you know, the amount of leverage, and what fed members and the fed staff, you know, are looking at i think historically is a model that's based upon a system of financial based system that is 20 or 30 years in the past when it wasn't levered. to the extent that we have substantial leverage almost everywhere in all financial markets, you know, much like japan has, it's very difficult to raise interest rates because that 25 basis points or that 50 basis-point increase makes a substantial difference in terms

of financial asset prices and, therefore, economic growth. i think 2% is about as high as we can go. i think it will take two to three years. i think the fed's gradual emphasis is a correct one. we shall see. i don't think it's one and done. i think it's probably two and wait in terms of 2016. >> guys, i do want to call attention to our viewers and listeners about what is happening in the markets post this interest rate decision. the dow hasn't moved that much. it's gone up a little bit. up 95 points on the dow jones industrial average. 0.6% on the s&p 500. once again, the price of oil falling out of bed yet again. we had a rally yesterday, giving it all back again. 6.1 million barrel inventory increase. those were the numbers today. price of a barrel of crude hitting another multiyear low. inflation adjusted as i pointed out, we are at more than a decade low on the price of oil.

$35.62 right now, so at our low, and, bill, the fed obviously loves to use the "i" word. they talk about inflation. you talk about the "l" word, leverage. we have got right now a couple hundred billion dollars in oil-related, largely high yield and junk debt that is sitting out there. cheese pe chesapeake had a tender offer at 50 cents on the dollar swapping out debt. how do you think this oil story and this leverage story is going to play out not just with the fed but with america and our financial market? >> well, the oil story is indicative of a greater story in terms of commodity prices themselves and an oversupply, you know, of commodities on a global basis and an oversupply to some extent of labor as well. that's why wagers are compressed and kept down. in this type of environment in which the core inflation rate

"x" oil and "x" commodities is only at 1.26% on a year-over-year basis. it stuns me, it staggers me that the fed with a 2% target can even contemplate in terms of their green dots something above 3% in terms of fed funds with a levered type of system with commodity-based products and financially based 50 cents on the dollar type of debt. it's difficult to believe that the fed would raise interest rates substantially until, you know, someone was waving an all-clear sign and we certainly aren't seeing that today nor will we see it in my opinion for the next 6 to 12 months. >> we'll get breaking news on wells fargo. what they did with the prime rate and what it means. >> i a little bit of background. normally when you see the interest rate rise on the interest you have to pay on a loan, a credit card, any type of variable interest rate product, you would also hope that the rate on deposits would rise so

savers would benefit, too. wells fargo will not be doing that in concord with the increase in this prime rate to 3.5%. they will not be raising the rate that they will pay on deposits. that will be important for consumers with accounts at this bank. unclear what the other banks will do but it could be a indicator for what they will see in the after market. they will not be raising deposit rates. >> very interesting. scott minerd, your reaction to that? >> the banks have no incentive to raise the deposit rate. under dodd/frank every bank in the country that's of any consequence or size is trying to shrink its balance sheet, and they are going to let the spread widen between their lending rate and their deposit rate and let deposits go. the reality is there's nowhere for these deposits to go, and so i think it's going to be big for the banks. >> it seems like the banks know

they have got the consumer and maybe even the fed dangling over the sword of damocles. >> and that's not just the banks. scott is right, it is the barntion banks in terms of increasing their margins but also the money market funds. take your broker whether it's schwab or elsewhere, they've been subsidizing basically a close to 0% interest rate on their money market funds for a long time, and so this 25 basis point increase will help them, but it really isn't going to help savers in terms of raising the rate on money market funds for perhaps another 50 or 75 basis points. >> so when you look at it, bill, from an investing perspective, does it make, say, bank debt or other type of financial leverage options more attractive to you? >> well, it improves obviously the nims for banks and improves the profitability of a schwab. let's be fair and let's be happy

for them. so it make the financial sector a little more profitable, but it doesn't at the moment increase the benefit to savers. it probably doesn't increase the benefit for pension and insurance companies with longer-term liabilities and ultimately that's why the fed should never have gone below perhaps 1% on fed funds and should never go -- or at least never for the next several years go above 2% because there's too much leverage and ultimately the saver needs something, but not a lot. >> and just a reminder, we have about 1:45 we're expecting if she's on time fed chair gellyel. you see our steve liesman. he's diligently getting ready. scott minerd, who is a winner and a loser in today's decision? >> well, look, i think that people in general that have an

