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tv   Power Lunch  CNBC  December 14, 2016 1:00pm-3:01pm EST

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disney, cbs, comcast, new highs, i like that group. >> doc? >> clf, bought that one today, judge, unusual. >> steel, cliffs, new corp., u.s. steel, aks, all of them. >> appreciate your time today, barbara. >> all righty. >> barbara doran joining us. "power" starts right now. the countdowns are on. plural. first, bracing for a rate hike. the fed's latest decision set to drop in one hour from now. that's followed by janet yellen's news conference. then, trump's text summit. ceos coming to trump tower to meet the president-elect. plus, waiting for dow 20,000. will the fed rate hike push stocks to new highs. ticktock, ticktock. "power lunch" starts right now. ♪ the best song. the clock on the march, taking a bit of a break.
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indexes were pulling back. you can see, we're now flat across the board. the nasdaq just inching positive. all and all, one of the rare not up days for your stock investments. and of course all of this coming ahead of what is likely just the second fed rate hike in a decade. tyler? >> thank you very much, brian. we are less than an hour away from that fed rate decision. most people do expect a quarter point hike. could it be more? we'll explore that in this hour as well. it has been a year since the last hike, then there is yellen's news conference, that's at 2:30 eastern time. steve liesman following all of it for us live in washington. hi, steve. >> good afternoon. just a quick note that we got some data this morning, the fed got some data on the second day of its meeting when it makes its policy announcement. and decision. and that data was weaker. i want to show you the cnbc rapid update. what happened is economists have taken .2 off their forecast for the current quarter, down to 1.8, the first time we have been
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running below 2%. this number, by the way, as high as 2.6%. so we have taken quite a bit off it with a range of 1 to 2.4%. i want to show you who is where. they were well above three, now at 2.4. goldman sachs at 2. barclays down at 1.8. morgan stanley, they're the low on the street, they're looking for just 1% growth this quarter. so the economy seems to be taking a step backwards as the fed gets ready to hike and hike is the expectation, 25 basis point hike. you had all the numbers in there, first hike in the year, second hike in just a decade. let me show you some things i'm looking for here, the keys to the fed. the question is whether or not yellen and company jumps on the trump optimism train. do they boost their rate outlook? they're growth outlook, inflation outlook because of what is happening and the optimism taking over markets. does it affect the fed board room. we're looking, do we get two or three rate hikes forecast for
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2017? won't take much to make that happen. finally, how does yellen respond to questions, i think they're coming from journalists on trump's proposals and his policies. want to show you one more chart here, the outlook for the fed funds rate from the cnbc fed survey. you see there this is for the first time that the market now is above where the fed is. so the question is, does the fed let that lie or do they come up a little bit, or do they wait, tyler, i think more likely until the next meeting when there is a little more clarity on the outlook for the president-elect's economic proposals. back to you. >> that's a significant point, steve. thanks so much. speaking of the markets, the dow turning positive ahead of the fed. let's get to bob pisani live at the nyse. >> dow having a little problem in the last few days because the sector leadership is rotating and should. some have gone parabollic. remember, we had leadership, exxon, industrials, like 3m and financials like travelers and jpmorgan. not a lot of energy from them in the last couple of days.
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if you look at the sector winners, so far this week, all the big sector winners, the banks, small cap russell 2000, transports, material industrials, they're down. we're getting resistance now that these things have had enormous moves up in the last few weeks here. you can see that today, in the sector, laggards this quarter are the winners today. technology, consumer staples and utilities all are doing a little bit better week to date. that makes sense because those had been the laggard. this is what i mean when i say rotation. see this today, and what are the sectors -- what are the dow stocks that are on the upside. it is basically technology stocks, like cisco, and apple, and consumer staple stocks like procter & gamble. walmart up all day. that is the famous -- the biggest consumer staple stock of them all. all of this could change if janet yellen is sufficiently dovish and enough optimistic. fine balancing act, steve liesman just explained to you. >> absolutely, the trading today
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is so typical, flat into the decision. thanks, bob. for more on what to watch ahead of the fed's decision, let's bring in kate warren and bob doll. kate, does the fed do anything today to derail the very strong rally we have seen since the election? >> i don't think their intent is to derail the rally. i think they're pleased investors are expecting stronger economic growth, and that's what the fed has been looking for several years. but i think at the same time, investors are looking for some confirmation that we will see better policies with the new trump administration. i don't think we'll see that because i don't think the fed will be incorporating any of those expectations into their outlook, and they'll be quite cautious and saying we don't yet know what the policies are, we don't know the timing, and so i think we may see some disappointment there that the fed doesn't reinforce these more optimistic expectations. >> ban, whob what do you think?
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any reason to take your foot off the accelerator? >> i don't think so. maybe because the market is tired. it is up 24% since the february low. so the market has done a lot, is entitled to a rest. i don't think the fed will get in the way much. i agree, they'll say we don't know, we don't know when. >> what is the most important thing you're watching for as steve liesman outlined. is it whether or not they talk about donald trump's potential policies? is it what they think the growth rate is going to be? or is that not relevant because they want to wait to see what the policies are? are you looking for a hard core -- this is what we think we're going to do next year when it comes to rate hikes? >> i would love them to show the way toward higher rates, you know. i've been of the view they're behind the curve. i think one of the interesting things they'll need to address is, okay, in light of the hope for good news from the trump administration, business confidence is up. will that translate into more spending, more capex, even before we get the new policies.
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that will be one of the balancing acts the fed needs to work with. >> i don't want to steal the thunder. what if they don't raise rates? what if they just stay doves? stay up in that little cage. >> i think they will surprise 100% of the people. >> what happens then? stock investments reverse, do the markets fall, do bond goes back up, do yields come down, does the dollar move? >> i think the markets will scratch their head and say what is the fed doing? what is the fed looking at? what has the fed been signaling? what does the fed know that we don't know. i don't think it would be a good reaction. >> what are the odds today. brian asked what if they don't do anything. what if they doe hago half a po. do you think as we move into next year that the internal discussion within the fed leads towards higher, quicker if there is a lot of fiscal stimulus. in other words, that the fed will feel a need to counteract
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that stimulus? >> i don't think there is any chance of more than a quarter point, similar to what bob said about not much chance of -- zero on the upside, zero on the downside, they communicated pretty clearly it is a quarter point. in terms of the outlook for next year, i think they'll continue to emphasize that they'll be patient and watch the data. and that means that whatever the policies are, if there is a stimulus plan, it is likely to happen later on in the year, and we could easily, like we have seen the last few years get slower growth, not just in the fourth quarter, as we were hearing earlier, but also in the first quarter. we had this sort of funny first quarter effect, and i think they'll be reassuring they're watching the data and taking the appropriate policies. so i think the market will take that as good news. i think where they could see some disappointment is if the -- if at the press conference we hear more about the possibility of more rate hikes if the economy picks up, because that would suggest they'll be trying
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to slow it down and exactly at the point where investors are saying we got the growth we're looking for. >> that's what the markets are saying right now. thanks so much. >> if you're largely invested in fixed income, you may be wondering why does cnbc keep talking about a rally? bonds are down across the board in the past month. some bigley. which begs the question, if you're heavily into bonds, what do you do now? scott mathers. i guess you get my point. stocks have been soaring. if you have a well diversified portfolio, you're probably looking at your returns and going what is cnbc talking about? how have you changed your clients investing strategies over the last 30 days? >> well, that's a good point. and we're just coming out of our most important quarterly meetings, so we'll be publishing our cyclical outlook tomorrow. so won't steal all the thunder from that. obviously one of the things that has happened is we had a big adjustment in yields. so from these levels, we're
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looking at a much more fair pricing for fixed income. so we have taken advantage of some of that sell-off and repositioned accordingly. much more value in high quality fixed income bonds today and less value in lower quality fixed income. >> we can't overstate it, the ten year yield, scott, i don't need to tell you, i'll tell the audience, is up 44% in three months. that is a nearly unprecedented move. i would assume pimco being as big as you are are some of the sellers of treasury bonds, so where are the proceeds going? going into other bonds? going into the equity market or cash or gold or -- >> should be careful about making those assumptions. in this case, i don't think that would be correct. we own more core fixed income, more treasuries today than we have in the recent past. >> what? >> you've been a buyer into the -- everyone else is selling to you. >> well, that's -- and one of the things that we're talking about, you heard us talk about the new normal and new neutral.
