says the fed chris condon, the fed says that the economy is doing okay. is it heating up and could we face another recession? we are 10 years out from the last one. >> i would say there is little overheating in the economy. pretty amazing if you look at that. we have unemployment that picked up a little bit in june. astoundingly low. i say astoundingly because it is not generating more inflation wages. it is very subdued. overall inflation and the measure that the fed looks like kicked up in what they call the core measure which takes out the volatile components and the feds target is not a lot of alarm over the inflation issue. the people that are worried about inflation point to the fact that when unemployment drops the slope, historically it generates excess inflation. you have to get ahead of that because you change the rate and that does not really work its way into the economy for another six or 18 months or longer. you can't afford to wait to see the sign. the fence they look for don't single -- signal any flags. it is remarkable.>> randy in west v

it is not an audit of the fed's .ooks it is an audit of the fed policies.eral other policies with dilute the power of the fed. with arthur burns and richard nixon, even alan greenspan, you saw pressure on these fed chairman. we saw economic performance not looking good. joe: this is just my opinion. chairman powell does not strike me as hawkish. he seems to have some skepticism of the usefulness of the idea of the unemployment as we know it. be what president trump backfires that it makes people on the fomc more inclined to assert their independence through policymaking? >> absolutely. that is a great point. two scenarios. the fed says we are independent and we are going to raise rates whether we like it or not. the other would be if the fed starts to slow down. tariff war's get worse, the fed gets reluctant to raise rates aggressively. the fed is would say slowing down because it is being pressured by the white house. either way you have to say that the fed's motives may be questioned more because trump has injected himself in this debate. joe: you can't u

we began with a stepping on fed independence. >> ultimately it puts into question what the fed and fomc is and the ability to maneuver. the reserve is not going to react from tweets from the president. >> is a strong institution, and they have staying power. >> it is time to move rates back to normal. they will continue on that path. >> if people feel the fed is going to kowtow to the president and allow the economy to grow too fast and inflation to go up, interest rates will rise. and vigilantes will kick in and rates will rise which is what the president does not want. tothey be the fed will say show its independence, it will preemptively raise rates. it away, the president is shooting himself in the foot. jonathan: joining me now from jp morgan asset is lisa coleman, the head of global investment grade corporate credit. joining also is bob michele. pushes act reserve against higher interest rates. does it change anything? bob: it doesn't. the fact that you have tweets yesterday to how independent the fed is. certainly, the president gets to appoint who they want as the fed chair, so

the fed, itwill see is a new fed, get its feet under itself.will have to interpret that a year from now. jonathan: that takes us to the spread between europe and the united states. u.s. high-yield and european high-yield, will they narrow and spread in the coming year, and from which direction and why? bob: both look great. if we look at u.s. high-yield, it has traded in a range of 330 to 380 since february. we are in the middle of that range. as lisa pointed out, there is a tremendous tailwind coming to corporate earnings and that will be reflected in better credit quality, and the cycle u.s. high-yield tends to go to 300 over. i think there is at least 50 to 60 basis points of tightening. we have european high-yield at a 4% handle. but europe looks good. you have an accommodative central bank, you have them buying investment-grade corporate spirit -- corporates. that will spill over to the european high-yield market. we expect 3%. jonathan: should we get to the elephant in the building? your boss on a higher floor, talked about companies this

as for monetary policy, the fed will continue in powell's words, gradually raising the fed fun rate inrder to avoid overheating or weakening the economy or creating asset bubbles. winding down the balance sheet, he said, is going smoothly, offering no hint to the pace may change. has been, upbeat on a solid pace of growth. finally on target. from consumer spending and a healthy level of business investment. that should all continue given he says areand what favorable interest rates and financial conditions. while there are great uncertainties in parts of the world, economic growth abroad remains solid. inflation finally reaching the fed's 2% target, it is encouraging. the challenge is in keeping it there. headline inflation has been driven largely by higher oil prices. one thing not boosting inflation is unemployment. it is low. while running a little faster than a year ago, they are not causing higher inflation because productivity growth is so low. it is interesting that while pal spends all of his testimony talking about the economy, the bank committee chairman is spending most of h

