Peterson's Gagnon Doesn't Forecast a Rate Hike in 2016 (Audio)

and financial stability, and that threatened their outlook. The minutes show FED policy makers thought it was prudent to wait for the result of Britain's June twenty third referendum. Markets were little changed after the release. The equities are advancing. Cautious sentiment is easing amid speculation that the American economy can weather the impact of the UK's decision to leave the European Union. We check the markets every fiftwo minutes

throughout the trading day. Dow Industrial Average up twenty seven points an eighth of a percent, trading at seventeen thousand, eight hundred sixty nine S and P five foundered up four points two tents of a percent to two thousand ninety two. The NASDAC is up nineteen points four tens of a percent at forty eight forty two. West Texas

intermediate crude oil up at nine cents of barrel. That's a gain of two percent, trading at four spuckled of eight dollars eighty cents announced to thirteen sixty seven fifty and the tenure Treasury eight down one thirty seconds with the yield of one point three eight percent. And that's a Bloomberg business flash. This is taking stock with pin

Box and Kathleen Hayes on Bloomberg Radio. The feder Reserve was stopped in its rate hiking path in mid June by a job support that showed that maybe, just maybe the US labor market has lost a lot of momentum, and by their concern that the result of Britain's June Brigit vote was too close to call, and it was prudent to wait to see how those results would affect global markets and there for the global economy. We're gonna

take them in depth. Look now at just this question of what the FED is looking at and what it means for the FED. Moving ahead with Joe Gannon. He is a senior fellow at the Peterson Institute. He is in charge of watching international finance, monetary policy, and trade. He was at the US for the Reserve Board at the Division of Monetary Affairs. He was also the head of their division of International Finance. Joe, welcome back to

the show. Thanks good to be here. So these minutes people watching to find out just what made that not only decided not to hike its key rate, that wasn't such a big question to to really kind of pull back expectations on how many rate hikes are coming this year. What leaps out at you from these minutes, Uh, well, two things why. I was really surprised at how much play they gave the the Brexit vote. It's mentioned at least three times that I saw quickly in the document

as being a reason to delay. I wouldn't have expected them to give so much prominence to that, but they did. And the other thing was a lot of uncertainty about what the May employment report um meant. Most people said, well, we're not changing our forecast because of this one data point, but it does make us nervous. That's what you saw

in the minutes. Joe, wondering if you could comment on the potential of the US economy and whether that is going through a secular or a cyclical change, because we haven't seen the kind of growth in GDP that many economists were expecting coming out of the recession. Yeah. Absolutely, I think everyone's been surprised that growth has has come in slower than we would have expected. And um, you know, we just don't understand proctivity very well. I don't know

anyone who does. Um. Uh, it's hard. It's just impossible to forecast. But the best guess is it's going to stay low until it doesn't. And so I think the best thing you can do is mark down your forecast. And that's what they're doing, marking down their forecast and uh wondering, I guess how how much weight they're going to be putting on the next job suport because you know, Jennet Ellen said in her one of a recent testimonies,

you know we can't put too much emphasis on one number. Obviously, if you look at a great chart, in fact, in our UM story today by our FED reporters Steve Matthews, Uh, looking at what we should be looking for the minutes, and you can just see that it looks like a downtrend in payrolls. Right, And this last bratchet down to thirty eight thousand. That's a really small net gain in

new jobs. Could be an outlier, could be revised away, but the Fed is clearly putting a lot of weight on that number, even the Janet's Yellen said, don't yeah, it's tough and never thing was. The unusual thing is how steadily it had been up there in the two dred thousand range for so long, for so steadily that that, um, that was the surprise. I think if you look historically, so we shouldn't be so surprised by some volatility in that number. But it but it was more than just

a headline number. I mean, uh, you know, pieces of the of the story also didn't look good in terms of backward visions to previous months, in terms of people who are involuntarily working part time I'd like to work full time, things like that, you know, decline and participation. So a lot of pieces of it that were unsettling, not just the headline number. As far as their decision making process goes, are they really data dependent or as you say, are they just interpreting the data over several

years and trying to make sense of the economy. I think that's the big thing that markets say that they're not communicating very well. While I think it's it's easy to communicate if you see a data release and you can point to that. But in this case, despite the June data release, I think they didn't change their forecast much.