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you'll see us re-emphasize that on the outlook. as we still think that's applicable. we had a big adjustment in price, we still think that the neutral level of funds is in the 2, 2.5% range. we're likely to get there over the next few year on a slow -- in a slow process. that means you look at ten year rates, which on a going forward basis, the market is priced that they get closer to 3% over the next couple of years, we think that's much closer to fair value. no reason to be overly bearish on fixed income, especially at this point, after we had 100 basis point or so adjustment. >> what is your view on the yield curve overall. some people think that inflation is a risk or is a bigger risk near term, but out in the yield curve, they don't see it going higher. which would imply a curve, like a hump, or flattening or slope downward. >> yeah, so we have been talking about the value in inflation
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linked treasury bonds. they have been to perform quite well, relative to nominal bonds. we think that's what investors should focus on when thinking about 10 and 30 year maturities in high quality bond portfolio. that will protect you from what is likely to be rising inflation and rising inflation expectations. we think the fed is trying to engineer an overshoot of their inflation target and likely to be successful. but we're not talking about radical 3% inflation, just about inflation getting back to target first and going slightly above that over the next couple of years. >> what is the sweet spot on the -- in duration right now with respect to government bonds and what besides governments have you been buying? >> we think there is quite a bit of value in other sectors, mortgages is a sector both in the agency side, we think they have cheapened up substantially and should do well going forward. as well as nonagency mortgages.
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it is a pretty good environment for some credit related assets. there we would focus on once again still being pretty defensive, but looking at shorter dated corporates, a substitute for treasuries, still overvalued. >> shorter data. like a 2-year s&p 500 company? a three-year? >> yeah, the 2 to 5 year sector is what we're emphasizing. >> and s&p 500, that kind of quality is what you're talking about? or could you go lower? >> yes, in most cases. we haven't talked about emerging markets. we have seen some overshooting in that sector. it is a sector where there is more interesting opportunities. one of the themes we're emphasizing for the outlook in the year ahead is this is not a time to be -- to act or position your portfolio as if you're overly certain about the outcome. there is a wide range of possibilities, left tail and right tail. it is not a time to be investing for certainty. and our concern is that much of the market seems to be priced as if they're quite certain of the outcome next year. >> scott, we'll look forward to
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the outlook that you're going to be releasing tomorrow. sounds very interesting. scott mather, thank you. enjoy your fed day. >> thank you. >> dreams of higher rates and less regulation of financials on a tear since the election. your playbook ahead of the fed's decision straight ahead. tech titans head to trump tower, getting to meet with the president-elect. we're there live. mary buys a little lamb. one of millions of orders on this company's servers. accessible by thousands of suppliers and employees globally. but with cyber threats on the rise, mary's data could be under attack. with the help of at&t, and security that senses and mitigates cyber threats, their critical data is safer than ever. giving them the agility to be open & secure. because no one knows & like at&t. so what else is new? humm..she's doing good. she needs more care though. she wants to stay in her house. i don't know even where to start with that.
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fiand see what we can do.at ok, so we've got... we'll listen. we'll talk. we'll plan. baird.
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we're watching the parade of arrivals at trump tower.
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we're told that jeff bezos has arrived. that's the back of his head. he turns around in the elevator, you can see him as the doors close. front of his face. ceo of amazon, of course. >> he should have brought a package, come on. a delivery. >> a drone. >> a drone. >> go through the service entrance. that's the rule. with the fed decision just minutes away, we're keeping a close eye on the financials. the sector has far outperformed the rest over the last three months. up over 22%. will financials continue to outperform? let's bring in jeffrey harp and anton shuts. anton, if you look at some of the valuations, the runs are stunning. the valuations are more stunning when you look, price to earnings ratio, that may not be the metric you use, but for regionals, i looked at comerica, 27 compared to bank of america. where are you finding value at this point? >> as i've always done, i found value in banks that are doing
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things. companies selling themselves, buying other companies at good prices. we're seeing some of that. some of the guys using new found currency to buy others and smart deals and seeing a lot of capital raises and the ones i'm interested in are the ones where they're raising money going on the offensive and using currency to buy others. the pe ratios are misleading. the tax effect is not in those forward earnings estimates. and most banks pay close to 30 to 35%. so any sort of massive tax cut, pe ratios are lower. >> and i think the rule of thumb is for every 1% lower on the corporate tax rate, that's a 1% boost estimate. if you factor that in to your favorite stock, you layer over that the expectation that there could be fewer regulations or some of the regulations could be paired back, do you then look at the companies that have suffered the most under regulation and say those are the ones that could stand to benefit the most under new regime. >> i do think that's the case. sitting here, we like citigroup,
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b of a, goldman sachs. i think there is a lot of good news priced into the stocks now. another way of looking at it, just a valid a way of looking at it, there was a lot of bad news priced in before. depending on what we end up getting, there could be a lot of upside to earnings or a little bit upsid to eae to earnings. the move we have seems reasonable relative to the fundamentals we're expecting there is the potential to go up or down from there. if you start factoring in a tax rate cut, things like that, you can come up with some very big earnings numbers very quickly. >> you mentioned you think a lot is priced in. how much? is a full repeal of dodd frank what we're seeing in the response in the stocks? a partial rollback, just leniency from regulators when it comes to liquidity interpretations. how much do you think is priced in? >> that's a tough question. i would say any tax benefits are not priced in when it comes to the regulatory environment.
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we may be pricing in kind of an easier day to day scrutiny from regulators. but certainly not a repeal of dodd frank, period, or let alone parts of it like volcker. but even just, you know, looking at volcker, 15 metrics the banks have to report on every day and they're afraid to trip over them. if that just gets eased a little bit or they can miss for a day or two, that could push a lot more capitol of trading desks and push things up. i think we're pricing in stabili stability. >> a comment and question to anton, a comment around the table here, guys, coming back from d.c., i can assure you that any elimination or major rollback of dodd frank is difficult at best because you still need 60 democrats, you need six or seven to get on board. assuming all the republicans go for it, and everybody we talked to on air, off air, said that is going to be very, very difficult, anton, the question to you is, i hear what you're saying, when i look at a zions
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bank core, not picking on them, stock up 40% in 90 days. how sure are you that many of these sort of stodgier retail and regional banks haven't just gotten ahead of themselves? not their fault. >> if you put all of the positives in zions, i don't have a position on it here. you can actually make an argument they're capable of earning $4 a share. so if you look at 2018, which you have to take a whole bunch of leaps it not as expensive tass looks. a lot of the stocks that moved have been heavily shorted. zions has a lot of energy exposure. you had a dual effect of people covering shorts. oil prices went up. this company is not as expensive as it looks on the surface. >> anton, thanks. special addition of the good, the bad and the ugly on tap as the dow eyes 20,000.
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check this out, president-elect trump just a short time ago tweeting out a picture of bill gates with nfl hall of famer jim brown, following their meeting yesterday. trump calling them two great guys. we'll be right back.
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all right, welcome back. we're doing a special good, bad and the ugly for you today. as we close in on dow 20,000, you know, good, bad and the ugly. normally we highlight three
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stocks in focus that day. today, we're going to focus on three dow stocks this year. first, to the good. that's got to be caterpillar. that stock, the best in the dow this year, up nearly 40%. on to the bad, disney, it is only down about 1% this year. that's bad for shareholders because the dow is much higher. it has been an underperformer. it is ugly for nike. that stock down about 17% this year, making nike unfortunately the single worst dow performer by far of 2016. tyler, she dog a great book but not a great stock. >> coming back lately, i think, if i'm remembering correctly. look at disney. lining for the disney latest "star wars" film, rogue one premieres tonight. fans camping outside the fame ous tlc chinese theater in los angeles. they have been there since yesterday. same group that has lined up early for all of the past modern era "star wars" films starting
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with "the phantom menace" in 1999. already got tickets. a raffle whether they get to inside the theater. sit outside? >> i guess. >> must be an outside viewing. >> i guess that would be a hear 3 po because they wouldn't be seeing anything. that was cute. >> it was okay. >> raising funds for the star light children's foundation. tech giants at trump tower, including apple, amazon, microsoft, oracle, meeting with president-elect trump in a few minutes. just over $3 trillion in market cap gathering in that golden tower. dying to know what is on the agenda. and counting down to the fed's latest decision on interest rates. about 30 minutes away, many expecting a hike. that's followed by janet yellen's news conference. we'll be all over it.
