Brought to you by Bank of America Merrill Lynch. Seeing what others have seen, but uncovering what others may not. Global Research that helps you harness disruption voted top global research from five years running. Merrill Lynch, Pierce, Fenner and Smith Incorporated. We've been anticipating this interest rate increase for a year that was supposed to go four times. In the end, I've only gone once probability that this would happen today according to markets, and it did. Why do
we care? Hello, and welcome back to Bloomberg Benchmark Show about the Global economy. I'm Scott Landman and economics editor with Bloomberg News in Washington, and I'm Daniel Moss, Executive editor for Global Economics in New York. We're taping this just a couple of hours after the Federal Reserve announced that it's raising its main interest rate by a quarter percentage point, the first increase since a year ago, and it's just the second since rates were cut to almost
zero during the depths of the global financial crisis. Joining us to explain what the Fed did and what it means is Steve Matthews, a Bloomberg reporter who covers the federalis of Steve. Now, I've known you for more than a decade, and when I met you were covering the FED. How long have you been at this? I've been doing this I guess twelve years now, which is even longer than before the financial crisis, and traveling all around the country,
based in Atlanta where they're the FED. While people think of Janet Yellen is representing the FED, and she does. It's an organization that's made up of twelve regional banks. They're based all over, including one in Atlanta, one in St. Louis and Richmond, and I end up coming around covering a lot of the original FED executives around that. What you saying is that, unlike Scott and I, you have the benefit of doing this from outside the New York
DC bubble. I definitely have an outside perspective. And we should note that Steve probably has more frequent flyer miles than almost anyone in the bureau, traveling all over the country to all sorts of cities and both cities and rural areas where a lot of these fedeficials speak week after week. Well, given I'm no longer based there, that's
probably right. So let's get down to it, Steve. We've been anticipating this interest rate increase for a year that was supposed to go four times in the end, they've only gone once. Probability that this would happen today according to markets, and it did. Why do we care? I think the news today was not so much the one increase that happened, the quarter point rate increase, although it does effect a variety of business and consumer lending rates.
But the fact that the Fed is now forecasting three rate increases next year as opposed to to that is significant in that it's the first time the Fed has increased the number of increases that it is forecasting. So we're having, you know, a little bit of a of a pivot in uh in what the Fed is looking at doing from where they've been. So does that mean that rates are going to go up even more next year?
And if I, say, wanted to buy a house now I already own a house, if I happened to hypothetically be in the market for a second house or one of our listeners were in the market for that, should they, uh, you know, really think about doing that transaction? A s a pie. So to get ahead of this coming increase in interest rates. Rates do seem to be headed up next year? Yes, And there are a couple of different
ways to think about this. Today's increase was a quarter point and when you think about what does it mean, Okay, first of all, it means an increase in the prime rate, which is for business lending. It also affects some consumer lending rates such as credit cards. A lot of credit cards are tied to the prime rate. For example, home equity loans. A number of home equity loans are tied to short term rates, so all of that is affected right away. Most home loans are not directly tied to
short term rates. They're tied more to like the ten uere right, but that too went up today. The tenure treasury yields went up, so there's a sense that they may be headed up, not immediately but over time. And it also affects people in terms of not just on a borrowing side, but on deposits. You know, for the last number of years, retirees and others who have had money and banks and money markets have been getting essentially nothing. And over time those rates are going to go up.
You know, you're gonna actually going to get some yield on your savings. Are they going to get more than nothing? I mean, there's still it's still very low. Isn't it still going to be a while before people are getting a better return than you know, one percent or less on their savings. You know, it will be a little bit of a little bit of time. What one person said to me was, if you think about this, like how oil prices affect gasoline prices. When oil prices are
going down, you know, the there's some lag. When oil prices are going up, it seems to hit the pump immediately. And when rates are going down, it seems like it affects depositors right away. Now that rates are going up, even just ever so gradually, there's gonna be a lag before you're going to see it in deposit rates. Steve, let me play devil's advocate. You said a few minutes ago. It was a quote a little bit of a pivot, isn't the emphasis there on a little bit? Fed's benchmark
rate is still below one. Historically speaking, this is nothing compared with where we've been in past economic cycles. Aren't we just getting a little too excited here? Historically? You are correct? I mean we're still below one percent. I mean, if you would have told people, uh, ten years ago, you're gonna have rates below one percent, nobody would believe that was possible even and here we are still below
one percent over you know, a number of years. So while things have started to turn up, we're still in that kind of new normal environment with really low rates. And you know, Janet Yelling today was saying, you know, the increases are going to be gradual. That was in the statement as well. So there's a sense that, yes, things have started to turn, but you know, it's like an ocean tanker, it's it's turn ever so slowly. And let's come back to those projections you talked about this
