tv Closing Bell CNBC December 16, 2015 3:00pm-5:01pm EST
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 to do is
stabilize. i believe there is some limit below which oil prices are unlikely to rise. if we look to fall -- if we look at market expectations, market expectations are for stabilization, and then some gradual upward movement. so i certainly grant that we have had a series of shots pushing them down. but we're not looking for them to revert back to higher levels that they were at merely to stabilize. i would point out, you asked me would we tolerate overshoots for a number of years between 2004 and 2008. we had a series of increases in oil prices that for a series of raised inflation above, again, we didn't have the 2% objective then, but raised it above 2%. and we judged those increases to be transitory as well.
we saw that expectations were either moving up in a way that made them seen unanchored, or down, that would be of concern. and we have called attention to some light downward movements and survey measures. we are watching that. but i still judge that inflation expectations are reasonably well anchored. so yes, we have tolerated inflation short falls that we thought would disappear over the median term, just as we did overshoots of inflation that we also judge to be transitory. but we do need to monitor inflation very carefully because if engineer prices and the dollar were to stabilize import
prices, our expectation is that both headline and core inflation would move up, and if we failed to see that occurring in the manner that we expect, we would need to take further action to reconsider the outlook and to put in place appropriate policy. [ inaudible question ] well, if the economy were disappointing, our actions wouldn't purely be based on inflation. we would also take employment into account. so i can't give you a simple answer. but we would pursue a more accommodative policy because we do certainly are committed to achieving 2% over the medium term. >> bill dudley has talked about the need for the fed to adjust policy based on the responsiveness of the financial marks. you didn't talk about that today. is it a point that you agree with? and if so, what is it that you
are looking for? how will you judge whether financial markets are accepting and transmitting these changes? >> there are a number of different channels through which monetary policy is transmitted to spending decisions. the behavior of longer-term interest rate, short-term interest rates matter. the value of asset prices. and the exchange rate also these are transmission channels. we wouldn't be focused on short-term financial volatility. we're there unanticipated changes in financial conditions, they're persistent and we judge to affect the outlook. we would, of course, have to take those into account. we will watch financial developments, but what we're looking at here is the longer-term economic outlook, are we seeing persistent changes
in financial market conditions that would have a bearing, a significant bearing on the outlook that we would need to take account in formulating appropriate policy? yes, we would. but it's not short-term volatility in markets. [ inaudible question ] >> well, look. this is not an unanticipated policy move and we have been trying to explain what our policy strategy is. so it's not as though i'm expecting to see a marked immediate reaction in financial markets, expectations about fed policy have been built into the structure of financial market prices. but we obviously will track carefully the behavior of both
short and longer term interest rates, the dollar, and asset prices, and if they move in persistent and significant ways, that are out of line with the expectations that we have, then we will take those into account. >> rebecca jarvis, abc news. historically, most economic expansions fade after this long. how confident are you that our economy won't slip back into recession in the near term? >> so let me start by saying that i feel confident about the fundamentals driving the u.s. economy, the health of u.s. households and domestic spending. there are pressures on some sectors of the economy, particularly manufacturing and the energy sector reflecting global developments, and
developments in commodity markets and engineer markets. but the underlying health of the u.s. economy i consider to be quite sound. i think it's a myth that expansions die of old age. i do not think that they die of old age. so the fact that this has been quite a long expansion doesn't lead me to believe that it's one that has its days are numbered. but the economy does get hit by shocks. there are both positive shocks and negative shocks. so there is a significant, odd probability in any year that the economy will suffer some shock that we don't know about that will put it into recession. so i'm not sure exactly how high that probability is in any year, but maybe at least on the order of 10%. so yes, there is some
probability that could happen, and of course, we would appropriately respond. it isn't something that is fated to happen because we've had a long expansion. and i don't see anything in the underlying strength of the economy that would lead me to be concerned about that outcome. >> in the event of an outcome like that, in the most negative scenarios, are there other policy measures outside of quantitative easing that you outside of the fed have discussed and come templative -- have you talked about anything that would be more direct to the economy? >> well, during the years in which we were -- you know, the economy was recovering from the great recession and we put further policy measures in place, we studied our policy
options quite carefully. as you know, communications policy to affect market expectations played an important role. that's something we did in con jumgs with ass-- conjunction wi purchases. we have seen some foreign central banks -- the ecb and others that have taken their overnight rate into negative territory, and that's something that i don't contemplate that we will need to do this, but it is something that we could study. we have balance sheet policies, and there might be a range of direct policies that we could use as well. but this is something that we have thought about on a range of
options. >> could i ask about the balance sheet policy you're adopting today? you said you want to keep a large balance sheet until normalization is well under way. can you explain why you anticipate that being appropriate? what does well under way mean in terms of normalization? what are your views on the idea that the fed might need to have a larger balance sheet than historically over the longer term? >> well, in our normalization principles, which are in effect, the committee stated that we eventually want to operate with a much smaller balance sheet than we have at present. we would reduce the size of the balance sheet to essentially whatever size we needed to manage monetary policy effective an efficient way.
a lot has changed since pre-financial crisis in terms of the financial system, and we are studying, we're engaging in a project at this time to consider what our long-run operating framework should look like. so i can't tell you exactly what size of balance sheet we will determine is the best to operate in an efficient and effective manner. it might be somewhat larger than the reserves we had in pre-crisis. we've also said we expect to reduce the size of our balance sheet over time by cease diminishing or ceasing entirely reinvestments. and beyond that, we haven't given additional guidance other than to say that the timing of reductions and reinvestment will depend on economic and financial
conditions. and i suppose the additional guidance we're giving today when we say well under way, we want to say -- as i mentioned, there are a number of considerations. as we've discussed the factors that will be relevant to the decision, one factor that we've talked about is the desirability of having some scope to respond to an adverse shock to the economy by lowering the federal funds rate. so it would be nice to have a buffer in terms of having raised the federal funds rate, to a certain extent to give us meaningful scope to respond now. it would depend on the entire economic outlook, how robust the
economy is. but that is an important consideration for the committee. it means that this is not something that we expect to be turning to to cease reinvestment very quickly. >> on financial market conditions, is there a problem developing in the high yield sector of the bond market, the junk bond sector? as you know last week, a mutual fund third avenue management halted redemptions so that it wouldn't have to -- because of the sharp selloff in these kinds of bonds, are you concerned at all, and did you discuss in the meeting any risk to the financial system of systemic risk because of the conditions in the junk bond market, and the individual investors and institutions hold trillions of dollars of these funds, which were sold heavily because of low
rates, and did the low interest rate policy help sew the seeds for this development? thank you. >> well, risk spreads in the high yield bond market have been widening since last year. partly reflecting falling oil prices, only partly, but partly and redemptions and high yield bond funds have been increasing in recent months. but third avenue focus credit fund was a rather unusual open end mutual fund. it had very concentrated positions and especially risky and liquid bonds and it had been facing very significant redemption pressures. my understanding is that the s.e.c. is in touch with third avenue, and as you probably know, the s.e.c. has proposed some reforms to address what's a structural problem of liquidity
mismatch and open end mutual funds. so we continue to believe that financial conditions are supportive of economic growth. we will be -- we have been and will continue to track developments in financial markets very carefully. i would say i think we have a far more resilient financial system now than we had prior to the financial crisis and highly capital banks that are well-situated to support corporate lending. i'd also point out that many corporations during these years have reduced their interest payments and extended their debt profiles and i think that should help to mitigate. we will be evaluating this
carefully. >> you said earlier that expansions don't die of old age. i think the other half of that is that it's often central banks that kill them off instead. so i'm wondering how worried you are about the possibility that the fed will have to turn around after hiking rates? other central banks have had to do just that. how damaging do you think that might be to the fed's credibility? >> when you say that central banks often kill them, i think the usual reason that that has been true when that has been true is that central banks have begun too late to tighten policy and they've allowed inflation to get out of control. at that point, they've had to tighten policy very abruptly and very substantially and it's