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hi, everybody. i'm sue herera. here is your cnbc news update for this hour.
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the national highway traffic safety administration officially kicking off its drive sober or get pulled over campaign. it is an effort to raise awareness about the dangers of impaired driving. last year 259 people were killed in alcohol-related traffic accidents during the holiday season. pakistan says it has conducted a successful test of its babar cruise missile which can strike targets on land and see within a range of 440 miles. great lakes public hospitek workers walking off the job. it comes as the lenders continue talks for a bailout. that's a cake, re-creating a british village and it is going up for auction tomorrow to raise money for the local church. yulegrave is a small town. the cake which includes 35 fruitcakes has attracted a large
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number of visitors. it lights up. there you go. just in time for the holiday season. that's the news update. back to you, brian. >> i want a bite. >> i know. >> a la mode. >> have to be a fruitcake lover apparently, though. >> yeah. >> i think you would feel very powerful taking a bite of an entire village. do what i say -- the markets are steady ahead of the fed rate decision, the dow turning slightly positive. american express, visa, ibm leading the way. tech utilities, consumer staples, the s&p sectors. all bets are off as we head down to this fed countdown in less than an hour. >> leaders meeting with the president-elect just about 30 minutes from now. the meeting set for 2:00 p.m. at trump tower. we're there live, john harwood is outside. on the lookout for those guys to walk in. have you seen anything so far?
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>> just a lot of -- >> sorry, john, sorry, on the inside. >> jon fortt, you go ahead. >> intel just walked in. we heard that jeff bezos has shown up already. stafford katz first entered around a quarter to 11 and is coming back. she's got other meetings here today as well. there are a couple of different entran entrances, people entering from the street, entering from one side, which you can see from our camera and people coming in by car. entering around the other side, going up the same set of elevators. as you said, the meeting expected to begin around 2:00. not sure how long it will take. but many of those executives filtering in now. and i had heard that there was a meeting of at least some of
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these executives and ceos ahead of this meeting. some sort of premeeting. can imagine not -- not every day that executives of this caliber from the tech industry are all gathered together in one place and seem to be taking advantage. at least some of them of the opportunity to get together and discuss something. not sure exactly what. clearly an important meeting, many people tried to support hillary clinton, in the presidential election, or distance themselves from specifically supporting donald trump, had been holding -- planning to hold an event involving donald trump. that was publicized as a fund-raiser which intel said it was not intended to be that canceled that. now they will be meeting. >> a premeeting ahead of the big meeting. that implies that maybe the ceos are a little worried about what the president elect could have up his sleeve. >> i think there is good reason
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for that. we have seen from boeing and lockheed martin, if the president-elect is displeased with companies, and how they react to certain things, he might send out a tweet and maybe the stock price will go down. you also have the reality that these were tech executives, who didn't care for donald trump's campaign. he didn't care for them. went after cook and bezos and they got to figure out how to live with them now that he's president-elect. everybody wants to be practical about it. but these are also people with strong values, individually and corporately and in the valley and so i would expect they're figuring out what kind of approach to take. >> all right, guys, thank you. john harwood outside. jon fortt on the inside. we'll keep you posted on who else walks into that tower. worth noting the collective net worth among all the ceos there, over $200 billion. the companies they founded and or lead have a total market cap
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of over $3 trillion. a lot of money walking the streets of manhattan this afternoon. >> i'm so surprised not to see on there the ceo of twitter. i mean -- >> not invited apparently. >> that's a great point. yes. >> number one customer. >> hello. >> i saw jack dorsey -- >> jack dorsey was asked recently about how he felt about donald trump using twitter. and it was so mealey mouthed, mushy. it is complicated. come on. the guy is your best advertisement ever. >> if you're trump, what would you ask this group of people? i would ask, is automation, software that you're providing, going to benefit the american worker? and how? i would want to know.
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>> the american economy or the american worker? >> the american worker. the economy is a collection of workers. is your technology going to take jobs? can't disagree with my question. >> i think he'll be yelling at them. just like -- just like the journalists. >> not all the ceos are cut of the same cloth. elon musk, he manufactures in the united states, building a giant factory in the united states in the las vegas area. he rescued a plant that was a joint gm/toyota plant in the -- 2010, they started making model ss. he's committed to making cars here in the united states and having the technology developed here in the united states. i don't think it is a coincidence you saw tesla shares outperform yesterday and today. >> you think he's going to yell at them? i don't. i think he likes success. i think he likes business. i think he detests journalists. >> will he yell at them. here's why he would. collectively, these people did not stand up for him.
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they were quite negative. silicon valley with the exception of peter teal and one other guy on who acknowledged he would vote for donald trump. but there was all this consternation, all of this stuff th that happened in silicon valley was anti-trump. >> he'll hold that against them. >> now the other side says, the proliferation of fake news on facebook may have helped him. bezos owns the washington post. >> which he called a scam. >> dow turning higher. how are trading desks getting ready for the big decision out at the top of the hour? seema mody live on the trading floor with cowan ceo jeff sullivan. >> the fed could potentially steal the spotlight for trump today with a first rate hike expected since december of 2015.
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let's bring in president of kalyn, jeff sullivan. half an hour to go. what you expecting? >> i'm expecting a raise. i've been saying for a while, irrespective who is elected, this is the optimal time to be doing this. fed has been waiting to see what decisions were made bit american public, this would have been the time for them to do the next raise, trump or clinton. >> big question for investors, can we have a rising rate environment and rising stock market? >> great question. i think -- i think we're going to get a rising rate environment, short end. the fed has been waiting for the optimal time. we have some steadnyness to the economy, pro growth going forward. an infrastructure bill, so the fed has been waiting for fiscal stimulus to take hold. now that we're more like through get that, you'll see it actually happening much more quickly next year. >> do you think president-elect trump's fiscal spending will be
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the catalyst behind stocks, not monetary policy? >> i think monetary policy will act as a little bit of a governor, if you will. i do think, you know, if we're talking about the fed funds getting into the ones, it is not that much of a determinant. more psychological. the question is how fast will they go and where will they stop? that's the ultimate determiner on stock prices. the pro growth policies are way more important than fed action. what you're likely to see is a balancing and more focus on fiscal policy now than on monetary policy. >> why do you see bonds headed six months from now? >> that's a tough one. long end of the curve will be about how we feel about inflation long-term. if you look at growth globally, pretty slow. it makes it super hard to have a strong dollar here. versus the rest of the world. it will impact export prices. with so much going on, tax code changes and talking about the new tax regime, may or may not have an impact on u.s. exports
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and imports, way more important things that will impact the economy than just what the long end of the curve is doing. i feel like the long end of the curve -- a lot of it has to be figured out before we see -- call a direction on the long end. >> are you recommending clients to buy stocks? >> today? >> yeah. i think, you know, any of these increments -- >> dow 20,000. >> market timing is such a tough thing to do. there is some things to look at, a better time to be buying stocks in anticipation of growth. the fed raising rates is just something you think will happen, i think it is factored and priced into the markets. >> jeff, thank you. back over to you. >> seema, thank you very much. still ahead, a closer look at what stocks have done in the past, following the election of a new presidential administration. really interesting stuff. we expect nothing less from dominic chu.
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>> look at what is happening overall with some of these presiden presidencies. a lot of comparisons being made between trump and reagan. we'll see if the numbers play out.