is trying to set the fed funds rate.ut this spring, right after they had started to unwind the balance sheet, you started seeing the effective rate, the actual traded fed funds rate start to creep higher and higher and higher. and because of that, they said oh, well maybe this is a reserve problem. i do not think it is. i think there are other factors that are involved, but this is one reason why some academics and some others are talking about stopping the unwind. jonathan: ira jersey, great to have you with us from bloomberg intelligence. sticking with me along with krishna memani from oppenheimer funds and iain stealey from j.p. morgan asset management. coming up on the program, this week's treasury builds sales suffer a mini massacre. we will explain. this is "bloomberg real yield." ♪ l yield." ♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now, where there was a condensed treasuries schedule due to the holiday shortened week. the weekly auction of four-week bills

last week the san francisco fed released forecast showing that the fed is likely overly optimistic. the booster growth will likely be below projection. it's not just the tax bill, the economic recovery hasn't been felt across the country, not even close. they talk about family still struggling from a lack of meaningful job increases. >> while ours have increased over the years, real hourly earnings have not. for production and nonsupervisory workers, ours are flat and pay has dropped slightly in the number of jobs created in 2017 was smaller than each of the previous four years. not what we hear in the mainstream media. so the very companies those notes billions of buybacks and dividends are now announcing layoffs, shutting down factories, offshore and more jobs. some of the biggest buybacks as we know on this committee are in the banking industry. earlier this month, as part of the annual stress test, they allow the seven yet largest banks to redirect $96 billion to dividends of buybacks for this might've been used as the president and party like two promise during the tax bill. th

that is something the fed may not care about. i think by 2019, they will have no choice but to care about. i think that is where the transition will take lace. jon: whether the feedback loop is still sort of there, whether we can get a u.s. economy that responds to what is happening in european high-yield and in asian high-yield and whether there is feedback into u.s. credit. right now, on the screen, equity bonds rolling over. enthusiasm about the u.s. economy and u.s. high-yield being the place to be, does that change? iain: i do not think it does and i would disagree with the investment rate. there is a reason it has been selling off in the u.s. we have seen leverage ratios picking up. it has been classic late cycle behavior but we are not seeing that in the high-yield market. high-yield market leverage ratios is coming down following the energy crisis. there is a bit of a disconnect at that is why we have seen the underperformance. when we look at the rest of the world, the european market looks healthy to us on the investmen

the mantra was, don't fight the fed.f you are trying to stay away from the risk you are fighting , the fed. the fed is not your friend anymore as a fixed income investor. all of the investors that were espousing that mantra should now start to believe it on the other end of this because that is the biggest issue for fixed income markets, treasuries included, which is the reduction of the fed balance sheet. lisa: ok. taking that, let's take a look at a chart that i find fascinating that shows the massive divergence between the long and short positions in the treasury market. you can see the divergence between the real money long and the speculative shorts has reached the widest since leading back to the last financial crisis. joe, who is right here, the longs or the shorts? joe: i believe 2.85% on a 10-year is not a bad entry point. i think the longs are more correct. we heard the fed for the first time in recent weeks or days comment that they are hearing and local districts that businesses are slowing capex. we really n

i think you're going to see the fed -- it is a new fed -- get its feet under itself.he market will have to interpret that a year from now. jonathan: which takes us to the spread between europe and the united states. but not bonds-treasuries. u.s. high-yield and european high-yield, do you think they are going to narrow in spread in the coming year, and from which direction and why? bob: both look great. if we look at u.s. high-yield, it has traded in a range of 330 to 380 over since the start of february, and we are kind of in the middle of that range. as lisa pointed out, there is a tremendous tailwind coming to corporate earnings. that's going to be reflected in better credit quality. high-yielde, u.s. tends to go to 300 over. so i think there is at least 50 to 60 basis points of tightening. you have european high-yield at a 4% handle, but europe looks good. you have a very accommodative central bank, you have them buying investment-grade corporates. money will spill over to the european high-yield market again. so we would expect yields to go to 3%. jonathan: shoul