caused a downturn and the downturn has served to lower inflation. so if you don't mind my flipping the question on you, i would point out that it is because we don't want to cause a recession through that type of dynamic at some future date that it is prudent to begin early and gradually. now, it is true that some central banks have raised rates, and later turned around. not in every case has that reflected a policy mistake. economies are subject to shocks. sometimes when they've raised rates, it hasn't been the wrong thing to do, but conditions have changed in a way that they have had to reverse policy to respond to shocks. i'm not denying that there are situations where central banks
have moved too early. we have weighed that risk carefully in making today's decision. i don't believe we'll have to do it. as the committee has said, we're watching economic developments closely, and we will adjust policy in whatever way is necessary to support the attainment of our objectives. >> you said it's important not to overblow the significance, but there's been a lot of attention paid to it. can you explain to the average american what if anything might be different in the next few weeks or few months for them because of this interest rate hike? >> so i think the first thing that americans should realize is that the fed's decision today
reflects our confidence in the u.s. economy that we believe we have seen substantial improvement in labor market conditions and while things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement, so in thinking about their labor market prospects and their financial prospects going forward, i hope they will take this decision as one that signals the fomc's confidence that conditions will continue to strentden and job market prospects will be good.g market prospects will be good. it is a very small move. it will be reflected in some
changes in borrowing rates. longer term interest rates, loans that are linked to longer term interest rates are unlikely to move very much. for example, some corporate loans are linked to the prime rate which is likely to move up with the fed funds rate, and those interest rates will adjust. i think credit card links that are linked to short-term rates that might move up slightly. but remember, we have very low rates and we've made a very small move. >> how concerned are you with interest rate risks in banks now that you've obviously ended the zero rate era and began the.25%
interest rate era. is that a factor in decisions going forward? is it something that you're concerned about? >> interest rate risk at banks is something that we have been monitoring very carefully for quite a long time. the community banks that we work with, part of our supervision has been ensuring that they manage appropriately for interest rate risks. and the larger banking organizations that are subject to the stress test and capital planning, the scenarios that we've presented in each of the last three years, look at their ability to withstand what would be much sharper increases in interest rates than we're envisioning would happen, but we want to make sure that if there were sharp increases, unlike our
expectations, that they would be well-positioned to handle it, and we have concluded that their capital positions are sufficient for them to weather it. so this has been very much on our minds. >> you keep saying that the things holding back inflation are transitory, and yet every day there seems to be new impulses from outside that they could drive prices lower. i guess my question is, if in a year's time inflation remains where it is today, would you see that as a defeat for your theory? and is that part of the reason why the language has been upgraded, to say that you want some actual progress towards your 2% target? >> well, we have said that we will carefully monitor both actual and expected progress.
i think that standard fed policy has been to look through shocks that are transitory. occasionally, there are sequences of transitory shocks. we have had some further declines in energy prices. and as i said previously, i do expect there is a bottom to that. i expect we will be seeing it. if we analyze inflation data and conclude that clearly transitory influences are holding down inflation, i do not want to say that we would respond to that. but if we concluded that there were structural factors, or that there were a problem with our
theory or some global deflationary force that we're simply persistently holding down inflation in a way that was not transitory, and i don't want to attach any simplistic meaning to what we would need to see to conclude that the inflation data. if we concluded that, we would certainly take action to make sure we adjusted policy so that we obtain or 2% objective. we would need to see that what we were seeing in the data suggests a sustained departure from our 2% objective that we really needed to address. >> greg ropp from market watch. there's been a lot of discussion about the downside risks facing the economy from the global
environment. could you talk more about the upside risks that you see to the economy? and just briefly. some fed officials have been emphasizing lately the medium cpis from dallas and cleveland. how much weight do you put on those measures? >> well, starting with the median cpis, we look at a range of statistics that bear on the inflation outlook and the median cpi has been somewhat more stable in running closer to 2% than the pce. but there is a systematic gap, and our objective is 2% on the pce price index. so there's no simple translation. we do have a pce inflation objective. i'm sorry, what's the other? the upside risks.
there are upside risks to the economy. i think we tend to focus on the downside risks. it's right to do so. we want to be careful about downside risks. consumers are in much healthier financial condition. their income prospects have improved. we see them buying a lot of cars. housing has been recovering very slowly. but the demographics would point to considerable upside for residential investment. my main line forecast is for gradual recovery, but there is upside risk there. we've seen the decline in drilling has been depressing investment spending, but there's
upside risk, too. the global economy. there are many countries that are undergoing very difficult adjustments or slowing growth, especially with declining commodity prices. but even recently, we've seen growth in emerging markets strengthen. we do pay attention. the risk is overall balanced. >> you have often said that the fed is beginning to be data dependent, but you've also said in the past that you want to avoid being mechanical. if the data seemed to warrant rate hikes at successive meetings, how will you avoid the perception that you're falling into a pattern or becoming mechanical? >> well, we will try to avoid that.
i do want to emphasize that while we have said gradual, gradual does not mean mechanical, evenly timed, equally sized, interest rate changes. that is not what the committee means by it. my guess is the economy will progress in a matter that is not sufficiently even, that we will decide to make evenly spaced hikes. i recognize we want to do what's appropriate. i recognize that's a danger. but i do want to asewer you that we will be data dependent. we'll respond appropriately. i strongly doubt that it will mean equally spaced hikes and it certainly is not the intention of the committee to follow any mechanical formula of that type.
>> you just mentioned that it may be possible that structural factors are holding down inflation as well, and the dynamic that's happening in top line inflation is happening in core as well. in september, the median projection is revised down. this is happening at other banks as well. within the fed, how are you adapting your models to look at what now seems to be a new reality, and what are you learning as you do that? >> well, so the reason -- the main reason that we revised down our projection ever so slightly, it's hardly revised for core inflation, is because we have seen further appreciation of the dollar that's holding down import prices that spills over into core inflation. i mean, my own estimation is
that core inflation will pick up. there are various idiosin karatic factors that affect core inflation. for example, non-market price increases, which are a little bit hard to understand. there are factors that have been affecting prices in medical care prices that may change over time, so there is are some factors, but but i personally don't think we're in a world where inflation is being determined in a different way than it has historically. i see import prices and energy prices as holding down, headline by also core. i do believe it will pick up. but as we've said, if that theory is wrong and we do not see inflation is unfolding in the way the committee expects, we will make adjustments over
time in policy. >> you have a background as an academic. are you looking into these models to see whether they need to be adapted? >> we have many people who are studying inflation models. i tried to -- let me express some humility about them. i do not think they are perfect. monetary policy is based on economic forecast. there are theories of how the economy works that govern many aspects of economic forecasting. whether it's consumer spending or residential investment or inflation. the underlying theories are not perfect and they are subject to uncertainty, and this is true in all aspects of forecasting, which is why we change our forecasts and our models. we throw out models that are
persistently not working. we're always trying to develop better models. i'm not aware of a different model of inflation that would be superior to the one that we employ. but we have to verify that inflation is moving in the manner that we expect and if it's not, we need to adjust policy accordingly. >> are you concerned about the negative impact your decision could have on the emerging markets? do you fear it could trigger financial problems abroad that could hit the u.s.? >> so, we are constantly monitoring foreign economic developments, including those in emerging markets. we understand that in the global economy with integrated product
and capital markets that our fates are very much linked. and that the performance of the u.s. economy has important spillovers on to emerging markets and vice versa. we have been trying very carefully, we've made a commitment to emerging market policymakers that we would do our best to communicate as clearly as we could about our policy intentions to avoid spillovers that might result from abrupt or unanticipated policy moves. i think this move has been expected and well-communicated. at least i hope that it has. so i don't think it's a surprise. this action takes place in the context of a u.s. economy that is doing well. and is a source of strength to the emerging markets and other
economies around the globe. and so that is there can be negative spillovers through capital flows, but remember there are also positive spillovers from a strong u.s. economy. my general view is that many of the emerging markets are in the stronger position than they would have been in the 1990s. for example, that they have stronger macroeconomic policies. they have taken steps to strengthen their financial systems and are in better position to deal with this. on the other hand, there are vulnerabilities there and there are countries that have been badly affected by declining commodity prices, so we will monitor this very carefully, but we have taken care to avoid unnecessary negative spillovers.