What really is important is they're rethinking they're parameters of the economy, in particular, what is the parctivity growth right going to be going forward, and what does that mean for the interest rate going forward? And they're marking that down, both proctivity and interest rates down for the for the medium term, longer term. And there how do you tell the markets that you're changing your mind. I mean, it's not about data you can point to in the past

few weeks. It's about your interpretation of data over the past few years. And that's a harder story to explain to markets. Well, Joe, why did you say that you're surprised that they put so much emphasis on uncertainty over Brexit as a reason to pause. Well, I guess I was thinking before the meeting that it was unlikely that there would be Brexit, and they don't tend to condition their actions on sort of these kind of discrete events that are possible but unlikely, things like the debt feeling

negotiations with Congress. You know, obviously if if if those break broke down, the US defaultent's death, that it would change it would be a hugely important for the Fed's policy. But they view it as an unlikely thing and they're not going to change policy in advance of that. Uh. This I thought was something like that, albeit more likely to happen, but still unlikely. Well it turned out to happen, so, uh, maybe they were right, but I'm surprised that they It

just seemed like Britain is a small country. We don't export much to it. Um. People were saying it wouldn't affect you as a coonty, but more than a quarter of a percentage point on growth if if, if it happened. So it just seemed like it was a small thing to worry to put so much effort on. We're going to continue the conversation with Joseph Gannon. He is the Senior Fellow for the Peterson Institute for International Economics, based in Washington, d C. Of course, home to Bloomberg one

and one oh five point seven h D two. You're listening to taking Stock and This is Bloomberg taking a look at central banks around the world, and not only

in the United States. We're going to take a look at the u K. The probability of a ray cut in less than two weeks is now up to seventy broadcasting live to New York, Bloomberg eleven, Brio to Washington, d C, Bloomberg to Boston, Bloomberg, Well under It, to San Francisco Bloomberg nine to the Country, Shoes at Them, General one ninety and around the globe the Bloomberg Radio plus Appen, Bloomberg dot Com. This is taking stock. I'm

Kathleen Hayes along with PM Fox. It's not just the uncertainty and the aftermath of the Briggs vote that's weighing on the feder Reserve and central banks around the world. It's plunging bond yields as well. The European Central Bank is having to buy more, maybe lower quality bonds. What is this going to mean for central bank moves ahead. We're going to find out as we continue our conversation

with joe Gannon from the Peterson Institute. PM. Yes, but right now, let's go to Katherine Cowdy in the Bloomberg news room, Katherine, thank you, Pamlasco main higher after minutes from the Federal Reserves Dune meeting did little to alter perceptions, but the timing of higher interest rates. Concerned that fallout from the Brexit vote may spread beyond the UK, drove demand for hans. At their June meeting, several FED officials lowered their expectations for the number of times they'll increase

rates this year. The gains in the US today are interrupting a sell off in global share sparked by sparked by Brexit concerns. Charles to Foe is chief investment advisor at International Value Advisors. Most stocks and bonds around the world still trade at nosebleed valuation levels. Well, to be more polite, there are price for profession and I think we're reminded by by Brexit, which was someone unexpected, that

uncertainty is part of the investment landscape. We check the market SAVY for two minutes throughout the trading day that industrial leverage is up forty two points at quarter percent trading at seventeen thousand, eight hundred eighty three smps. I've hundred up six points a third of our percent at two thousand, ninety four, the nastact is hired by twenty four points a half a percent. Trading at six West

Texas Cinemedia. Crude oil up seventy six cents a barrel one point six percent to forty seven thirty eight about gold is up eight dollars thirty cents announced at thirteen sixty seven. Tenure Treasury down one thirty second with the yield of one point three eight percent. Among today's top business stories, two more UK property funds have halted withdrawals in the wake of Britain's Britain's decision to leave the European Union, and that brings a total number to five.

Henderson Global Investors in Columbia Threadneial Investments have suspended trading in at least six point nine billion dollars of property funds. CBS is planning to file to take its radio division public by the end of the month. It's a sign that CBS has been unable to find a buyer willing to pay the right price. Now, let's get an update of some of the other stories were following on Bloomberg Radio. Thank you Katherine from the Bloomberg News room. I'm Ramie

in a cent Cio. President Obama said today he will slow down the US troop withdrawal from Afghanistan. Even as we've meamed maintained a relentless case against the who are threatening US. We are no longer engaged in a major round war in Afghanistan. The President says he would draw down troops to eight four hundred from the original plan

of fifty five hundred. Their strong reaction from HOW Speaker Paul Ryan after an FBI recommendation that no criminal charges be filed against Hillary Clinton in connection with her use of a private email server when she was a Secretary

of State. I think um the d N I Clapper should should should deny Hillary Clinton access to classified information during this campaign, given how she so recklessly handled classified information, Ryan said, the presumptive Democratic presidential nominee quote clearly lives above the law. IBI Director James Commey will appear before the House Oversight Committee tomorrow to testify on the recommendation. Tennessee Senator Bob Corker has taken himself out of consideration

to be Donald Trump's running mate. That's according to The Washington Post, which says Corker in Trump of the decision yesterday. Corker appeared with Trump at a rally last night in North Carolina, and new casting has been announced for the leading players of the smash Broadway Hit Hamilton's Tony Award nominee Brandon Victor Dixon will replace Leslie Odom Jr. As Aaron Burr on Broadway. Dixon takes over in mid August.