what do you think the fed does gillian at financial times who we interviewed seemed to think the fedgo public jerome powell will speak directly to the public in some format to defend the fed independence is that the card played here. >> i think there are people who can speak for the fed before the fed speaks. >> run that by me again. >> i'm thinking janet yellen ben bern naeng allen green span is also a former fed chairman who could speak up you might expect them to speak at some point. i think powell wants to stay out of this if he can. i think increasingly it's becoming difficult for them to do it. i think the reaction of the federal reserve is one where they keep going and stick to their knitting in terms of their intentions for this year right now that december rate hike has now become a political litmus test for the federal reserve. >> yes. >> and what's really interesting is president trump may have made that second rate hike more likely now because the federal reserve. >> that was your point. >> the federal reserve might have to do this. >> to prove. >> to prove independence.

the fed is following the yield curve, as always, and there was a debate at the fed as to why this doing it. somethink it is technical, think it is the insatiable foreign demand for u.s. treasuries that pushes down on the long end. powell did not offer explanations from his point of view but said the fed would continue to keep an eye on it. did not seem to think that continuing to raise rates on the short end will drive it negative. know the yield curve has remained flat for many years without inverting, and he did not think at this point it necessarily will. shery: again, we had economic data today showing the capacity utilization came in lower than expected. some argument that inflation will remain contained. anymore hence on where we are headed there from chairman powell? michael: no, he stuck to the party line that the fed is data dependent will see. they had three rate hikes pencil then, they have done two they could do a fourth of they need to. the fed is pleased inflation is that 2% but he suggested that was largely because of oil prices. oil prices have been going down the last f

>> the first headline, fed rates, solid outlook for the economy. one interesting thing in q and a, said we think it will be fine for wages to move up more. i thought that was interesting we don't know how high a rate he would tolerate, but we know the former chairman was between 3 and 4% would have been fine. they're around 2.7, 2.8. he said it was early for the tax bill to help wages now, but said it is probably helping the economy. then got into the politics the eu is not a foe of the u.s. when asked that question, and said countries open to trade do better than countries that are closed >> good recap. thank you. dow up 14. trying for a fourth straight day of gains back to chairman powell. >> in your testimony you said good economic performance in other countries has supported exports in manufacturing what other country would that include, the eu, canada, mexico? other countries with good economic performance, would that include china? >> it would include all those countries, yes >> and i know you said the tariff situation is -- and trade situati

. >> i put a very good man in the fed. i don't necessarily agree with it because he's raising interest rates. i'm not saying i agree with it and i don't necessarily agree. i must tell you, i don't i'm not thrilled we go up and every time you go up, they want to raise rates again. i am not happy about it. but at the same time, i'm letting them do what they feel it best. i don't like all of this work that goes into doing what we're doing. you look at the euro and what's going on with the eu they're not doing what we're doing and we already have somewhat of a disadvantage although i'm turning that into an advantage last year, and for years, we've been losing $150 billion with the eu nations, with the european union and they're making money easy. and their currency is falling and china, their currency is dropping like a rock and our currency is going up and i have to tell you, it puts us at a disadvantage i'm just saying the same thing that i would have said as a private citizen. so somebody would say maybe you shouldn't say t

but the fed gave them passing grades, anyway. the fed wants to make the test easier next year. vice chair quarles is suggesting he wants to give bankers more leeway to comment on the tests before they're administered. guess it's okay in washington to help, to let students help write the exam. the fed is considering dropping the qualitative portion of the stress tests, all together, even though banks like deutsch bank and santander and citigroup and hsbc and rbgs, have falled on qualitative grounds before. that doesn't include the changes that the fed has passed to weaken dodd frank, making company-run stress tests for the largest banks periodic, instead of annual and exempting more banks from stress tests altogether and vice chair quarles has made it clear that massive foreign banks can expect goodies, too. and on and on it goes. the regulators loosen rules around big capital, dismantle the cfpb, ignore the role of the f-soc, undermine the voeckler rule, weaken the community reinvestment act. when banks make record profits we should be preparing the financial system for the nex