>> wage growth is not quite where you would like it to be -- >> i'm sorry, what? >> wage growth is not quite where you would like it to be. how much is that going to play into your thinking next year as you're trying to decide whether to raise interest rates more and when? >> so my expectation is that in this strengthening labor market, that we would see faster wage growth. i believe there is with a 2% inflation objective space for wage growth to be higher than it's been. we may be seeing some incipient signs of faster wage growth. we've seen it pick up in hourly compensation and some slight firming in recent months in average hourly earnings. i hesitate to say that this is a firm trend. we've been disappointed in the
past. there are many factors that affect wage growth. it's not definitive in any sense in determining our policy, but it does have a bearing on the inflation outlook. it also has a bearing on assessing how much slack there is in the labor mark, and i think a number of my colleagues looking at the slow pace of wage growth, you've seen their estimates at the longer run normal unemployment rate have come down, and i think that is one of the factors that has prompted those adjustments. so it does affect views about just how much slack there is in the labor market and the inflation outlook. >> we have liftoff. fed chair janet yellen concluding her news conference after the federal reserve announces as expected a quarter%
increase in the fed funds rate from zero, serendipitously on the seventh anniversary of when the fed last cut rates, putting it at zero. fed funds were at zero for precisely seven years. numerologists would probably have a field day with that at some point. we welcome you to "closing bell." >> you mentioned liftoff. stocks are starting to see it that way. the s&p for itself part adding 30. >> so many markets, just pay attention to the close. but intraday, you get the stutter-step moves. it's back up to 2.30%. the dollar moved lower initially. it is back in positive territory
as far as the dollar index goes right now. >> all sorts of interesting signals to get through. david scranton is with us here at post nine of the new york stock exchange. we have mr. arthur cashen from ubs. diane swan joins us from chicago. and so does our own rick santelli. let me go to ladies first. diane, you're the economist on this panel here. so we finally have liftoff. we finally have the first rate increase in seven years. put it in perspective for us. bearing in mind, janet yellen has said don't overblow the importance of this first rate increase. >> it's really more of a limp-off rather than a liftoff. i think it's really important that although yellen sort of hedged herself in terms of whether they needed to see more firming in inflation, it did say in the statement that they need
to see actual as well as their confidence that inflation would actually move towards its goal. i think that was really a nod to the doves. it's her way of corralling the cats and getting the unanimous vote in terms of acknowledging that inflation has fallen short of their expectations. one of the things i really do worry about is that dot. >> the projections they have for fed funds down the road. >> exactly. how is that different than measured pace? i think that could be the achilles heel that they're going to have to deal with in communications going forward. but not predetermined. they need to get rid of that kind of trajectory. >> okay. when it comes to the fed's intentions here, people have never reached such a consensus on the fact that they were going
to raise rates today. nearly every economist surveyed by us, by "the wall street journal" expected it. everybody was on one side of the boat when it came to the short rates and which way they would move. does the fed want to hand it to markets each time? look at the reaction today. they couldn't have asked for a better one, i imagine. >> the immediate reaction was ideal. there's got to be high fives going on all around the building. they got a perfect reaction in stocks. a muted reaction in the dollar. a muted reaction in bond yields. they couldn't have asked for a better thing. i wrote in my comments today that it wouldn't be the initial reaction that would tell the story. i think it may take several days for us the find out what happens with a variety of other things. and that, by the way, is contrary to what vice chair fisher wants to do. he wants to restore mystery. >> exactly. >> so we'll see how they go.
but most importantly, we're going to watch what happens the next several days. >> joining us right now is richard fisher, former dallas fed president. you agitated for this rate hike for quite some time. what's your reaction to the unanimous decision for them to lift today? >> i think it is important it was unanimous. you had some expression of concern by two governors. i think janet brought them under control. it's important that she did so. so having the anonymity is key. i think this is really the beginning of the yellen era. in that sense, it is a liftoff. it's a liftoff for janet in terms of it being her committee, and re-gearing, however slightly, the direction of policy. it will take a long time. they'll be gentle. they'll be slow. but this is an important step in establishing janet yellen's authority. >> what are your expectations
now for interest rates going forward, depending on what pace they are trying to pursue in raising rates down the road? >> when i heard the anticipated target would be perhaps 1.5% by the end of 2016, 2.5 by the end of 2017, i had a tough time believing that for two reasons. number one, if that were to happen while europe is easing, the dollar would most likely strengthen, historically speaking, which is going to make it very difficult to hit that 2% inflation marker. the other thing is to keep the rates long-term, that means the ten-year treasury would have to be between 4% and 5%, which i don't see how that's going to happen at a time when there's quantitative easing abroad. >> richard fisher, just to this point, we kind of raised with you and with art just now. this is now janet yellen's fed. is it a fed that will continue
to hand us each time what they're going to do, gradual meaning hey, we'll pretty much go once every other meeting. is there something to be said for keeping that sense of mystery? aren't all markets going to go the same way as long as they're given the same message from the fed? >> i understand stan fisher's concern. perhaps not as much as the first turn, which we've just taken, but try to get the markets to discount what is likely to happen. it lowers volatility. i think it's important. i want to mention one thing that i hope you all will discuss. the key test here will be how the reverse repo facility actually works. and they've expanded the purview in this meeting. and that will be the key operating tool, obviously on the other side, you have the interest on excess reserves.
it's that overnight reverse repo facility, which even while i was there, we were building, getting more test room for. but this will be the first real test to see if it can be used properly. which i believe it will. to keep the fed funds rate at the targeted rate. and that will be the most interesting thing to watch here in addition to the fact that there's been a turn towards the yellen era. >> we will discuss that. i know that you have to leave in less than a minute. so let me finish up with you. how aggressive do you think the fed will be in 2016 with raising rates, or really truly does it depend on the data down the road? >> we've gone through this forward exercise. we had quantitative forward guidance. let me summarize what forward guidance is in two words. it's "we'll see." i think that's basically what janet said. it is a matter of feel and looking at the di that. i don't expect them to
immediately follow through. i think they'll take some time, digest what happened. but they also have to be mindful in the second half of this next year that they're going to get involved in the presidential cycle. no central bank wants to be involved in the presidential cycle. if they do want to move forward, they might want to front load a little bit, but not very much. >> all right. >> thank you for your time. >> it's good to see art. >> as always. steve liesman joins us here. what's interesting going back to the idea of we'll know a lot more after today than we do right now. other global central banks have tried to do this. in large part they've had to actually renege on that. now the fed is trying to avoid having to do an about-face as well. >> yeah, they're going to be very cautious. i think that's pretty clear. but kelly, you've been a reporter for a number of years. you know that feeling when you try to understand a really complicated story, and finally you get it.