opportunity to invest in fixed income here, have cash, are winners. and the reason for that, brian, has more to do with the fact that the fed is basically i think given us some signal they're not insensitive to the pressures we're seeing on credit, and as bill pointed out a couple days ago on your show, you know, bank loans and leverage loans are so cheap right now, but in terms of return over the next two or three years, it looks like a much more attractive option than buying stocks. >> yeah. >> so i think, you know -- of course, as rates rise, the refixes on loans will go higher. >> bill, does this today, what happened, the statement, anything, change your views on the financial markets, what you find attractive right now? >> yeah, i think it does and i'm with scott in terms of mentioning what i mentioned two days ago, and i like those closed in funds at 10% to 11% yields but i think the treasury

market as well has overstepped its limit in terms of yields. the 10-year treasury was at 3% ten minutes ago. i think that's attractive. long-term treasuries are attractive. bonds in general are attractive. >> bill gross, thank you. scott minerd, thank you. we'll go live to d.c. and fed chair yellen. >> the fomc decided to raise the range for the federal funds rate by one quarter percentage point bringing it to one quarter to one half percent. this action marked the end of an extraordinary seven-year period during which the federal funds rate was held near 0% to support the recovery of the economy from the worst financial crisis and recession since the great depression. it also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the

economic hardship of millions of americans, and it reflects the committee's confidence that the economy will continue to strengthen. the economic recovery has clearly come a long way, although it is not yet complete. room for further improvement in the labor market remains and inflation continues to run below our longer run objective. but with the economy performing well and expected to continue to do so, the committee judged that a modest increase in the federal funds rate target is now appropriate recognizing that even after this increase, monetary policy remains accommodative. as i will explain, the process of normalizing interest rates is likely to proceed gradually. although future policy actions will obviously depend on how the economy evolves relative to our

objectives of maximum employment and 2% inflation. since march the committee has stated that it would raise the target range for the federal funds rate when it had seen further improvement in the labor market and was reasonably confident that inflation would move back to its 2% objective over the medium term. in our judgment, these two criteria have now been satisfied. the labor market has clearly shown significant further improvement toward our objective of maximum employment. so far this year a total of 2.3 million jobs have been added to the economy, and over the most recent three months job gains have averaged an estimated 218,000 per month. similar to the average pace since the beginning of the year. the unemployment rate at 5% in november is down 0.6% from the

end of last year and is close to the median of fomc participants of its normal longer run level. a broader measure of unemployment that include 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 also has shown solid improvement. that said, some cyclical weakness likely remains. the labor force participation rate is still below estimates of its demographic trend and voluntary part-time employment remains somewhat elevated, and wage growth has yet to show a sustained pick up. the improvement in employment conditions this year has occurred amid continued expansion in economic activity. u.s. real gross domestic product

is estimated to have increase d at ap average pace of 2.25% over the first three quarters of the year. net exports have been restrained by subdued foreign growth and the appreciation of the dollar. but this weakness has been offset by solid expansion of domestic spending. continued job gains and increases in real disposable income have supported household spending, and purchases of new motor vehicles have been particularly strong. residential investment has been rising at a faster pace than last year, although at the level of new home buildings still remains low. and outside of the drilling and mining sector where lower oil prices have led to substantial cuts in investment outlays, business investment has posted solid gains. the committee currently expects that with gradual adjustments in

the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. although develops abroad still pose risks to u.s. economic growth, these risks appear to have lessened since last summer. overall, the committee sees the risk to the outlook for both economic activity and the labor market as balanced. the anticipation of ongoing economic growth and additional improvement in labor market conditions is an important factor underpinning the committee's confidence that inflation will return to our 2% objective over the medium term. overall, consumer price inflation was only 0.25% over the 12 months ending in october.