b c take a listen i've got a very good man in the fed i don't necessarily agree with it be because he's raising interest rates i'm not saying that i agree with it and i don't know that i was so you know i don't. i'm not thrilled because you know we go up and every time you go up they want to raise rates again and i don't really i am not happy about it but at the same time i'm letting them do what they feel is best. and despite that nod to the fed's independence at the end of mr trump's comments there today he criticized the fed again on twitter complaining that quote the us is raising rates while the dollar gets stronger and stronger with each passing day taking away our big competitive advantage that that is slowly raised rates since late two thousand and fifteen higher interest rates tend to support a stronger dollar which makes u.s. exports relatively less affordable abroad mr trump's critics were upset by him and his lack of deference rather to the unwritten policy of avoiding comment on fed decisions that begin during the clinton administration and federal reserve president from st

from st louis president jim boehlert said the comments would not affect the fed's decisions on interest rates but others still fear that the fed choices will now be second guessed to an even higher degree. we have seen record bank profits some of which we reported here on the program earlier in the week at the same time we see continuing calls for relaxing regulation in the financial sector and even things like stress tests conducted by the federal reserve which are meant to guard against another government big bank bailout here discusses the former banker herself she's also the author of collusion how central bankers rid the world nomi prins know me thank you for being with us again we sure appreciate it the big banks have never made more money than right now does that surprise you. well now they've had ten years of being subsidized by the federal reserve by the policies that have allowed them to mass a lot of extra capital the quantitative easing policies that even though they have tapered off still have amassed a multi-trillion dollar book of assets from the banks to the fed over the

i don't agree with him on criticizing the fed.ok at the manipulation of the chinese currency, he is probably right about china. they probably do manipulate the currency lower. i think he's got the eu wrong. on the eu raising rates, they faced immigration crisis and the debt crisis. there is a lot of uncertainty with brexit. of course the u.s. is going to raise rates faster, strengthening that dollar. the euro currency is going to lag in value. if you look at the dollar index, if we could break through there, the dollar is getting stronger again. we will probably have a consolidation around this point. caroline: many people would question of china is a manipulator. talk to us about the dollar move. what is driving it? does the market think the tweets will have an effect on the fed? >> the way it is supposed to operate, the fed has to work independent of politics. it should focus on the numbers. i expect the fed to keep going with interest rate hikes. i don't think those for going to stop at all. talk to us about copper. how much is

you heard about the fed.e a lot of other ground to cover. that's coming up after this break. a mu-sstee interview you won't want to miss 6:00 a.m. eastern time keep it tuned here are you ready to take your wifi to the next level? then you need xfinity xfi. a more powerful way to stay connected. it gives you super fast speeds for all your devices, provides the most wifi coverage for your home, and lets you control your network with the xfi app. it's the ultimate wifi experience. xfinity xfi, simple, easy, awesome. . >>> good morning welcome to a special edition of "squawk box. coming up, president trump's one-on-one interview with joe kernen he speaks up about the fed >> i don't necessarily agree with it. >> the trade war with china. >> we are being taken advantage of i don't like it. >> and vladimir putin. >> i'll be the worst enemy he's had. >> it's friday, july 20, 2018. "squawk box" begins right now. >> live from new york where business never sleeps, this is "squawk box. >>> good morning, everybody. welcom

fed trump say what the should be doing with policy mean the fed is more likely to stay its course? there are a few things to discuss. let me start with the administration policy. there is this academic notion that the dollar will rise to offset the impact of tariffs. that has been the consensus for a year now. it is actually the opposite. you do not start a trade conflict to end up with a stronger dollar. past, when they impose such measures, you have long dollar weakness following. that is one thing to keep in mind and to put these notions in context. when it comes to the fed, what they do will be linked to economic data, rather than politics. the i would say is that market has priced, for a wild now, a little uncertainty around the fed delivery. --delivering. in our case, we mentioned that the market is almost always pricing the fed in full. the measures that have been announced will have an impact on growth, even if that is small. and basically, our economists have removed one-from their expectations. the market is not pricing at ,his stage any kind of downside with respect to h