you know what i'm talking about? you finally get it? i don't get that yet. i'm not there yet with the fed and understanding how they're going to hike in 2016. i read the statement a bunch of times. listened to yellen. i don't think the fed is exactly clear, with getting its criteria to be as finely honed as it was before for liftoff. i think liftoff was very clear. once liftoff became apparent, we knew it was coming. the next one, it's still unclear. i'm interested in ricky's point of view on this. you're at 100 basis points right now. not too much change. then i go back to what our fed survey said going in. the market expected three. not seeing much change to the two-year. so i think that three is pretty much what the market is taking from this. that's going to be my best guess for what the fed's going to do until something comes along, with the question being how do i process better than expected data, worse than expected data? if i'm right in with a 5% next
month on unemployment and 200,000, they tell me the fed's going to hike in january, i don't really know the answer to that right now. >> well, if you don't get it, then stan fisher has gotten his wish. >> it's a process of understanding the fed and the reaction. >> let me bring rick in here and get your thoughts on the move and what the market is doing right now. >> i e-mailed steve. his follow-up is basically i know what your criteria. how does the quarter point raise get you there? in other words, why did you do it today? that's the only thing i walk away with. the answers just didn't measure up. let's ponder. if the criteria doesn't match up, that means it wasn't really data dependent. everybody in the world, including janet yellen knows the
conditions after the september meeting were better than the conditions today. so why raise today? and the answer to that blows away all the dots, because if the answer is there are issues with the pricing of risk, just think last week with junk, there are issues out there that has caused different parts, different sectors to price in ways that they can't possibly continue to price at. that's the reason, which means the path may not be about the dots. may not be about being data dependent. and i think that's really key. because her answer is -- >> hey, rick. >> wait, the answer to the other reporter was if the economy gets too hot, i don't want to raise too abruptly. one thing i know for sure, 36 years in this business, if the economy is too hot, you can never raise too abruptly. >> rick, what do you think of the two-year being at 100 basis points, not much changed on the day. we've seen some big swings in
the two-year. this notion of a three-year rate hike is pretty much the takeaway from this meeting today in yellen's press conference. >> i think you're spot-on again. >> for the moment. >> your dollar options. they are at a level that is nowhere near the dots. >> not near the dots. >> so let's ponder what that means. the dots are more aggressive. >> forget about the dots. >> we have to go. ten minutes left to go in the trading session here. >> i think they've gotten exactly what they want. i would watch if oil were to change abruptly. one of the benefits they got here is that oil is off, it starts to weaken again as we go into the close. >> all right. we so wish we had more time to talk with everybody. but we don't. we've got to move on at this point. it was a long news conference today. thank you all for your thoughts
on today's rate hike. >> the fed's hike having an impact already across two major banks. kayla has more details. >> it's the borrowers of what is now three major banks, pnc, jp morgan chase, and wells fargo each raising their prime rate to 3.5%, having all held it at 3.25% since the fed cut interest rates to zero in 2008. the fed doesn't control the prime rate. the banks control this. but generally, prime follows the fed funds rate. so an increase in the fed funds rate is followed by an increase in the prime rate. it's a peg that is used to calculate the price of adjustable rate credit. think the apr on your credit card home equity lines. some are priced off of prime. usually those are less than a million dollars. larger loans are priced off of libor. wells fargo says some of those small business loans that have variable rate interest will be repriced according ed accordin
have any type of variable rate interest product from one of these banks, expect you could be paying a little bit more. the banks tend to keep these rates uniform across the board, so even though we've just seen a couple banks come out with this news, it's largely expected that every bank that has a prime rate or prices products off of prime will be increasing it. and while it does mean higher interest payments for some borrowers, it doesn't necessarily mean higher interest earned. neither wells fargo nor jp morgan -- we're still waiting on pnc. but neither will be raising the standard deposit rate earned on accounts. wells fargo saying our strategy is to be methodical in nature and monitor the competitive landscape chasing much the same thing. of course, they don't want to do something another bank isn't doing, and then get caught footing the bill for it. analysts say it will still be several quarters before you see that deposit rate go up. banks hope to capture some of those earnings in the meantime. back to you. >> wells fargo raised their prime rate faster than a new
york cabby honks his horn when the light turns green. >> first at the gate. >> thanks very much. we have breaking news on hilton right now. dom with details. >> shares are up 6%. this after dow jones is reporting citing sources that hilton is looking to possibly spin off its hotel properties into a real estate investment trust. hilton has privately received irs blessing for some kind of a spin-off of hotel property assets, so if this does happen, it could be announced as early as next year, so again, that's proving the stock. it looks like hilton, if this story is true, could separate its real estate assets and focus on just the management of hotel properties and have a separate company for real estate, guys. back over to you. >> we'll watch the company for that. we'll also watch reits. thank you, dominic. let's get more reaction on what the fed's rate hike means for the bond market. rick reiter is ceo at black
rock. >> are you going to sleep better tonight? >> or worse? >> we've talked about a bunch on this show. watch the equity market's reaction. a rate hike is not that scary a dynamic. in fact, markets like certainty and the constant discussion about it. i think they threaded the needle pretty well in terms of a press conference and a statement in terms of it's going to be gradual, and describe how it's going to take. >> with high yield bonds, which have seen a massive selloff, is this a lifeline? is this a time you think they might ramp? >> i'd say a couple things. part of what i think the 25-basis point move is not that significant, you think about how much the transmission mechanism of other rates, they're moving hundred of basis points. part of why i think 25 is insignificant. i think the oil market makes a difference. i think how cash flow changes -- we talk a lot about technology and what industries get impacted. there's some real value in parts of high yield market. >> oil is more important.
>> as you said to me. parts of high yield market we like investing in today. if you said to me what are you most focused on? i would say oil is important. growth in the world is important. >> econ 101 would suggest a flattening in the yield curve. the dollar would go higher. do you see that happening? or is something else going to go on? >> i think that's right. i think you've got to put it in perspective. i think the dollar will continue to appreciate. i think it's going to be gradual, as the fed described, they're going to be gradual. and i do think the yield curve flattens, including the statement today that should get some attention about we're going to keep the balance sheet longer for a while. people thought once you start raising rates, six months later you start reducing the size of the balance sheet. i don't think that's right. i do think you get flattening of the curve. but i think a lot of this was priced. >> all right. we'll have to leave it there, rick. thank you for joining us. 900 million to sell art cashin just said, but looks like it's largely paired off here with the
dow up almost 250 points after the federal reserve decision to raise interest rates. beginning perhaps a rate hike cycle for the first time since 2004. the s&p is up 31 points. gains of 1.5% across pretty much all the major averages. and coming up, jim grant will be here explaining why he's expecting interest rates to return to rock bottom levels next year. here at the td ameritrade trader group, they work all the time. sup jj? working hard? working 24/7 on mobile trader, rated #1 trading app in the app store. it lets you trade stocks, options, futures... even advanced orders. and it offers more charts than a lot of the other competitors do in desktop. you work so late. i guess you don't see your family very much? i see them all the time. did you finish your derivative pricing model, honey? for all the confidence you need. td ameritrade. you got this.