Global News twenty four hours a day, powered by more than twenty journalists and analysts in more than one twenty countries from the Bloomberg News Room. I am Ramy in Essencio. Thank you. Now, let's get a quick update of the equity bench marks down. Industrial averages up forty points at seventeen thousand, eight hundred eighty smp F I founded up six points at two thousand ninety four. The NAZAC is up twenty four points at six. And that's a Bloomberg

business flash. This is taking stock The FED in Focus on Bloombird Radio. The FED in Focus. I'm pim Fox. My co host Kathleen Hayes, our guest Joseph Kanyon, Senior Fellow Peterson Institute for International Economics, joining us from Washington, d C. Previously, he helped edit the minutes of the Federal Reserve Open Market Committee meeting for almost two years as a Fed economist, uh joke, Joseph Canyon, the pound, the pound, sterling, the trades. Right now one twenty nine nineteen,

Japan's twenty year bond yield has turned negative. UK property funds have suspended trading people can no longer sell out of those investments. If someone was to ask you, how do you describe the world's economic picture today, what do you tell them? Well? Two things. One is the Brexit shock is real. I think we shouldn't overstate it, but if you live in the United Kingdom, you're going to

feel it. And certainly London property is precisely where I would think you get some of the biggest hits, because there's a risk that if you own London property, you won't be part of Europe anymore and you will lose some of the benefits, uh that London has and being within Europe and being a financial center. So I think that's understandable. But the other big news to today is

how low interest rates are everywhere. I think that is shocking and I wouldn't have I think there's been a long term trend to lower interest rates went back over thirty years, but how it's gone farther than I would

have ever guessed. Well, to a certain extentio, it seems you could argue that federal reserve policy, Bank of Japan policy, ECB policy buying lots of bonds are largely responsible for this, or to it to a very important degree, because obviously yields were falling long before the Brexit impact, which accelerated this trend. Bank of Japan is a clear example. The yend Act actually has gotten very strong because it's sent you know, it's cut money in Japan, it's put risk off, etcetera.

Have the central banks maybe aired in not understanding what they were leashing? Uh So, I wouldn't say so, because I think the central banks are responding to market forces. I think, um, they are seeing weak grow oath and inflation below their targets, and the textbook response is to have lower interest rates, and ultimately, if they get the economy recovery again, then they can raise rates back to normal. But they keep being surprised that what they think are

lower rates are not really doing the job. And the answer I think is that the economy needs rates lower than people thought if no one wants to spend, everyone wants to save. Okay, so if everyone wants to spend, will it be increased spending in the United Kingdom in order to accommodate Brexit and indeed increased spending in the European Union in order to deal with what has really never happened before, a country exiting the European Union. Yeah, that's it's hard to know, but I think the thing

is people are afraid of spending right now. That's the problem in the in the phase of the Brexit uncertainty, but even the bigger changes we've seen beyond that, people are holding back. They're they're worried about their retirement, they're saving more. The businesses are holding back on investment because they're unsure. I think this has has been a problem for central banks is what how do they get those

pocketbooks open again? So financial stability is certainly one of the federal reserves, every central banks responsibility, right up there with you know, containing inflation and looking at jobs. Uh. For the u K. This is has been obviously Mark Arney's big challenge right now. He spoke for the third time in twelve days, basically since the Brexit vote markets pricing in two rate cuts. Uh, what do you see for for the for the Bank of England and will

will will this have any linkages? Are spill over to the Fed and others? Well? I think Carney's signaled that he probably would be cunning rates or doing something to stimulate because the UK looks like it's going to be heading into a mild recession. Uh, that sounds appropriate. I think they're the experts on how big and how bad the recession will be and what the right response will

be is I think it will have spillovers. It already is, and mean that the dollar was gone up since the Brexit vote, and that holds US economy back, and we'll have a mild recession UK that also holds US caught me back. I think we won't be getting any rate hikes in the US this year, That's my call. Can you comment on the Italian and European banking situation currently, because of course you've been following what's going on with the shares of Italy's Banca Monte di Pasci d Sienna.

They've gone down forty pent in ten days. Yes, Um, that's a surprisingly large reaction to the Brexit voter and it's a little puzzling, but it it. It does suggest that the weak link in European banking is in Italy.

Um and I'm not quite I don't quite get the magnitude of the link with Brexit, but it seems it seems to be there, so I'm not follow I don't fully get it, but it seems to have shined a spotlight on if there's weaknesses in the euro Area UH in Europe and Union European Union generally, that makes it harder for the Europeans to deal with Italian banking. Joe,

I just want to understore something. I want to make sure I heard you say correctly that you do not see an interest rate hike by the Federals of this year. I do not see an entry hike. No, especially if if the forecast for Brexit, of a mild recession in the UK with some spillovers to the US, and the pound stays where it is, the dollar stays high, There'll be no rate hike this year. Next year, Oh hopefully, I mean, yeah, Okay, I wouldn't. I wouldn't bet the

farm on it. Well, he wouldn't bet the farm on it. Pim. I di that just left me speechless for a minute. Joe Daniel, and thank you so very much for joining it as he's a senior fellow at the Peter Institute for International Economics. He was formerly with the FEDZ Division of Monetary Affairs and ran their International Finance division. No rate hick this year, Maybe not next year either. Wow.

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