the fed says a cost u.s. consumers, the average household is spending this year about $300 extra at the pump. spending butmer changes in the u.s. economy, particularly where oil is produced, not as bad as it used to be. it's as higher oil prices imply much more of a net overall drag on the economy than they did in the past. something's not in this report, no extended discussion of either the flattening yield curve, of great concern to many participants in the market. number two, no extended discussion on trade disputes. , when hejay powell goes to capitol hill next week to present this report and testify before the senate banking committee on tuesday morning and the house financial services committee on wednesday, not going to be able to get away with ignoring that topic. predict hesure to will be pressed on how much the growing trade disputes are affecting the fed outlook for the economy. vonnie: yes, indeed, the house and senate will have a field day on trade. chris condon at the federal reserve, thank you

the fact that certain fed governors are talking about it tells me that the fed will be somewhat reactiveould this go further. oksana: let's look at the supply of and demand dynamics of the market. we are on track to issue roughly $2 trillion of fixed income in the u.s., which is $400 billion above the 1.6 trillion average over the last five years. most of that extra issuance is coming from treasuries given the significant deficit we have. the fed is on track, given the current guidance -- perhaps they change it -- but given their current guidance is on track to reduce their demand for the market by 200 billion through the second half of the year, as our largest sovereign buyers are buying less, banks holding less because they are less regulated, etc. the supply demand dynamic is what is going to continue pushing yields higher and much less so how many hikes the fed will do or not do. lisa: you think the speculative shorts are more accurate here? oksana: when we look at the longs and shorts, when you look at the fixed income market in general, where is the exposure? trillions upon trillio

the fed then a ecb and the boj was lacking. for rates toe case be rising a little bit over run the world. >> let's talk about the spread that has been superwide. it has widened much of this week as well. could see that spread start to tighten. do you expect to tighten? >> i think it will tighten. this issue globally through the next 12 months. with the balance sheets that you have. obviously the thread is -- fed is tightening. we just spoke about bank of japan, you see it there. that should moderate as well. over the next 12 months if you look at the whole group of central banks, you have quantitative tightening going toward the end of 2019, that will make that spread come lower. i was speaking to clients of the conference this past week and we had a chart up that showed the otherr u.s. against the tenure sovereigns. there is a huge gap there. that gap is holding our long and down and that will have to narrow as quantitative tightening becomes part of anyone's. >> expectations are so low to the ecb. very little was priced in. w

how the fed respond? is why i think today's interview is much more important than it might seem. president trump is not responded -- notet correction responding to market correction. when we do have those things, i think the fed will get the same treatment the journalists have gotten from the president, the f the eye has gotten, that some judges -- the fbi has gotten, that some judges have gotten, and that will be a publicity war. the fed has not come out well in those wars. the fed depends so much for its legitimacy on public regard for it. that would be devastating if the president takes 85% of republicans with him in denigrating and trashing the fed's institutional identity. julie: one more quick question. what about as you say, if he takes republicans with him, with the other institutions he has yntact, he has mostl been supported by the majority of congress, but what about the fed? is the fed different? has congress been traditionally respective of the independence of the fed? peter: the coalition th

a nice way michael mckee summarizes the fed. was that your take away from the fed?: pretty much. one of the things we note, especially when you look at dollar priced action, we haven't adjusted to the clouds here. that's what makes us uneasy about looking at the fx market is. we don't think there is directional trend markets because of what's happening in trade war's, but one of the things we look at is the ms. prices. markets don't seem to have adjusted to u.s. growth expectations, relative to a period of trouble -- prolonged trade war uncertainty. wen we look at the dollar, say the dollar might be higher, but the only way is an up. it's unfettered, unconstrained dollar upside. short might be against the e.m.'s. against the euro and the yen, we may be there about. we are looking for flatlining dollar profile, not really seen probably because risks haven't been adjusted. anna: we don't talk much about the clouds. as goldman sachs ceo was saying, when you're in financial markets, you're paid to take account of terrorists. we talk about them a lot -- tail risks. we ta