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heading into the last two minutes of trade here on the day, the fed raised rates for the first time in almost a decade. you can tell where it happened, when it happened. dow doing that classic stutter-step after the announcement came out and we finish appreciably higher. a gain of 222 points. just off the highs of the session. ten-year. yield dipped a bit when the word got out. then it has come back. we're at 2.29% on that ten-year. the dollar index counterintuitively dipped as well. but now it's back in positive territory against the other major currencies. and then the vix has dropped today, bob pisani.
we're well below that 28 level today. and then there's oil, too. >> we were prepared for basically everything to happen. the only thing we weren't prepared for is what we got, which is not a lot of volatility and market movement because the fed essentially delivered exactly what the average trader wanted. >> it waswe well-telegraphed. >> going to be slow and shallow. they did everything essentially the market wanted. i think we were all primed for all of this craziness. the important thing about today, just put up -- it's oil, stupid. it still is. it's not the fed that moved the stock market today. it's the oil market. when the inventory numbers came out, it was a build in inventories. we had a 150-point rally going. the whole thing essentially just fell apart. on oil, not on the federal reserve. that's still going to be the story. when do we get stability in oil? and tomorrow will be all about where does the stock market go from here for the end of the year?
that's what i'm going to be talking about tomorrow. >> that's for sure. >> thank you, bob. >> so an eventful day. the dow up 224 points on the close. stay tuned. jim cramer, james grant, many others weigh in on what this means and we'll see what happens tomorrow. stay tuned for the second hour of "closing bell" with kelly evans and company. see you tomorrow, kelly. thank you, bill. welcome to "the closing bell" on this historic day where the federal reserve has hiked interest rates for the first time in nine years. i'm kelly evans, and here's how stocks reacted to that. positive across the board. the dow was the weakest relative perfo performer. the nasdaq added 75 points. interesting moves across the u.s. dollar. oil we've got to get to here as well. joining today's panel to help us with that, we have our own mike santoli and cnbc contributor stephanie link. for more on today's market
reaction to the fed decision is laura rozner and tim seymour. so mike santoli, i'll just begin with you. a remarkable response to a historic move today. >> it definitely was. it was the comforting message. there was the expected move. and i do think it makes a lot of sense in that context that you had a little bit of sideline money saying fine, this was the big distraction, it's out of the way. so we're back on the s&p 500 to levels we were at a week and a half ago. so i hate to always be the one to say hey, we really haven't gone anywhere, but this year, we really haven't gone anywhere. we were basically flat to number on the year. >> this is basically the perfect response. is that because it was so obvious, exactly what they were going to do here? were there any surprises to you? >> it was exactly as expected on the hike. it was exactly as expected on the dovishness. i thought a couple things. the balance sheet commentary i thought was very positive. a little more dovish than i
would have expected. i thought the fact that they spent so much time on inflation, and they're going to watch inflation, we really don't have a lot of inflation. in my mind, if inflation starts to pick up, then we're going to start to talk a little bit more maybe about more tightenings, if we get that data. i'm not sure we're going to get it. i thought that was interesting. >> it's fascinating to compare the statement this time around from what the fed said back in 2004 when it was raising rates for the first time that time around. in 2004, they were talking about hey, inflation's been surprising on the upside a little bit lately. there is nothing like that kind of rhetoric in the statement today. so laura, it goes back to the question rick raised just a little while ago, which is so why do it at all today? >> because at this point, the fed has already essentially met its employment mandate. inflation is expected to pick up. in fact, the fed no longer
expects it to pick up gradually. it expects it to just pick up to 2%. that's likely what we're going to see starting in january, where we expect headline cpi to print 1.5% year on year. so the inflation picture should improve a little bit. >> sure. that's still a far cry from the numbers that we saw, again going back to the last time when that cpi number you referenced, consumer prices were growing better than 2% on the year. we're not there, and in the fed's own forecast in its projections today, they don't see it getting towards that target on their number until 2018, and how does the rate hike help get them there? >> sure. i mean, look. the path of inflation is very uncertain, though. what we see is a guess pretty much. it's their best guess. we could see misses in both directions. you can bet that the dots and the policy will react to those changes. so the path of policy is very
much outlook dependent. just right now, and at the beginning of the policy tightening phase, the fed is communicating that it will likely be gradual. to soften the blow and maintain expectations. >> gradual is the launch word now, stephanie. last time out, it was moderate and that ended up meaning hiking a quarter percentage point, each six weeks. this time around, more broadly speaking, if this is the backdrop here, what do you do with the market? does this give current investments a lifeline? does this mean it's time to rotate into new ones? >> initially, everyone looked at the banks because of higher interest rates. and they were up. i thought what was really surprising was consumer. not only discretionary, but also the staples. and that's because the data is like we're moderately growing. so we're not going to escalate. the dollar probably doesn't take off from here. sure, it can stay strong, but maybe it doesn't take off from here. if that's the case, then oil prices probably stay fairly low
and that's really good for the consumer. at the same time, we're seeing better wages as well. so it's kind of good. i thought it was interesting for the consumer as well as for banks, for a lot of different sectors. >> and what about those rate sensitive areas? let's show the utilities if we can. which actually had a strong session. >> it's a little bit counterintuitive, i would say. probably because the long end did not blast higher. we're not actually seeing anybody thinking that we're going to be in store for much higher rates at the market rate end of things. so that's probably good for those guys. i like that industrials outperformed a little bit today. and really, the behavior of the market when oil, of course, was detracting from it, was all pretty good. i think we're entering a year where it's going to be this tension. maybe it's a healthy tension between what's good for main street versus wall street. if it looks like the consumer is really going to start to rip, then maybe the fed goes a little bit faster. so we might be in for that kind of push. >> tim seymour joins us now. what about you, and what about
this is attractive to you heading into 2016? does it include the u.s. consumer? >> it's interesting, because here's janet yellen playing up the strength of the u.s. economy. the messages of strength. more slack in the labor force, which again, at least leads to a more dovish outcome. but two things. you talked about the out-performance of certain sectors today. definitely wasn't really industrial. it wasn't cyclical. it was utilities. and i think that's something of concern. also puzzling to me why the fed did nothing about the economy. in fact, were much worse than where we were in september. and yet we're also at year end where you have liquidity issues. so i think it felt like the fed felt like they had to go, and we know that, except for the fact that the upgrade of the u.s. economy to me, the downgrade of the fear of global market conditions is why markets are very positive. if you believe that, there's more to go here. >> hey, tim.
mike here. i do hear you on this idea that many conditions are worse than they were in september. but here's what's different today and better today, which was the fed's preparation of the market for this move. in september, the world said it's a 50/50 shot. this is a coin toss. and in that context, if the fed panics, basically it seemed more prudent not to go then. it just seems like it was a better prep job. >> that's exactly right. then you had that payroll number that came out in november. that pretty much made it almost unanimous. it was a coin toss. we're at a place here where i think first of all, if you look at the treasury curve, we're exactly where we were on the ten-year going into the september meeting, around 230. it's the short end that's come up. the curve has flattened. do with that what you want. the u.s. economy is chugging along. it's nothing extraordinary. i think that's okay. i'm puzzled by it, though. they held back at a time when a
lot of people felt like it was their shot, and now it's year end liquidity issues. so far today it looks fine. think about where we've been all week. think what's going on in emerging markets. these are things that people should be worried about. coming up on "fast money" at 5:00 p.m., tim and the crew are going to be asking jeff gundlach what he thinks of the fed's decision to raise rates, which earlier today he suggested might not be the best idea. t's bring in jim cramer what he thinks. what do we make of this? >> we're done with it. we don't have to talk about it anymore. i mean, i think they put themselves in a situation where if they didn't raise rates, our market would be down very big. if they didn't raise rates, it meant that there was something lurking that you and i and many others don't know. so they pegged it to employment. they got strong employment. they can do this. i think they're going to be
common sensical. you can go by facebook, netflix, google. they got it. >> they had quite a session. in a way, does this give further support to trades that have already been extended? is there any way in which longer term this comes back to haunt the markets? >> well, look, i think that stepping back, you would say we can't keep the rates as low as they were when the patient was near death. and we've got to walk them back some way. my take is that i know i didn't hear a lot of this today, but i thought the fed did a great job. i mean, i think they waited until they had an employment number that then covered themselves by saying look, we've got a pretty good balance here with that last employment number. we're doing okay. look, if something really goes wrong, i don't think they're going to do the lock step. this is a different fed from the one that raised 17 times even when things are starting to roll over. it allows us to go back and look at companies. so you looked at honeywell and
ge. cvs, they said things are great and they were rewarded. that was terrific. stephanie link, definitely right. the consumer product stocks went up because they went up so quickly that their yields. there's a little something for everybody. do i wish they hadn't raised? at this point if they hadn't raised, i'd be saying there must be some junk fund i don't know about. some bank i don't know about. now i just feel like all right, there. let's go back to looking at companies. >> what about oil, jim? which has been raising concerns, hitting the credit markets. today had a horrible session, but stocks were higher. what do you make of that? >> i think that the oil stocks should have been down. you mentioned the yield liquidity at year end. the seller should come back if oil does take out that 35 level. i do not think that oil can bring down the economy. i just think -- i mean, in other words, that that $300 billion in
high yield debt, that even all of it defaulted. i think obviously, i can say five stages where you would see business go down to appreciably enough to affect gdp. but in the end, look, the junk bond funds are as bad as they were before. the ones that have a lot of oil are now being talked about as cheap by people that are trying to push them on you. oil is not great versus so many other ends of the market like the banks. stephanie and i are old friends. i worked with her for seven years. i thought the banks acted terrifically. and i think that the banks, when they did the prime rate -- you should feel a little aggrieved. they're going to make more on your savings and they remain strong, and i think they can go up very substantially. >> all right. we'll come back to this in
moments. but those stocks up about 2% today. jim, really appreciate you joining us. >> always great to see you, kelly. >> you can catch more of jim on "mad money" at 6:00 p.m. he'll have more on the fed move. plus, a big interview with the co-ceos of chipotle as that company continues to deal with the fallout from the e. coli scare. at big bank as we just talked about raising rates. >> jim cramer was just talking about this and now you can add bank of america to the list of banks that have increased their prime rate to 3.5% from 3.25%, which they had been holding the prime rates at since the fed reduced rates to zero back in 2008. these are pretty simple. one-line press releases. all of these rates will be effective immediately or perhaps at the open of business. you won't see it on your bill until a couple billing cycles from now if you do have a variable rate type of credit, be that a credit card or an adjustable rate mortgage. but bank of america, kelly, is raising its prime rate to 3.5%.