however, much of the shortfall from our 2% objective reflected the sharp declines in energy prices since the middle of last year and the effects of these declines should dissipate over time. the appreciation of the dollar has also weighed on inflation by holding down import prices. as these transitory influences stayed and as the labor market strengthens further, the committee expects inflation to rise to 2% over the medium term. the committee's confidence in the inflation outlook rests importantly on its judgment that longer run inflation expectations remain well anchored. in this regard, although some survey measures of longer run inflation expectations have edged down, overall they have been reasonably stable.

marked-based measures of inflation compensation remain near historically low levels although the declines in these measures over the past year and a half may reflect changes in risk and liquidity premiums rather than an outright decline in inflation expectations. our statement emphasizes that in considering future policy decisions, we will carefully monitor actual and expected progress toward our inflation goal. this general assessment of the outlook is reflected in the individual economic projections submitted for this meeting by fomc participants. as always, each participant's protectiojections are condition his or her own view of appropriate monetary policy. participants' projections for real gdp growth are little changed from the projections made in conjunction with the

september fomc meeting. the median projection for real gdp growth is 2.1% for this year and rises to 2.4% in 2016. somewhat above the median estimate of the longer run normal growth rate. thereafter, the median growth projection declines towards it's longer run rate. the median projection for the unemployment rate in the fourth quarter of this year stands at 5%, 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. the path of the median unemployment rate is slightly lower than in september. and while the median longer run normal unemployment rate has not changed, some participants edged

down their estimates. finallyf omc participants project inflation to be very low this year, largely reflecting lower prices for energy and nonenergy imports. as the transitory factors holding down inflation abate and labor market conditions continue to strengthen, the median inflation projection rises from just 0.4% this year to 1.6% next year and reaches 1.9% in 2017 and 2% in 2018. the path of the median inflation projections is little changed from september. with inflation currently still low, why is the committee raising the federal funds rate target? as i have already noted, much of the recent softness in inflation is due to transitory factors that we expect to abate over

time, and diminishing slack in labor and product markets should put upward pressure on inflation as well. in addition, we recognize that it takes time for monetary policy actions to affect future economic outcomes. were the fomc to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly at some point to keep the economy from overheating and inflation from significantly overshooting our objective. such an abrupt tightening could increase the risk of pushing the economy into recession. as i have often noted, the importance of our initial increase in the target range for the federal funds rate should not be overstated. even after today's increase, the stance of monetary policy remains accommodative thereby

supporting further improvement in the labor market conditions and a return to 2% inflation. as we indicated in our statement, the committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. the federal funds rate is likely to remain for some time below levels that are expected to prevail in the longer run. this expectation is consistent with the view that the neutral nominal federal funds rate defined as the value of the federal funds rate that would be neither expansionary nor contractionary if the economy were operating near potential. it's currently low by historical standards and it's likely to rise only gradually over time. one indication that the neutral

funds rate is unusually low is that u.s. economic growth has been only moderate in recent years despite the very low level of the federal funds rate and the federal research's very large holdings of longer term securities. had the neutral rate been running closer to its longer run level, these policy actions would have been expected to foster a much more rapid economic expansion. the marked decline in the neutral federal funds rate may be partially attributable to a range of persistent economic headwinds that have weighed on aggregate demand. following the financial crisis, these headwinds included tighter underwriting standards and limited access to credit for some borrowers, deleveraging by many households to reduce debt burdens, contractionary fiscal

policy, weak growth abroad coupled with a significant depreciation of td appreciation of the dollar, and elevated uncertainty about the economic outlook. although the restraint imposed by many of these factors has declined noticeably over the past few years, some of these effects have remained significant. as these effects abate, the neutral federal funds rate should gradually move higher over time. this view is implicitly reflected in participants' projections of appropriate monetary policy. the median projection for the federal funds rate rises gradually to nearly 1.5% in late 2016 and 2.5% in late 2017. as the factors restraining economic growth continue to fade over time, the median rate rises

to 3.25% by the end of 2018 close to its longer run normal level. compared with the projections made in september, a number of participants lowered somewhat their paths for the federal funds rate. although changes to the heedime path are fairly minor. aide like to underscore that the forecasts of the appropriate path of the federal funds rate as usual are conditional on participants' individual projections of the most likely outcomes for economic growth, employment, and inflation and other factors. however, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. stronger growth or more rapid increase in inflation than we currently anticipate would suggest that the neutral federal