commentss why the about the fed or trying to influence the fed are in that regard. it is going to be a bigger pressure point if the dollar keeps rising. that not a surprise that independence has been challenged by this particular president. it was only going to be a question of time. also, i'mid say letting them do what they need to do. not a surprise that he breaks with decades of tradition and does something unconventional. commentators talking about this have said the legacy of the trump economy rests on the shoulders of jay powell. president trump has to be careful what he does here. they also suggest the fed might be more inclined to hike to show their independence if the president continues to express concern about higher interest rates. >> they may, or that could be rhetoric. i would have thought they are relatively relieved that there's only two or three more planned at the moment. is lesscase, there debate. anna: we talked about whether we've gone from trade wars to fx wars. in terms of the chinese response, the yuan as a policy tool, do you see them active

. >> the fed will hike at least once more. why not more than that?imply because wage growth is sluggish. >> the fed is going to go another two times this year, but i wonder how they are going to go in the economy starts to bend down a little bit and the curve starts. jon: joining me in new york city , iain stealey and krishna memani. coming for me is london -- in --don solid, solid, solid. krishna: it was across the board, reasonably good. good for risky assets, for sure. good growth and employment -- in e,p;pu -- .mployment for jon: it was probably the least anticipated payrolls report so far in 2018. why do you think that was? iain: when you look at the major issue, jobs in the u.s. are fine. tariffs,is focusing on and that is what has been driving the market. little bit of everything, good job growth, but the wages did not tick up. what we are seeing id risk assets have done really well. at,his is a chart i look you can look at the hours worked, the amount of people they get paiduch per hour, and this is growing at the same rate that we did before

jack: well, they're not the first administration to blame the fed and to push back on the fed, so thiss kind of normal politics to me. and as marilyn said, the fed has a job to do, and they are going to do it. jonathan: literally the consensus view from everyone i have spoken to, jack, throughout the week and the last several months is we are going to have a fantastic q2, things will roll over q3, q4, and things will get worse through 2019, 2020. the fed will carry on hiking through next year as well. the flattener just makes sense. does that still make sense to you in the treasury market? jack: well, if you look at the forward spots, it is already priced in. it is a flat curve all the way out a few years, so it is there. as a matter of fact, though, i think the risk of inflation coming, there could be a surprise. i like the idea of the fact that the market is basically pricing in flat and no inflation forever, and i like to take the other side of forever. jonathan: would you take the other side of forever, victoria? victoria: well, in a sense, yes. when you look at the inflation numbe

the fed sees more rate hikes. listen to exactly what jay powell said as prepared testimony earlier today. job market,rong inflation close to our objective, and the risks to the believe thatce, we for now, the best way forward is to keep gradually raising the federal funds rate. kathleen: why is that a big deal? more and more people are dignified on autopilot. let's take a look at the dots dot plot. rise interest rates regardless. looking for the four rate hikes. jay powell made people think i guess it is not a done deal. on the plus side, talking about the economy, he had four drivers he mentioned in the past. financial conditions are favorable. banks are more stable. there is lots of credit. tax cuts, spending, increasing in the united states. overseas growth continues to be strong. when it comes to trade, he did theit difficult to predict impact and timing of trade tensions and tax cuts. their impact on the economy. here is what he said about trade. dan: it may well be -- >> it may well be. we have heard a

end might donald trump actually want to get involved in fed speak here and fed policy?think of the midterms and what happens with stocks and equities with regards to rate hike. >> that is the other complication. we are in an election cycle in the u.s. and this matters not just for the u.s. before the entire world. monetary policy flows along the whole global economy. mr. trump will be watching the market levels above all else and if you see that the interest rate hikes are causing pain to the stock market that might trigger a response from him. then it goes back to mr. powell and sticking his ground and staking out independence from the fed and making it clear that he will not be dictated to by politicians. regardless of what mr. trump said going forward, he will be -- we will see how mr. powell responds and handles that pressure. thank you so much. we will await of course a response from the fed or from powell but getting some breaking news coming from -- from the japanese economy minister, he said the tpp 11 and japan epa will advance free trade. the tpp 11 is expecte