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the parade continues at trump tower. elon musk having just arrived there at trump tower. he's getting in the elevator. this is a live -- >> this is like the red carpet of the oscars. where is -- i was going to say where is billy bush. i shouldn't say that, should i? >> no. that guy should move so we can see her. doesn't he know he's right in the camera shot? on purpose. >> yeah. and ibm, i guess last night, in an open sai-ed saying they're go hire. >> the new collar jobs, right? >> not blue, not white, but new. >> don't need an advanced degree
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for a job in technology in the united states. enforcing the idea you can get a new job out there, find a new industry and this could be one. >> she's upset she missed that elevator. there she goes. watch her turn around. there she is. they're building the next store, so not a long walk. >> stocks on a tear since the election. where do they go from here? dominic chu looking at how stocks have performed historically between election and inauguration. >> if we look, there has been a lot of comparisens made between whether or not trump's first year in office will be like ronald reagan's first year in office. earlier last hour on "the halftime report," you heard richard fisher say he did see a one point a 20% drop in the dow from the trough levels. he was right. look at this. in reagan's first year, between election day of 1980 and inauguration day of 1981, the dow moved higher. but it did drop to finish the year between inauguration in 1981 and the end of the year by
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8%. did drop by 22% at the lows of the year. if you look at since 1981, since reagan, all of the first times are -- the first terms of presidents since 1981, on average, between inauguration day and the end of the year, stocks are up, dow up by 11% so far on average. the worst performance was that reagan first year, 1981. but the best performance barack obama, 2009. you may recall the caveat there is we were at the lows of the financial crisis back in 2009 and ratcheted up sharply from there. we talk about the comparisons, it is important to put some historical things in focus here. as we refer to whether or not donald trump can continue this trump rally, into the end of next year, want to keep in mind that overall the five times we have seen presidents on average, the stock market is higher. >> great reagan bull market of the '80s didn't begin until the summer of 1982. quite a while. that was the turning point.
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what else is the market telling us about expectations for a trump presidency and a fed rate hike? let's bring in jeff rosenberg, chief fixed income strategist for black rock and ron insana. welcome to both of you. >> thanks, tyler. >> do you see any possibility they would go more than a quarter point, and, number two, do you think that within the fed the discussion in 2017 is going to be about do we need to be a counterweight to a fast growing economy, egged on by fiscal stimulus, tax cuts, infrastructure spending. >> those are great questions and the market will focus on that at 2:00 p.m. or during the press conference as well. >> sorry to interrupt, we're seeing live pictures of the ceo of microsoft entering the tower. he's in the elevator now. >> go ahead. >> on his way up, very good. want to make one point about the previous segment about 81,
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you'll remember you had some interest rate movements, big inflationary environment that volcker was trying to reign out. there was some very unique periods around there that we clearly don't have today. it is a very different kind of environment. to your questions, tyler, the market is expected 25. i think that's what we'll get. i think the second question you asked is more important, around, you know, how does the fed react to this potential shift upward in growth and growth expectations, resulting from changes in fiscal policy. and i think what the fed will say is it is too early to comment on that, too early to say, too speculative. over the course of the -- particularly the gin beginning part of 2017, a focus on how the fed reacts to higher growth environment. not priced into the market now. the market is pricing for two hikes in 2017. it is a big issue. >> we had a conference brought on before the show, by brian, which is this is the last time we really is to pay that much
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attention to the fed? are we going to start paying attention to the economy? is the market telling us this is the last eight years are done, and now we can focus on something else, rather than every quarter -- >> i've been doing this for 32 years. >> the last eight years aren't unique? >> they're unique in the direction in which we moved if you go back to 1980, which jeff was talking about and -- >> the ceo of oracle standing right there. >> she arrived earlier. must have come and gone. >> doing some shopping. >> starbucks. >> lots on fifth avenue. >> lots right there. >> sure. >> jeff alluded to the early days of reagan. we were talking the prime rate and short-term interest rates from 20.5% down to much, much lower levels. that was a period in which gentlemen like henry kauffman, doctors doom and gloom, created the industry of fed watching. so it has been with us for -- i don't think we can stop watching the fed. monetary policy --
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>> had a recession. >> i want them to be less important. >> they set monetary policy. i agree with jeff, in the short run, if donald trump with a republican congress is successful in large scale fiscal stimulus, tax reform and deregulation, that may boost the economy, but the fed may end up being the counterweight and in my estimation, we talked about this a couple of weeks ago, may move faster and farther than people are discounting. >> all right. gentlemen, thank you very much. jeff, ron, appreciate it. the countdown continues. minutes away from the fed decision on interest rates. and from some of the biggest names in tech, they're meeting right now with president-elect donald trump. dow 20,000. keeping a watch on all of that straight ahead on "power lunch."
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more live pictures from the elevators we are told that eric schmidt, larry page and steve mnuchin, there you see them. larry page is toward the back and on the left is also steve mnuchin, the man donald trump wants to be treasury secretary. >> can you imagine if that
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elevator for tgot stuck? >> that would be bad. >> what are the odds. you can imagine -- i'm thinking what might be stuck is fifth avenue. anywhere they're that building right now -- >> earlier this morning it was a mess. >> i bet. you it squawk, right? >> yeah. >> fed decision seven minutes away. don't move. i laugh, i sneeze...
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and welcome back to power lunch oig. we are just five minutes away from the fed decision on rates and what is likely the second rate hike in a decade. also, some of the biggest names in technology as we have been showing you set to meet with president-elect trump. we are waiting for tim cook and cheryl sandberg. and also maybe waiting on dow 20,000. we could be waiting minutes or years for dow 20,000. just because we're close doesn't mean we will hit it. let's bring in our all-star fed panel. and we have a former fed adviser
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onset with us. scott, let's start with you. obviously you're in the 25 basis point rate hike camp. you've already positioned yourself and your money that way i'm assuming. what for we need to focus on most at 2:00. >> i think there are two things. the language that we're going to hear in the press conference and in the statement about the pace of the increase in rates, and the dot plot. i think that we're likely to have the fed soften us up for the poelts ssibility of three, even four increases next year. >> that's a lot. i don't think so. b of a merrill took their estimate down to 1.3%. so we could end at 1 pp.7% of economic growth. janet yellen will be paying to the economic data we've been seeing the past few days. >> i think that first off with
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all due respect to the bank of america, i don't necessarily agree with what they're seeing in terms of growth. i think that the fed is going to be very concerned about the impact of trump nomices. and the likelihood that there will be some significant stimulus next year in which to the ratcheting of confidence which is already starting to show signs of lifting the which i. >> and tie diana, if you're jann and if you think that the donald trump will get this maybe $500 million to a trillion infrastructure plan or tax reform that provides cash infusion into the economy, do you have to get ahead of it by perhaps being aggressive on the rate hike cycle? scott, is that your thinking? >> close enough. >> and i agree with scott that i think that we will see the dispersion of dots move up and
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also worry about about asset price hikes and the move down to 4.6% on the unemployment rate. so i agree 100% with scott. that said, the fed is reactionary. there is too much uncertainty. they have to react to policy, not promises. and i think that that is where there will be tension within the fed. i also think it's important the elephant in the room is in fact not just watching the fed, we should be watching it more now than ever because we have an unprecedented opportunity the president-elect to reshape the face of the fed and curb its independence. >> we have to go pretty quick, but what do you think? >> janet yellen i think will get a rate hike, but she will be dovish because she wants to let them make policy first and then react to it rather than presume what they will do. >> all right. so i won't go any further on that. here is our setup, though, because we might just get the second rate hike in just a
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decade. dow up about two points. oil down 2.5%, u.s. dollar a dollar six per euro. >> traders going out on a limb. >> going nuts. slow down, america. 2. -- i was going to say flat as an ihop breakfast. but let's talk about the grand slam of them all, steve liesman with the fed decision. >> a quarter point hike, the federal reserve in a unanimous decision raising its benchmark interest rate by 0.25% to a new mid range of 50 to 75 basis points from the old one of 25 to 50 basis points. it brings the mid point to 0.625% from the prior prks call it 62 versus 38. the fed also increased the rate outlook for the next several years by essentially adding a single hike to next year. the average fed official looking for three hikes in 2017, that is up from two if they go by quarter point hikes.