funds rate was rising more quickly than expected making it appropriate to raise the federal funds rate more quickly as well. conversely, if the economy were to disappoint, the federal funds rate would likely rise more slowly. the committee will continue its policy of reinvesting proceeds from maturing treasury securities and principal payments from agency debt and mortgage-backed securities. as highlighted in our policy statement, we anticipate continuing this policy until normalization of the level of the federal funds rate is well under way. maintaining our sizable holdings of longer term securities should help maintain accommodative financial conditions and should reduce the risk that the federal funds rate might return to the effective lower bound in the

event of future adverse shocks. finally, in conjunction with our policy statement, we also released an implementation note that provides details on the tools that we are using to raise the federal funds rate into the new target range. specifically the board of governors raised the interest rate paid on required and excess reserves to 0.5% and the fomc authorizized overnight reverse purchase operations at a rate of 0.25%. both of these changes will be effective tomorrow. to ensure sufficient monetary control at the onset of the normalization process, we have for the time being suspended the aggregate cap on overnight reverse repurchase transactions that's been in place during the testing phase of this facility.

recall that the committee intends to phase out this facility when it is no longer needed to help control the federal funds rate. the board of governors also approved a 0.25% increase in the discount rate for primary credit to 1%. based on the extensive testing of our policy tools in recent years, the committee is confident that the normalization process will proceed smoothly. nonetheless, as part of prudent contingency planning, we will be monitoring financial market developments closely in the coming days and are prepared to make adjustments to our tools if that proves necessary to maintain appropriate control over money market rates. thank you. i will be happy to take your questions.

>> i guess the word is finally. we have asked you for so long why were you delaying, where fr were you delaying. so i will ask given developments around the world, there's still weakness and the inflation is still nowhere near your target, what made you say do it now? some have said it was because you feared a lack of credibility if you didn't move. is that play a role in your decision? >> we decided to move at this time because we feel the conditions that we set out for a move, namely further improvement in the labor market and reasonable confidence that inflation would move back to 2% over the medium term, we felt that these conditions had been

satisfied. we have been concerned, as you know, about the risks from the global economy, and those risks persi persist, but the u.s. economy has shown considerable strength. domestic spending in the u.s. economy has continued to hold up. it's grown at a solid pace, and while there is a drag from net exports from relatively weak growth abroad and the appreciation of the dollar, overall we decided today that the risks to the outlook for the labor market and the economy are balanced. and we recognize that monetary policy operates with lags. we would like to be able to move in a prudent and as we've

emphasized gradual manner. it's been a long time since the federal reserve has raised interest rates, and i think it's prudent to be able to watch what the impact is on the economy, and moving in a timely fashion enables us to do this. i think it's important not to overblow the significance of this first move. it's only 25 basis points. monetary policy remains accommodative, we've been indicating we will be watching what happens very carefully in the economy in terms of our actual forecast, the projected conditions relative to our employment and inflation goals and will adjust policy over time as seems appropriate to achieve those goals. our expectation, as i've indicated, is that policy

adjustments will be gradual over time. of course they will be informed by the outlook which will in turn evolve with incoming data. >> under the old regime, before you were raising rates, it was easy to understand within your mandate what you wanted to do. you wanted the unemployment rate to fall, you wanted inflation to rise. it was easy for the public to judge the success or failure of your policy. could you explain under the new regime what you're looking for? do you want the unemployment rate to stop falling? do you want it to rise? what is it you hope for from inflation, which i think is a little more understandable? or is neutral itself now a policy goal? >> neutral is not a policy goal. it is an assessment. it's a benchmark that i think is useful for assessing the stance

of policy. neutral is essentially stance of policy, a level of short-term rates. in which if the economy were operating near its potential, and we're not quite at that, but reasonably close to it, it would be a level that would maintain or sustain those conditions. so at this point, policy would be judged to be accommodative. the committee forecasts that the unemployment rate will continue to decline. and i think that's important and appropriate for two reasons. first of all, as i've indicated, i continue to judge that there remains slack in the economy, margins of slack that are not reflected in the standard unemployment rate. and in particular, i've pointed to the depressed level of labor force participation, and also the somewhat abnormally high