welcome back. let's bring in kayla for more. >> we just got that press release moments ago. citi raising its prime rate to 3.5% from 3.25% following the like of bank of america, pnc, jp morgan chase, and wells fargo. there's a group of 30 banks that contribute these prime rates into the average national prime rate. they generally try to keep these uniform for competitive reasons. that is why you are seeing pretty much everyone in line, in lock step raising two 3.5% in line with the increase that we saw in the fed funds rate. one of the reasons why we are seeing the banks' stocks move
the way they have, is they are not going to be passing through these new earnings on increased rates to their savers, so their consumers. we haven't seen any banks so far say it would be raising the standard deposit rate. most of the big banks have been flooded with deposits since the financial crisis. and so there's really not any incentive to try and compete for these that they have had in their coffers for years. it could still be quarters before we see the banks actually raise that standard deposit rate. that's why analysts say that perhaps we're not pricing in how beneficial it is that we won't be passing the new earnings to the consumer will actually be to the bottom lines of these banks. we've been thinking more about net interest income, increased yields. we are thinking about it perhap.
>> that's one reason you like -- do you like them across the board? is it the regionals more? >> i think they'll all act well. you want to own banks when rates are rising. the slope of the curve is going to be important. at the same time, you're seeing better consumer loan growth. that's really important. balance sheets are really strong. stocks are cheap. so i see why they rallied. i was glad that there were other sectors in the market that rallied today. >> as you mentioned some of the consumer names, too. let's get to fedex. those earnings are coming through. shares are up on the report. what can you tell us? >> that's right. the shares of fedex are up 4% in after hours. that's after a beat on the top and bottom line for the company's fiscal second quarter results. reporting $2.58 per share. that is better than the $2.51 per share. revenue also better than analyst
expectations of 12.43 billion. the company reaffirming its full fiscal year outlook. that is unchanged. ground average daily package volume was up 9% for the quarter. the company citing that they have continued to see weakness, but also seeing a record number of holiday shipments fueled by the steady rise of e-commerce are flowing through the fedex global networks. so we'll continue to bring you other headlines. in the meantime, shares of fedex are up 4% in after hours on th t that beat on the top and bottom line. >> one that's really good is what's happening with the committee. >> what's happening with the economy, what's happening with the dollar. obviously of the moment right now in terms of its visibility toward demand. the fact that the stock reacted as it did is going to have some relief in the dow transport. so probably a positive story
across the board. >> the dow transport needs relief. if you talk about leading indicators of what's happening in this economy, you had the transports looking weak. the ism numbers coming in lower. high yield credit spreads moving on out. you could easily paint a picture of an economy that's losing momentum, but the federal reserve raises rates today. stocks respond positively. and there was a lot of talk about whether the fed is actually doing the right thing to help prolong what's already quite a lengthy recovery. >> without a doubt. my answer to that, that paradox, is all those things you mentioned. you at least can plausibly say it's oil. i'm not saying it's the whole story. what's interesting to me, the tone of questions was all about is it really safe to do this right now? are we not so still fragile? i think that's good. we have this reserve of skepticism that somehow this is going to disturb things in a big way. >> to tie it all together, the stress test the fed was doing to the banks this year include a scenario where oil popped to
$110 a barrel. >> just getting back to fedex, the stock is down 14% year to date. so i think expectations were really low. people are concerned about oil. as well as the global economy. but there are enough pockets, it seems, that things are okay enough for this one, especially with expectations coming down. it's a very good sign that it's reacting this way. we'll see what they say. it's going to be a very lengthy one. >> taking a page from yellen today. coming up, we'll discuss how the rate hike could shake the bond mark. but first, a top fund manager tells us whether investors should be betting on bank stocks to outperform in a higher rate environment. every dollar count. that's why i have the spark cash card from capital one. i earn unlimited 2% cash back on everything i buy for my studio. ♪
welcome back. financials certainly climbing today. charlie, as we're getting word that they're raising the rates themselves, how significant is that for why you like the banks here? >> well, the impact on banks is complicated. but it's not complicated on some banks like morgan stanley, which have big asset management systems. for a big bank, you get the balancing between your liabilities and your assets, and it can be often the case that some banks don't actually do that much better in the higher interest rate environment. for an asset management firm like morgan stanley, they can earn huge with what they pay their customers on their cash balances and what they earn on those floats. so in the case of smith barley
in the old days, they could earn $800 million and those numbers have been zero for the last five years. >> i'm curious your thoughts about morgan stanley, because you're so positive on it. there's a lot of moving parts going on at that company and they just announced that they are going to be laying off quite a bit in the sick business. do you actually think it's going to make an impact in the short term? or do is this like a 2006-2017 story, and do you think it could work in the meantime? >> it's trading right at book value, which is just way too cheap for this business. the asset management business that i talked about is going to get a lot more profitable right now. we think they're going to make next year. and we think those earnings are going to go up. so it's a very cheap stock with the business that has been least performing well. it's getting smaller. the investment bank is getting better. and the asset management business is about to be a lot better. >> let's just move along from
morgan stanley to goldman sachs. another stock that you own. it's kind of been unable to get out of its way. people are not sure exactly what the overall earnings power is for this company. how are you envisioning that right now? >> i'm envisioning for goldman and morgan and some of the other big banks that the regulatory environment has been such a huge headwind. it's going to get better. it can't get worse. and if we get a change in the political environment, it could get a lot better. so goldman sachs trading right at book value. i apologize for repeating myself. people have fought for 50 years to be a partner at goldman sachs to get the right to buy stock. and you and i can buy it today. >> by the way, i also see that you like kkr here. talk to us a little bit about where you see deal making and debt raising going now that the fed has raised rates. >> so kkr is a little longer story. they are $10 a book and the stock is trading for $15.