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so the 2017 forecast now for fed fnd funds rate of 1.4% versus the prior forecast of 1.1%. so it's a somewhat aggressive fed for next year, but that just carries over into the subsequent years such that when you get down to the long run rate, it's 3% versus the prior of 2.9%. the fed expectations remain for only gradual increases. the risk to the economy, the federal reserve says are roughly balanced. also of course the federal reserve raised the emergency discounts window rate from up to 1.25% from 1%. the fed now looking for somewhat less improvement in the labor market. in other words, it says that policy supports, quote, only some further strengthening in the labor market before it was further improvement. so not looking for a whole lot more from the labor market, though does seem improvement coming and also inflation headed towards 2%. a couple things on the economy. it says the economy is expanding at a moderate pace since mid
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year. it had been a modest pace. i don't know what the much difference is there. unemployment it says has declined. job gains it says are solid. household intending rising mode modestly. business spending is soft. inflation, they're a little more worried about inflation. they say it's increased before they said increased somewhat. so those are the big headlines, guys. a little bit more concerned about inflation when you look at the language, they talked about the market based or the inflation spreads in the market having gone up quite considerably. so a quarter point here and maybe a slightly more aggressive fed to next year. but not by the way for outlying years beyond 2017. >> got it, steve. thanks so much. let's bring back our all-star fed panel. diane, david, danielle, and scott. david kelly, initial reactions to everything you just heard there steve. >> that's very much in line with what i thought we would see. and i think you will see even
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more dovish language out of janet yellen in her press conference. i don't think they wants to preempt what might happen next year. but for investor, it's important to factor this in along with what has happened with markets since the election. because it seems like in the u.s., we're pricing in every possible positive, and emerging markets in europe, we're pricing in every possible negative about . so markets have become dislocated. i think people should keep a focus on that, not just look at fed policy, but think about how far markets run in relative terms and is that quite appropriate. >> did you hear anything in a surprised you? >> not really. the one thing that i do think that the doves managed to push through was a nod to the fact that the labor force participation rate has nofthat muched donotched down to its loetest in six months. i think they're concerned on the employment side of the mandate, but again, they nodded to the rise in inflation expectations.
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>> three hikes in 2017, is that more than what the market expected? >> i don't being you can trust fed funds futures expectations actually. i think the numbers are distorted. i think that is in line with what a lot of people are thinking, six rate hikes. >> who is saying that? >> i know some managers are saying that. because it has to do with inflation. if inflation begins to pick up and if you get this fiscal stimulus, the key issue is we have a healthy tortoise, but you put the tortoise on steroids, the fed will have to lean that. so the fed may lean against that. >> i take david's point that miss yellen doesn't want to get ahead of policy, but she sure doesn't want to caught playing deep catch up. what is the conversation like in the fed next year, that's number one, and what is it like as we get toward the end of next year
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when there is a question as to whether miss yellen will be reappointed ie will she be a lame duck? >> before you answer that, we're at an all-time high in the industrial average average. 40 points around from the 20,000 mark as we see all three major indices in the green here. tlt still trading higher. >> and i think that tyler, the focus of the fed is going to be on date of depend ebs city. they have emphasized this so much ad nauseum. >> that is so boring. >> and reactionary. >> you're right. and so i think they're going to be focusing on the incoming data, they will be seeing how successful the trump policies are in terms of getting implemented. but to your point, tyler, i think that the fed would be reluctant to be pretty sized for falling behind the curve. and so even if we get three rate
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increases next year, we have rates in the neighborhood of 1.25% to 1.5%. we're still below -- >> fair enough, but who aim to disagree with our esteemed panel, especially my good friend scott, but i'll say this, steve, we have three new voters come onle to the fed next we're. we don't know robert cap lynn, kashkari, har kerr, we don't have any idea how they will vote, do we? >> we can game out some of it. you know, kaplan, kashkari a little more on the dovish side, but probably more like five new voters. but i want to walk people through, i'm seeing an initial dovish reaction and i want to walk through why it -- i don't know if this will hold up because the market does all kinds of crazy things after a fed statement. >> stocks or bonds? >> stocks were a little higher. and the reason is if you look at the outlying years for the fed forecast, they really didn't change much expect for that one extra hike in 2017. i thought there was a risk that
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if the fed went -- and i thought it was very possible and likely it added one in 2017, it could have added another in 2018, but all you see in the right hand column by the way is that same quarter point filtering through to the outlying years. so if you look at what has happened by the way to the long run rate, it's 3%, it was 2.9%, so you're still looking at a very gradual fed at least for the moment they're not building in additional hikes in 2018 and 2019. you could have had some people bracing for a somewhat more hawkish report thp regain that . and if the economy is doing better, if there is more fiscal stimul stimulus, and the price for that is another quarter point, i think a lot of guys on the street would take that if they showed up probably in spades in earnest. >> and no surprise we're seeing a spike in the regional bank etf, kre higher by almost 1%, s&p financials 52 week high on the back of this if not multiyear high at this point. david kelly, isn't this pretty
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much exactly what the market wanted in terms of confirming enough the notion that was coming down the pike coming more economic growth than previously expected than maybe the 2.2% p consensus on wall street at this point, enough for the markets to at least take a pause if not go higher? >> yeah, because what this says is that for the moment, the fed is not going to take away what the new administration giveth. and i think that is a positive. so i think there a lot of uncertainty about how much fiscal stimulus we will actually get and i think that will be reflected in yellen's remarks this afternoon. because there are some people like both the senate majority leader and the head of the house are talking about we're not going to -- we want some of this revenue neutral. revenue neutral is not stimulus. is a lot needs to be worked out. >> stay right in. we want to get to bob pisani. bob, what is the reaction?
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>> listen, if the goal is to not move the market, it's a master full statement. we're essentially unchanged. one or two points in the s&p is not statistically significant. any move that indicates steeper yield curve, higher rates would move true here very small here. that is not a big move overall. if you take a look at some of the more interesting rate sensitive areas like real estate for example, just a very small crop. bu drop. but this is normal that you see on a typical day.p. drop. but this is normal that you see on a typical day.p. drop. but this is normal that you see on a typical day.p. drop. but this is normal that you see on a typical day.drop. but this is normal that you see on a typical day. most moving slightly to the down side. so we were talking to people down here what she had to accomplish. she has to continually acknowledge the improvement of the economy. they did so here. they didn't upgrade the economic analysis in the first paragraph. she doesn't want to send a strong signal that inflation is
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picking up. there is 2that one word considerably market based measures have moved up considerably, but still are low. that's the only word she added, considerably, and she's side stepping questions on whether proposed fiscal stimulus will impact their monetary policy, nothing at all about that although i'm sure she will be asked that in the press conference. we'll see what happens coming up. back to you. >> bob, thank you. let's get to rick santelli. reaction from the bond market. just before the decision, twos were up and spiged. >> i'll tell you what, i think first of all the dollar index gets the trophy for making the biggest move and sticking it the best on the landing. it was godown, a bit, now a big turn around. i pepged it at 116, now at 121. so it's up about five basis points from where it was. and that is sticking pretty well. fives are clearly the winner how much they have moved.
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and consider this, twos, threes and fives will have closes if they stay in this neighborhood that have extended their historic range. not true on the long he said. tens are still flirting 249, 250. we had higher intra day highs. 30s same way. so in terms of what can we garner from all of this with regard to the marketplace? here is all people are talking about. and i know steve and many are trying to make this seem like there is a dovish slant. when i talk to traders, here's what they say. if the equity markets seemed uncomfortable with what is going on, whether the curve, interest rates or the dollar, they would be nervous. but they're not. they like the way it's all married together here. >> rick, i'm not trying to make it seem anyway, so i take exception to that remark. i'm trying to report the news
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and -- >> well, don't get -- >> thank you guys. much appreciated. point taken. i want to change the subject slightly, danielle. when i watch what donald trump has done thus far, the cabinet that he's chosen, i look at that and i say you know what, janet yellen is a lame duck. there is going to be a new person in charge of the fed. >> absolutely. you've heard names floated around people who are much more pragmatic, they understand the impact of monetary policy on the economy because they're on the receiving end. i think that that is -- i wouldn't be surprised to see him put a ceo or suggest a ceo who has been again on the receiving end of monetary policy. >> could that person not be an economist? is that possible? >> michelle! i hope that's the idea. i wrote an e open letter to tru today asking for that. >> t die auane wants to get a word i.