level of part-time employment. so a further decline in the unemployment rate and strengthening of labor market conditions will help to erode those margins of slack, but also we want to see inflation move up 2% objective over the medium term, and so seeing above trend growth and continuing tightness, greater tightness in labor and product markets, i think that will help us achieve our objective as well with respect to inflation. >> a follow-up. how does raising rates help get you to either of those goals? >> we've kept rates at an extremely low level and had a high balance sheet for a very long time. we have considered the risks to the outlook, and worried about

the fact that with interest rates at zero, we have less respond to negative shots than to positive shots that would call for a tightening of policy. that is a factor that has induced us to hold rates at zero for this long. but we recognized that policy is accommodative, and if we do not begin to slightly reduce the amount of accommodation, the odds are good that the economy would end up overshooting both our employment and our inflation objectives. what we would like to avoid is a situation where we avoided so long that we're forced to tighten policy abruptly, which risks aborting what i would like to see as a very long-running

and sustainable expansion. so to keep the economy moving along the growth path it's on with improving and solid conditions in labor markets, we would like to avoid a situation where we have left so much accommodation in place for so long that we overshoot these objectives and then have to tighten abruptly and risk damaging that performance. >> in the sentence if your statement about gradual increase in that section, the committee says it will carefully monitor progress, actual and expected progress on inflation. it's going to read like a lot of code to people on wall street. can you describe what do you mean when you say carefully monitor.

and specifically with regard to what you do next, you need to see inflation actually rise at this point in order to raise interest rates again. >> well, we recognize that inflation is well below our 2% goal. the entire committee is committed to achieving our 2% inflation objective over the medium term. just as we want to make sure that inflation doesn't persist at levels above our 2% objective, the committee is equally committed. this is a symmetric goal, and the committee is equally committed to not allowing inflation to persist below our 2% objective. now, i've tried to explain and many of my colleagues have as well why we have reasonable confidence that inflation will move up over time, and the

committee declared it had reasonable confidence. nevertheless, that is a forecast. and we really need to monitor over time actual inflation performance to make sure that it is conforming, it is evolving in the manner that we expect. so it doesn't mean that we need to see inflation reach 2% before moving again. but we have expectations for how inflation will behave, and were we to find that the underlying theory is not bearing out, that it is not behaving in the manner that we expect, and that it doesn't look like the short fall is transitory in disappearing with tighter labor markets, that would certainly give us pause. and we've indicated that we're reasonably close, not quite there, but reasonably close to achieving our maximum employment

objective, but we have a significant short fall on inflation, and so we're calling attention to the importance of verifying that things evolve in line with our forecast. >> so do you need to see it rise, but in order to move again, do you want to see inflation measures actually moving higher? >> i'm not going to give you a simple formula for what we need to see on the inflation front in order to raise rates again. we'll also be looking at the path of employment as well as the path for inflation. if they call into question the inflation forecast that we have set out. and that could be a variety of different kinds of different kinds of evidence that would certainly give the committee pause. but i don't want to say there's a simple benchmark. the committee expects inflation

over the next year, the median expectation is for inflation to be running about 1.6%, and both core and headline. so we do expect it to be moving up. but we don't expect it to reach 2%. >> hi, madam chair. craig taurus from bloomberg. i'd like to follow john's question. the way the committee describes inflation, there's this transitory language. i'd like to point out that oil prices today are at 36, and on june 159, they were -- 15th, they were $60. so this transitory is lasting a long, long time. maybe longer than many people's definition of transitory, and it could go on. and second, i really wonder if

the committee knows how quickly wage increases or labor market tightness transfers into higher prices. and that too is also a forecast. so my question, what will you be willing to do if you don't see progress toward 2% inflation? we missed the target for three years. and what would you be willing to do? and second, would you allow inflation to bounce around between 2% and 3% the way you've allowed it to move under 2% over the past several years? thanks. >> first, let me say with respect to oil prices, i have been surprised by the further downward movement in oil prices. but we do not need to see oil prices rebound to higher levels in order for the impact on inflation to wash out. so all they need t