if you put a multiple on the fees that they earn, you get to about $15 and you're basically getting the carried interest for free. this stock has come way down. people are worried about realizations the next six months. longer term this stock is a great guide. >> going further here, these get in slightly different territory. western union, is that a play as well? >> banks have been getting out of the business of transferring money overseas. the fact of the matter is people are scared of iphones and how you're going to be able to move money around on your iphone. if they don't have a bank account, try sending money. people are getting out of that business. it's a regulated business. and it's going to grow. >> could you get any more specific on who you think isn't well positioned here? >> i just think that the
regional banks are more complicated. people think it's great for the regional banks. everything i said about how cheap gold man and morgan stanley does not apply to the regional banks. >> they've been one of the favorites for a lot of the investors to date. appreciate it. so let's send it to dominic for an earnings alert. >> we're talking about a smaller cap retailer here. this is pier one imports, down on 330,000 shares of after hours volume. this after the retailer posted earnings per share of 13 cents, a slight beat over the 12% estimate. $473 million worth of sales. that misses the average analyst estimate of $492 million. they also saw comparable store sales decline by .7 of a percent, and they do see their current quarter comparable store sales down anywhere from 2% to 4%. they've also cut their 2016
earnings per share guidance to 42 to 46 cents a share from a prior 56 to 64 cents a share. the estimate was for around an earnings per share number. a slight earnings beat. a sales miss. comparable store sales decline. also a cut to their guidance. i want to read an interesting part about their diskrugs here. the decline of the casual in-store shopper continues to challenge.cussion here. the decline of the casual in-store shopper continues to challenge. a moderate start to the holiday shopping season and an increasingly competitive promotional environment. another retailer pointing out this highly promotional time of year, kelly. back over to you guys. >> that's a great point to make there, dom. thank you so much. our dominic choo. let's get to a cnbc news update with morgan brennan. >> a maryland judge declaring a hung jury in the police officer william porter who was charged
with involuntary manslaughter in the death of freddie gray. police arresting protesters outside the courthouse. a hearing will be held tomorrow to discuss a possible retrial date for the officer william powell. california unveiling rules that self-steering cars have a driver ready to take over if the machine fails. its rules will be a landmark in the development of self-driving technology. the maker of popular swagway hover board is facing a class action lawsuit. this suit filed by michael brown of new york claims the company failed to warn consumers of the risk that hover boards could burst into flames. female marines can wear lock and twist hair styles while in uniform. the hair styles must be neat and maintain a professional military image. that's a cnbc news update. back over to you. >> those can be pretty painful. i've had the little braids before. hard on the scalp. thank you, morgan.
morgan brennan. the fed just raised rates for the first time in nine years. jim grant, though, is predicting janua janet yellen and co will be forced to pivot. later, we'll look at whether the rate hike should slam the brakes on red hot auto sales. you're watching cnbc, first in business worldwide. big day? ah, the usual. moved some new cars. hauled a bunch of steel. kept the supermarket shelves stocked. made sure everyone got their latest gadgets. what's up for the next shift? ah, nothing much. just keeping the lights on. (laugh) nice. doing the big things that move an economy. see you tomorrow, mac. see you tomorrow, sam. just another day at norfolk southern.
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welcome back. here's a look at how we finished the day on wall street. the federal reserve raised rates for the first time in nine years, the dow added 224 points. in response, the s&p was up 29, nearly 1.5%. the nasdaq, that amount up 75 points. oracle's earnings are out. let's get out to josh lipton with more details. josh? >> well, kelly, the software maker just reported. let's get you those numbers. oracle reporting 63 cents. the street, kelly, was looking for 60 cents on 9.06 billion. just looking through the release, total cloud revenues jumped about 26% in u.s. dollars to 649. that's about 7% of the total. just above what the street was
at. new software licenses clock in at 1.7 billion. they're still on target to book more than 1.5 billion of new software as a service and platform as a service business this fiscal year. that's going to be considerably more business as any other cloud service provider, including sales force. that is at 5:00 p.m. eastern and we'll be on it. >> let's turn now to this historic move from the fed. steve liesman joins us from washington, d.c. with the details. hi again, steve. >> hey, kelly, good afternoon. the fed hiking rates. they signaled gradual rate rise. this was the criteria for many, for this to be a dovish hike. yellen said the rate hike was a sign of confidence in the economy. and here's the historic quote from the chair.
>> earlier today, the federal open market committee decided to raise the target range for the federal funds rate by one quarter percentage point, bringing it to one quarter to one half percent. this action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the great depression. >> so why hike rates? the fed says they want room to respond to future shocks, to stave off the need for abrupt tightening, pointing out that policy acts with long lags. they're saying they're not removing the combinations, they are simply reducing it. where do they go from here? looking for rate hikes in 2016. i think the market's reaction suggests that is still the
expectation and they can stomach a fed rate hike by the end of this year is a one and a quarter and 1.5%. >> that's for sure. >> my next guest says no, we are going to see zero again. so what happens from here, do you think? >> well, i think the important thing to recall is that ultra low rates do two things. they pull consumption forward and they push business failure out in the future. they subsidize extremely leveraged companies and they promote a lot of forestalls the recognition of business failure. so those two happy things, those are ending. >> they're ending even though they've done such a minor move here? >> they're ending because the
natural forces at work in any market economy. car sales running at 18 million clip as a reflection of uniquely easy terms for purchasing or leasing a car. >> so they're collapsing under their own weight. >> well, they have been accelerated, but that's taking car sales from tomorrow. and as to business failure, we're seeing the necessary consequences of these rates in working in the junk bond market. so the price control, which zero interest rates is one species. price control distorts the markets. and low interest rates, ultra low interest rates promote the misallocation of capital. not just theoretically, but in bricks and mortar and main street. which is not to say that america is in peril. it seems to me that the fed is acting not so much out of conviction. but to save institutional face.
>> so if the music is stopping both because these trends can't really continue anymore, and because they are making this small move today, how does that play out? what does that start to look like over the next couple of months? >> i think business activity will continue to dwindle. it seems the fed will come face to tas with the recognition that the stark fact is it has raised its rate in the midst of the lowest growth environment in the past three rate hikes. 2004. the one before that. the one before that took place in an environment of gdp growing in excess of 3%. oil prices, about the junk bond market, we know about. >> do you think recession is the case? >> well, they never advertise it. >> i think it's the chance that the fed will be seen to have
raised this rate at the start of the session. that's one possibility. >> how strong a possibility would you say that is? >> enough to talk about on cnbc. >> up to 50% to 75%? >> i would say it's a quarter to a third. so many possibilities that the dwindling we are seeing in business activity slumps its way into an actual recession. you don't see lack of recession when it starts. suggests it's possible. i think it's -- so as we say on wall street. obviously it's wrong. the fed today, the fomc was unanimous in this move. wall street is very nearly unanimous. certainly in thinking that there will be a succession of measured rate hikes next year. i think to give paradox and
upset and surprise there do in markets. after all, isn't that what markets are about? >> you know better than most. >> so the scenario that you're painting is one where the fed has to cut rates, going back to zero. >> the last five or six such hikes have been followed by retreat. it seems to me the fed as the evidence begins to mount, as i see it, that the economy is not lifting off, but rather continuing to dwindle. we'll be seeing more and more talk and speeches if the fed. and some pockets move that to zero. i think that will come. >> before we let you go, the better alternative would have been what, exactly? would it have been for them to start having raised much earlier in this cycle? >> the better alternative not to have embarked on this exercise. >> on quantitative easing? >> yeah, it's another
discussion. >> that wouldn't have made today's situation worse? >> today's situation is the consequence of seven years of manipulation. the consequences of manipulation at first are very pleasant. nothing is wrong with 18 million selling. commercial banks are showing almost no credit loss. so what you're seeing is the best of the outcome of this experiment. and what follows is the less desirable aspects. >> we'll leave it there for now. thank you so much for being here. >> you are welcome, kelly. >> really appreciate it. merry christmas to you as well. we have a news alert on aig. >> aig is reauthorizing an additional $3 billion worth of shared purchases to its existing share buyback program, so if you add this new $3 billion authorization to the $1.3 billion it had before, the total open authorization is about $4.3
billion. aig's board has authorized for their buyback program. some strategists thought the fed might hold off on today's hike due to worries about the high yield market. now that rates have been raised, what does it mean for junk bonds going forward? we'll get into that next. and it's a bond blowout. melissa lee and the gang will be joined by greg davis. jeff gundlach is back for more on the fed's moves. it all starts top of the hour.