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>> we'll have two new seats that will be appointed, there are people who are against the fed, want the gold standard and want to raise more rates more rapidly which is kind of ironic begin what the president-elect would like to do. but we're also talking about janet yellen will stay the course, but she'll have more hostile people on her own board in terms of the course shalle ws to stay. she will be replaced and stan fisher, so we'll have a whole change in the face of the fed at the same time that congress is going to try to push -- >> i'm not convinced she stays because donald trump -- >> stays what, beyond her term? [ everybody talking at once ] >> the federal reserve is the l.a. rams of the markets right now. there are changes coming, but they're irrelevant down the road. [ everybody talking at once ] >> we've had two dissients --
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>> i want to know- >> i want to know more about your letter to donald trump and why you think a ceo would be better than an economist which would break history. and i think it's possible he pushes her out earlier. [ everybody talking at once ] >> she's been adamant that she will be there until january 31, 2018, so help me god. but trump could make her very uncomfortable. >> the fed needs to run by a macroeconomi macroeconomist. >> hold on. one at a time. donald trump has not tweeted anything yet. it's -- for the first time, right? sf >> what if he does start to tweet? he could make her life uncomfortable. >> i bet you the fedded is worried about that.
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>> i'd like to go back to ryan's question. >> i just want to know how to make money right now and that's probably 90% of our audience. >> hold on, guys. hold on. >> the easy lay-up trade is to make on the current. we see it today, the fed told us that we will move -- will expect to move three times next year. the front end of the yield curve is not priced for this move p the curve will flatten and that's what has happened every time in history. >> in the immediate term, if we have a steep cover on the front end through the fives, isn't in a fine because banks rely more on -- so in terms ever t s of t reaction, we still have the ground work for the financials. >> i think the financials come very well with the yield curve. with short term rates higher. because it will open up their margin. >> but i think we're seeing weakness in the rates because there is $400 billion to be refinanced this year. and at some point these higher
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interest rates will start to bite. >> and that's one the things that the fed is concerned about, as well. one of the things that we haven't talked about, the gradual approach is important and david made the point about the dissonance. gradual is in part needed because of the outsize movements in the dollar and currencies in the ripple effect around the world. and i think one of the things that is a concern is the disowe nance th disowe nance that we see between the rate and ten year treasury. really widespreads there. this undermines market stability going forward and i think that is something that the market also has not priced this is the diso dissonan dissonance. and if the fed has to move more rapid rapidly, that creates more tension on the margins. >> and that's why we need a macroeconomist running the federal reserve. the fed has a responsible for
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the whole economy and you need somebody who understands all those interactions between monetary policy and the interest rates, stock market and also exchange rates. so i hope that whoever is the next fed chair is in fact a macroeconomist. we don't need a business person or somebody with not much macro economy experience. >> that is economist smack there. >> i heard it. but if there is one thing that donald trump is -- >> we'll look at -- >> video from the meeting at trump tower. there we go. there is president-elect trump, mike pence. surrounded by silicon valley. let's listen. >> hoping to help bolster our national security. >> donald trump jr.
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>> ivanka trump. >> brad smith,rd president of microsoft. pleased to be here. >> jeff bezos, super excited about the possibility that this will be the innovation administration. >> alphabet and goiogle, one of the youngest presidents here. >> excited to talk about jobs. >> mike pence, governor of then for a few more days. >> well, i just want to thank everybody. this is truly an amazing group of people. i won't tell you the hundreds of calls we've had asking to come to this meeting. and i will say these are monster companies. but i want to start by thanking peter because he saw something very early, maybe before we saw it, and of course he's known for that in a different way. but he's been so terrific and so
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outstanding and we have just about the biggest applause at the republican national convention. he's ahead of curve and i want to thank you. you're a very special guy. so i want to add that i'm here to help you folks do well. and you're doing well right now. and i'm very honored by the bounce that -- talking about the bounce, so right now everybody in the room has to like me at least a little bit. and we'll try to have that bounce fin continue. and anything we can do to help this go along and we'll be there for you, and you'll call my me, you'll call me, doesn't make a
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difference. we have no fornmal chain of command. everybody knows wilbur. just say oh, it's wilbur. we'll make it a lot easier for you to trade cross borders because a lot -- if you have any ideas on that, that would be great. because there are a lot of border restrictions and border problems. you probably have less of a problem than some companies have. but we'll solve the problems. >> that's when you know the cameramen have been led out of the room. >> just got to the good stuff actually. the president-elect saying he wants to help will yh wi you fo speaking to the people gathered in trump tower. and he wants some ideas as to how to make it easier for them to trade across borders.
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>> will better ross was in the room. and did i hear them say twitter wasn't there because they were too small?and did i hear them s wasn't there because they were too small? >> i will venture to right since i've been the irritant on the set, i will be venture to write tomorrow's headline. pal entear is a cybersecurity firm blanketed in secrecy. you look around the room and you know the companies but you don't know palantir. and this is headline for toll. their biggest invest to is peter teal. and the conflict of headlines will roll out. >> we saw him only from the back in that video. >> why is there a conflict of interest just because peter teal is an investor in palantir and palantir attends a meeting? >> you tell me.
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but there will be headlines about it tomorrow. i will buy you lunch anything under $4. >> and his three children were there, as well. >> i was wondering that myself. >> all right. we'll take a break? we have some p 500 hitting session lows. a lot more power lunch coming up we're watching the dow as it flirts with 20,000, 19,898. up a little bit more since the election. janet yellen news conference begins soon, but up next, bill gross will join us with his reaction to the fed decision. take one.
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only xfinity gives you more to stream to any screen. for just the secretaond tim a decade, federal reserve raises rates. let's get reaction from bill gross. i'm sure you heard part of our previous discussion. let's talk about how to make money in this environment. it's what everybody expected. it's a pretty solid statement from janet yellen because the reaction is n market is not reacting that much either way. so what do you to on the back of it? >> i think that the yield curve is going to flat p more -- is flat pitening more than the mar expected. so instead of two hikes, three hikes next year at least, that's what they're talking about. and it means a higher real interest rate over the long
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term, perhaps 1% as opposed to 75 basis points. so what does that mean for the market in terms of your question? i think it halts the rally in financials and banks. and, yes, banks like higher interest rate, but they like a spread between the long term rate and short term rate and to the extent that we see now the yield curve flat ping from the up side with short term rates going up, it narrows their margins. and so financial rallies have been halted at least to my way of thinking in the short term. >> and an important point that you're make, so the idea of the t-bill is not the, hey, rates are going up, that's good for banks let's buy them, because pretty much all of them have been bid up dramatically. but it's how they get to the higher rates and the spread that makes the big difference. >> the spread is critical. the net interest margin. and, yes, as i mentioned and you just said, higher interest rates
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are beneficial. but if short term rates go up more than long term rates and the net interest har begmargin affected, not to say that it's a totally negative influence in terms of bonds, but i think for twos and threes and fours in terms of the treasury market, we've seen the biggest increase today in that particular area by five or six basis points. and so i think that today's meeting did change some expectations based upon a more hawkish fed as opposed to a more dovish one. >> so i want to go back to the point that i was making earlier, which is that most of our viewers are not sophisticated bond investors such as yourself. probably at home wondering what to i do, how do i make some money. so whether we get three rate hikes, whatever it might be, how do you make money in the environment as we know it right now?
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>> well, i think for instance you begin to make money by suggesting fed volatility not just in the stock market as evidenced by the vix, but volatility in bonds as well will be contained. we've seen a little volatility today, but if the fed moves in a measured pace, and i think they will, because it's a highly levered global economy, then volatility can be used and employed, the selling of volatility can be used and employed to produce higher yields and defensive types of price movements. so that is a complicated answer, but the selling of volatility and this type of market i think is the key towards a 4% to 5% return over the next 12 months which is our objective. >> and we are awaiting the fed chair. bill gross, thank you very much. p run in financials is likely done. >> let's bring back scott and
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danielle. reactions to what bill said. that the fed just got a little mower ha more hawkish. >> they did. but remember a year ago we were staring down the barrel of four rate hikes in 2016. so i think in the upcoming press conference -- >> and look what happened. >> -- janet yellen will be painfully measured in her comments and she stick to her knitting when it comes to i am day take depe data dependent. >> flatter yield curve as low rates come up. >> exactly. and it's interesting, i agree with danielle that the fed is going to be very careful here. and so today's comments about three rate hikes in 2017 could morph into four rate hikes.
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could morph into more rate hikes in 2018. i think that we're on the beginning of a long path of interest rate increases. and historically the curve has flattened and there is a lot of money to be made in terms of expecting flattening trades. >> i want to go back to the conversation we were having before and that is the idea that it is this lots of people's view, and ear comhere comes jan yellen. so i'll hold that thought. >> good afternoon. today the fed open market committee decideded to raise the target range for the federal funds rate by one quarter percentage point bringing to one-half to three quarters percent. in doing so, my colleagues and i are recognizing the considerable progress the economy has made to our dual objective of maximum employment and price stability. over the past year, 2.25 million
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net new jobs have been created, unemployment has fallen further, and inflation has moved closer toward longer run goal of 2%. we expect the economy will continue to perform well. with the job market strengthening further and inflation rise to go ing to 2% next couple of years. i'll have more to say about monetary policy shortly, but first i'll review recent economic developments and the outlook. economic growth has picked up since the middle of the year. household spending continues to rise at a moderate pace assumed by income gains and by relatively high levels of consumer sentiment and wealth. business investment however remains soft. despite some stabilization in the energy sector. overall, we expect the economy will expand at a moderate pace
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over the thesnext few years. job gained averaged nearly 180,000 per month over the past three months maintaining the solid pace that we've seen since the beginning of the year. over the past seven years, since the depths of the great recessi recession, more than 15 million jobs have been add he had to the u.s. economy. the unemployment rate fell to 4.6% in november, lowest level since 2007 prior to the recession. broader measures of labor markets have also moved lower and participation in the labor force has been little changed on net for about two years now, a further sign of improved conditions in the labor market given the underlying downward trend in participate stemming largely from the aging of the u.s. population. looking ahead, we expect the job conditions will strengthen
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somewhat further. turning to inflation, the 12 month change in the price index to personal consumption expenditures was nearly 1.5% in october. still short of our 2% objective, but up more than a percentage point from a year earlier. core inflation, which excludes energy and food prices, that tend to be more volatile than other prices, has risen to 1.75%. as the transitory influences of earlier declines in energy prices and prices of imports continue to fade, and as the job market strengthens further, we expect overall inflation to rise to 2% over the next couple of years. our inflation outlook rests importantly on our judgment that longer run inflation expectations remain reasonably well anchored. market based measures of
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inflation compensation have moved up considerably, but are still low. survey based measures of longer run inflation expectations are on balance little changed. of course we remain committed to our 2% inflation objective and will continue to carefully monitor actual unexpected progress toward this goal. let me now turn to the economic projections that were submitted for in meeting by committee participants. as always, they conditioned their projections on their own individual views of appropriate monetary policy which in turn depend on each participant's assessment of the multitude of factors that shape the outlook. the median projection for growth inflation adjusted gross domestic product raised to 2.1% in 2017 and stays close to 2% in
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2018 and 2019. slightly above its estimated longer run rate. the median projection for the unemployment rate stands at 4.7% in the fourth quarter of this year. over the next three years, the spe median unemployment rate runs at 4.5%, modestly below the median estimate of its longer run normal rate. finally, the median inflation projection is 1.5% this year and rises to 1.9% next year and 2% in 2018 and 2019. overall, these economic projections are very similar to those made in september. gdp growth is a touch stronger, the unemployment rate is a shade lower, and inflation beyond this year is unchanged. returning to monetary policy, the committee judged that a
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modest increase in the federal funds rate is appropriate this light of the solid progress we have seen toward our goals of maximum unemployment and 2% inflati inflation. we continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and main taken our objectives. that is based on our view that the neutral nominal federal funds rate that is the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel is currently quite low. with the federal funds rate only modestly below the neutral rate, we continue to expect that gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years. this view is consistent with participants' projections of
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appropriate monetary policy. the median projection for the federal funds rate rises to 1.4% at the end of next year. 2.1% at the end of 2018, and 2.9% by the end of 2019. compared with the projections made in september, the median path for the federal funds rate has been revised at just a quarter of a percentage point. only a few participants altered their estimate of the longer run normal federal funds rate although the median edged up to 3%. of course the economic outlook is highly uncertain and participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to the economy outlook and associated risks. as many observers have noted, changes in fiscal policy or other economic policies could
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potentially affect the economic outlook. of course it is far too early to know how these policies will unfold. moreover, changes in fiscal policy are only one of the many factors that can influence the outlook and the appropriate course of monetary policy. in making our policy decisions, we will continue as always to assess economic complains relative to our objectives of maximum employment and 2% inflation. as i've noted on previous occasions, policy is not on a preset course. finally, we will continue to reinvest proceeds for maturing treasury securities and principal payments from agency debt and mortgage backed securities. as our statement says, we anticipate continuing this policy until normalization of the level of the federal funds rate is well under way. thank you. i'll be happy to take your
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questions. >> thank you. wall street journal. why does the fed now see three rate increases next year instead of two? is it because the economy is at risk of overheating or is the fed behind the curve or is this a reaction to donald trump's election? >> well, i would like to emphasize that this is a very modest adjustment in the path of the federal funds rates. amend involves changes by only, you know, some of the participants. so in thinking about the paths and revision, there were a number of factors taken into account by participants. unemployment rate is perhaps a touch lower than previously
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you've seen, some modest downward revisions in that projection. for this year, there was a slight upward revision to inflation. and some of the participants but not all of the participants did incorporate some assumption of a change in fiscal policy into their projections. and that may have been a factor that was one of several that occasioned the shifts. but i want to emphasize that the shifts that you see here are really very tiny.iesmliesman, c. in recent testimony, you said your advice was for fiscal authorities to increase the productive capacity of the economy. do individual and business tax cuts increase the productive capacity of the economy and how would the fed's reaction be different to fiscal policies that increase the productive
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capacity of the economy and those that don't? >> so the statement that i made that it would be useful to increase the productive capacity of the economy reflects my concern that productivity growth has been very low. it's the ultimate determination of the evolution of living standards. policies that would improve productivity growth would be policy changes that enhance education, training, workforce departme development. policies that spur to enhance quality of capital in the united states that workers have to work with and policies that spur innovation or competition or the formation of new firms.
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so tax policies can have that effect. it really depends on the specifics. i don't think that there is anything that i could say in general about what tax policy would do, but that -- and i really can't tell you what the fed's response would be to any policy changes that are put into effect. i wouldn't want to speculate until i were more certain of the details and how they would affect the likely course of the economy. >> good there was a rush of fiscal policy that did not increase the productive capacity of the economy,there was a rush fiscal policy that did not increase the productive capacity of the economy, would that mean the federal reserve would have to move more quickly with raising raterates? >> it's something that i can't
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generalize about. while it would be desirable to have policies that faek taffect neutral rate, a boost of productivity could spur investment as we have been saying, we estimate that the value of the neutral federal funds rate is quite low and one of the reasons for that is slow productivity growth. and so it's very hard to generalize about it because it could affect that neutral rate. >> for the average american, can you explain what the impact of this hike and three additional hikes will be next year and should they feel more confident in the economy now that you are raising rates at a slightly faster pace? >> so let me say that our
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decision to raise rates is -- should certainly be understood as a reflection of the confidence we have in the progress that the economy has made and our judgment that that progress will continue. and the economy has proven to be remarkably resilient, so it is a vote of confidence in the economy. as you know, this was a decision that was well anticipated in markets and i think it will have relatively small effect on market rates. it could boost very slightly some short term interest rates that could have an effect on borrowing costs that are linked to them, but overall i think that house holds and firms will see very modest changes from
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this decision. but certainly it's important for households and businesses to understand that midoy colleague and i have junked the course of the u.s. economy to be strong so that we're making log towaprogr toward our inflation and unemployment goal, we have a strong labor market and a resilient economy. >> financial times. clearly there has been a lot of discussion about fiscal policy, but even if you discount or don't know what the fiscal outlook will be next year, unemployment is already below the longer run projection under the policy rule you cited in your august speech, that would suggest that policy ought to be tighter. is there a risk that the federal reserve is already behind the curve even before any fiscal impact steps in next year?