welcome back. the junk bonds slump a big worry. jeff gundlach voicing his concerns on the halftime report earlier today. >> the jnk price is lower today, believe it or not, than it was three weeks after the lehman bankruptcy. it's incredible. it's lower today than it was when the world was deemed to be on the brink of a potential financial collapse. it's lower today. it's not hyperbolic. >> how will the fed's rate hike decision impact further? jeff gundlach likened this to the worst of the financial collapse. in a way, after listening to what we heard from james grant just a few moments ago, he was kind of talking about the same phenomenon. how do you review the junk bonds going forward?
>> there's definitely a challenging environment present. i wouldn't liken it to the weeks after lehman, for good reason. in addition to that, at that point, no one recognized the liquidity discount that was necessary for purposes of high yield bonds. and frankly, at that point, the regulatory regime that we have now that was created in the wake of 2008 wasn't present. so we've got banks now that are out of that game. they no longer hold inventory. they no longer facilitate trading. so therefore now we have to price a much higher iliquidity premium. the second thing, we have a serious contagion going on with respect to energy and mining. and that's a good portion. if you've got fund managers out there that are holding toxic oil and gas, and mining bonds that they can't possibly sell because
they're total liquidity and they're looking to go ahead and raise some capital, for whatever reasons they need to, they have to go ahead and sell some other things in their portfolio. they're finding those aren't necessarily easy to sell as well. >> that is the weakness recently in the high yield market, telling us not much more than the fact that energy and commodities have been such bad places to be. is the credit cycle in general not turning? do we have to be concerned about any messages they're sending about economic prospects? >> i don't think so, necessarily. i think the committee has been kind of, you know, steady as she goes for a while now and continue to be steady as she goes for a while coming. the next real concern for the credit markets, interms sin te fundamentals is a maturity wall. it's now pushed out to like 2018, 2019, 2020. that's when the issues will begin to go ahead and creep up. unless some issue has run out of liquidity before then and they frankly cannot any longer
support the debt load that they have, a la a lot of specialty retail companies. >> that's the argument, i guess, that defaults surged typically ahead of a maturity wall, if in fact you stop being able to refinance. so as an investor in this area, are they attractively priced right now in general or in pockets to the point where you'd be able to take that headline risk of default? >> i think the most enticing area are triple cs, that are not in energy or mining. because i do think that there could be a considerable rebound. they're trading down very hard on the basis of liquidity. a lot of folks trying to raise cash before the end of the year. so therefore there is opportunity there. so that's where we're focused right now. >> one way for people to think about it, david, while we're digesting the headlines today. thank you so much. >> my pleasure. auto sales as we've been talking a little bit about, one of the brightest spots of the u.s. recovery. but will higher rates slam the brakes on those very sales? what today's rate hike means.
and tune in to "closing bell" tomorrow. we've got a big show. i'll be leave here in new york. joining me will be doug yearley, and david stern among others. don't miss it. year-over-yearly, stefan on lus and gemore. don't miss it. it's your grandpappy's hammer and he would have wanted you to have it. it meant a lot to him... yes, ge makes powerful machines. but i'll be writing the code that will allow those machines to share information with each other. i'll be changing the way the world works. (interrupting) you can't pick it up, can you? go ahead. he can't lift the hammer. it's okay though! you're going to change the world.
record-breaker for auto sales. now that the fed has hiked rates will that be a speed bump. phil le beau is here with more details. >> let's dispel one of the myths over the last couple of months. when the rates go up with the fed, will it kill auto sales. historically and we went back and looked at the data, here it is. you could see when the fed raises interest rate and this is not what we should be looking at but we'll explain when the fed raises interest rate, you do not see a decline in auto sales. many times we saw auto sales move higher. so let's set the table in terms of what we have in the auto finance market right now. the average -- there is the correlation between auto sales and the fed funds rate. they move higher but generally speaking they move higher when the fed raises rates.
so here is the auto finance market right now. right now the average new vehicle loan is 4.63%. that is the interest rate. average monthly payment under $500. most people are financing under $29,000. do we expect that to change? not a whole lot. a spoke to dealers today who said i'll be surprised in the next six months if we see the average monthly payment going up $3 or $4 at most. we might see the impact when it comes to leasing. why? we've seen leasing become popular in part because the automatics could borrow money cheaply and finance a leased vehicle cheaply and the residual values were higher. now as they come off lease, the residual values may drop and not be as profitable for the automaker to offer lease deals. it might happen over the next six months. with that said, now let's look at the annual sales base for auto sales.
we're on track to finish the year under $17.5 million. and i've talked with a number of executives in detroit an other automakers around the world, almost everybody says the same thing. they are not seeing demand being pulled forward and they do expect to see record sales or close to record sales next year even with a gradual rise in interest rates. >> phil, thank you very much. our phil le beau there. what do you think about the points about leasing in light of what we just heart jim grant talking about. >> the bulls on auto sales say sure, we're at record levels. but the average age of the car on the road is still up there. there is still years to go in the replacement cycle. and cars don't die as they used it. it is just not clear. and the hype ear gressive lease deals, maybe the days are numbered there. sfr the fed to fedex. we'll dig deeper in those numbers and what they mean for
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the possibility of a breach can quickly become the only thing you think about. that's where at&t can help. at at&t we monitor our network traffic so we can see things others can't. mitigating risks across your business. leaving you free to focus on what matters most. welcome back. two feds we're talking about today. the fed rate hike and the fedex shares higher after the company beat earnings and revenue expectations. guys, we talked about how they managed to come in and kind of define the concerns. but they are still down 11%
year-to-date. >> yeah. so if you look at the metrics though, ground revenues rose 32% which was better than the 27% in the u.s. that people were expected. and express is the problem child with competition, et cetera. they missed on the revenue. however they beat on the operating margin side. i think that is enough actually. and i think it is a mixed report but the expectations were low enough. so i think it is good to go. >> mike? >> and if it is enough for the stock to rally in a sustained way, it will be interesting. because it screens out cheap and it is obviously at a discount to the market for high quality brand and if we are going to start to look for beaten-down industrial or cyclical names this could perform. >> and the fuel surcharges have helped them and the competitors in the past. we could safely assume those are going away of the do-do bird. what do you think about that. >> i think we should watch amazon because they are structurally changing the way business could be done and could fedex and ups, could they adjust
quick enough. that is why you have to watch the express business at fedex, it is important. >> great point. and amazon, they are makingen road. pun intended. we are better go. thank you both. walely appreciate it. that does it for us on "closing bell" today. a historic day. "fast money" is up next. live coverage of this historic day continues. i'm melissa lee. the fed putting an end to the era of historic rates and hiker for the first time since 2006. he was on the fed today and in moments jeffrey gundlach with $80 billion in assets under management will join us live with his reaction to the monumental decision. but first let's get to steve liesman in washington, d.c. and steve, it does look like, according to the market reaction, the fed a thread of the needle on this one. >> yeah. and they delivered pretty much what was expected.