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thanks. >> so i would agree that, and as we said in our statement policy remains accommodative. the degree of accommodation i would characterize as moderate. as i've emphasized and said in the statement, we currently judge the neutral level of the federal reserve funds rate to be pretty low. so there is some accommodation. remember that inflation is still below our objective. the committee projects at least the median projection shows a very modest undershoot of estimates of the longer run normal rate of unemployment. the median unemployment rate here gets down to 4.5%, which is just a few tenths below the estimated longer run normal level of the unemployment rate.
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and we positi think that that i appropriate because we want our inflation to rise to our 2% objective in a timely fashion. so there is not a substantial undershoot of the natural rate of unemployment. we're not seeing evidence in labor markets of very substantial upward pressures on labor that could signify extreme shortages of labor that could propel inflation higher in a very rapid way and inflation is still operating below our objective. so i do not think judge that we are behind the curve. my judgment is that we are in a good path to reaching our objectives. but of course the outlook is uncertain. we recognize that there are many sources of uncertainty affecting the outlook and we will have to
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adjust our thinking as things evolve, as complains evolve and we learn more about economic policy changes that could affect the outlook. >> "washington post." i'm curious, you and your predecessor had both at times called for more fiscal stimulus to help with the outlook, the growth outlook. and i'm wondering how much do you judge the economy has capacity for fiscal stimulus right now? it's a version of receivesteve' question, but how much can happen when we run that risk much overheating? >> well, i believe my predecessor and i called for fiscal stimulus when the unemployment rate was substantially higher than it is now. so with a 4.6% unemployment and solid labor market, there may be
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some additional slack in labor markets, but i would judge that the degree of slack has diminished. so i would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment, but nevertheless let me be careful that i'm not trying to provide advice to the new administration or to congress as to what is the appropriate stance of policy. there are many considerations that congress needs to take account of and many bases for justifying changing fiscal policy. i've continued to highlight the importance of spurring productivity growth that i think that would be something that is beneficial for the economy. of course it's also important for congress to take account of
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the fact that as our population ages, that the debt to gdp ratio is projected to rise and that needs to continue to be taken into account. and so there are many there arei think should enter into such decisions. >> chris condon, bloomberg news. janet yellen, you've just talked about the inflationary risks of the fiscal policy. but in october you were wondering about whether it might be possible to repair some of the damage done to the labor force during the recession by running what you termed a high pressure economy. so i'm wondering, why couldn't fiscal policy serve the same end in seeking to run a high-pressure economy, hoping to draw more americans off the sidelines and into the work
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force? is there something necessarily riskier about approaching it from the fiscal side, or perhaps have you become less enthusiastic about the idea of running a high-pressure economy? thank you. >> so i want to be clear that what i said in that speech in boston is that an important research question is whether or not in an economy with a very strong labor market there might be changes that took place that permanently raised the labor force participation, training and other things of the labor force that would be positives for the productive potential of our economy on a long-lasting basis. i never said that i favor running a high-pressure economy. you know, as you can see in the
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sep projections of the participants, and this has long been true not just in this forecast but in earlier ones as well, you see a modest undershooting. the unemployment rate is projected to modestly undershoot for several years levels that are deemed to be normal in the longer run. that's inappropriate policy purely on the grounds that inflation is running below our objective, and while we don't want to overshoot our 2% objective, we also don't want a persistent undershoot of our 2% objective. and that does involve a labor market that may succeed in attracting more people off the sidelines into the labor market. it's something we will see as we
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examine experience over the next couple of years, we may adjust our views on this, but i do want to make clear that i have not recommended running a hot economy as some sort of experiment. >> hi, lindsay dunsmore with reuters. how fearful are you with the incoming president? i'm talking about the negative impact his tweets in the last week have had on share prices. and do you feel that individual tweeting with federal companies, do you believe that could begin to distort federal decision making? >> well, i'm not going to offer the incoming president advice about how to conduct himself in policy. i'm a strong believer in the independence of the fed. we have been given the independence by congress to make
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decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation. and that is what i intend to stay focused on, that's what the committee is focused on. >> the president-elect has said that overhauling financial regulation is a high priority for him. i'm curious whether the fed has been asked to provide any advice on how that might be done and what advice you would provide to the president-elect about how our financial regulatory system should be improved. >> so our staff have been in touch with the trump transition team, and we, of course, share the objectives that the whole government has to work constructively to ensure a smooth transition. i've not been in touch beyond
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that, and it's not something that i would expect. but -- i'm sorry -- >> would you give the president-elect advice on how the system should be improved? >> on financial regulation. i feel that we live through a devastating financial crisis that took a huge toll on our economy. and most members of congress and the public came away from that experience feeling that it was important to take a set of steps that would result in a safer and stronger financial system. and i feel that we have done that. that has been our mission since the financial crisis for the last six or seven years. that's what dod-frank was
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designed to do. i think it's very important that we have reduced the odds that a systemically important firm could fail by requiring higher capital, higher liquidity, by performing stress tests that provide us another way of ensuring that the firms we count on to supply credit to households and businesses would be able to go on doing that even in the face of a severely adverse shock. the largest firms have a great deal more capital than they did before the crisis. those are important changes. we have placed the toughest regulations on those firms that are systemically important. i would advise that -- and we have been trying to do this --
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that it's important to look for ways to relieve regulatory burden on community banks and smaller institutions, to tailor regulation so it's appropriate for the systemic risk profile of the particular institutions. i think there was broad agreement also that we should end too big to fail, and that means not only reducing the odds of the failure of a systemically important institution but also making sure that should such a firm fail that it could be resolved in an orderly way, and the living wills process has been about that, and i think we've made considerable progress in making sure that the largest and most systemic firms conduct their businesses in a day-to-day way with some thought about --
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with important thinking in place about whether or not the way they're conducting their business would aid resolution in the event that they encountered a severe negative shock. so this is progress. i would say it's very important not to roll back. there may be some changes that could be made and we have suggested a few like eliminating the burden of compliance with the voka rule or incentive compensation, regulations for smaller banks or modestly raising the threshold for banks that are subject to enhanced prudential supervision, but i would urge that it's important to keep this in place. >> marty with the associated
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press. the election of donald trump seemed to spark a major reaction in financial markets, the dollar has strengthened, long-term interest rates are higher. did any of that get discussed in the meeting, and do you feel that it will have any effect, either negative or positive, on things? and also, did you have any broader discussion about trump's economic plan and what it might do and how the fed might have to react? >> we did skuts these topics in our meeting today. i would simply summarize by saying all the thoughts that there is considerable uncertainty about how politics may change and what effect they may have on the economy. if that will affect monetary
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policy, of course, we'll have to factor those policies along as well as many other things, including the global environment, oil prices and other matters. we will have to factor that into our outlook and figure out what is an appropriate response. but we're operating under a cloud of uncertainty and we have time to see what changes may occur, and we have time to factor that into our decision making when we have greater clarity. you mentioned the market moves. i assume the market moves about what impact these policies are likely to have on the economy? the changes, the financial market changes that you described, particularly the increase in stock prices, the increase in longer term rates, and the strengthening of the dollar suggests

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