time last year. The projections in the FED statement, what the geeks called the dots, projected four increases this year. Well, gosh, it's almost December thirty one and we've just had one. How seriously should we take the fact that there's a projection of three next year rather than just two. You know, when the four came out last year, markets reacted to that, and in fact, there was a very negative reaction on markets because people kind of freaked out, uh and said,
my my, gosh, what's what's happening here. So really they shouldn't have freaked out at all, and they shouldn't have freaked out because you know, the markets were right, The markets were We're skeptical that there would be much of a of a change at all, and there wasn't that. We've had one rate increase. So now markets though, are a lot more at expecting you know, several increases next year than the Fed. So there's more of an alignment with where markets are. Uh So, there's a reason to
believe that that these have credibility for next year. What about the Trump factor? Our president elect has talked about cutting taxes for individuals and corporations, talked about doing up to one trillion dollars in infrastructure investment over the next decade. These are things that will potentially stimulate the economy, boost growth, uh and cause inflation to go up. How much is
that going to affect what the Fed does? Its fascinating to hear Janet Yellen in the press conference today kind of do a dance because you know, we all know that Janet Yellen is at political point a. She was appointed by Democrats. She has been talked negatively by about Trump. Uh So, you know, there's a little bit of a of anxiety there between the two of them, and she definitely kind of did a dance talking about, you know, how the Fed would react to fiscal stimulus. We're gonna
talk about yelling and Trump in just a minute. For now, a word from our sponsor, brought to you by Bank of America, Merrill Lynch. Seeing what others have seen, but uncovering what others may not. Global Research that helps you harness disruption voted top global research from five years running. Meryll Lynch, Pierce, Spenner and Smith Incorporated. And we're back
Steve Focus. Through the press conference that followed today's decision, it felt like questions one too, three, five, seven, We're really all about trying to tease the chair out on what the president elects policies might make. How did that go? Janet Yellen was definitely doing a dance. I mean, she was trying not to say things that would be directly insulting towards the new administration, even though it was clear
that she didn't agree with all of the policies. She went on and on about how if there is fiscal policy, uh, it should be directed towards increasing productivity such as education programs, training, things that will improve the workforce, or for example, UH, bring about additional startups, which is not exactly where the Trump administration is, which is essentially at cutting taxes in a broadway, uh, and doing infrastructure spending things that would
just kind of create faster growth. And the concern is if we have faster growth right now with the unemployment rate at four point six percent, that you could have an economy overheating, and you could have too much inflation. And there were all of these kinds of concerns, and she basically was saying, let's wait and see and and see what they what they're going to do before we make our assessment of what it's going to mean for policy.
But there was a lot of apprehension there. Steve Janet Yellen gave a fairly sunny picture of the economy today. She talked about how things were close to full employment. Donald Trump has really presented a very different picture. He's talked about how the unemployment rate close to five percent is phony or fictional. Uh. You know, he wants to get people back to work. A lot of the country
is hurting. You've actually been to many of these places in you know, states across the South, Midwest, Northwest, places that are more economically distressed than uh, you know, the New York Washington bubble that Dan mentioned. Can you talk about how, uh you know the economy, what the economy is like in many of those places, and what the opinion is towards the FED that you've seen. Well, there's no question that there are big areas of the country
that are not doing all that well. I mean West Virginia, New Mexico. Uh, you know, parts of Alabama, you know, parts of Georgia, Mendalton, Georgia, Rome, Georgia. I mean places that were you know, manufacturing towns or coal country in West Virginia. And you know, there has been such a transformation of the economy, uh that many of these areas have been kind of left behind. But the FEDS view is that while that's the case, there's not a lot
that monetary policy that can do. I mean that these are areas or you really need fiscal policy, you need investment, you need education, you know, or energy policies, things that address the specific regional problems. Uh. And uh, you know, it'll be interesting to see to what extent these areas
are are helped. And of course Trump himself has talked about trade and and trade has had a devastating effect in in certain places like the Carolinas, where you've seen a big decline in the textile industry for for example. And lest we not get too focused on one particular narrative, there are parts of the country that are doing very well.
Bureau of Labor Statistics, I know some people might say this as a conspiracy, did release figas saying that last year was one of the best years for average wage growth that we've seen in some time. And isn't the Fed's job to set policy for the entire US economy? You know, that's exactly right. Uh, there are parts of the country that are doing well. Uh. Last year was a good year for most people. Uh. And the Fed is very much directed at the entire economy, the entire
labor market. Uh. So you know that they can't solve the problems of of everyone in Janet Yellen is is pretty clear about that. What about the rest of the world, Steve, There's been a lot of talking interest, at least in the financial markets, and about how the dollar has has become even stronger in recent weeks following the election. Uh. You know, higher interest rates in the US do tend
to boost the value of the dollar. How does that affect countries around the world and potentially play into these trade issues that you were talking about. You know, that's really curious because of course Trump wants to encourage trade, and one way you would encourage trade is, you know, reduce restriction so that US products can be shipped to other countries. But in other ways a weaker dollar. And instead of a weaker dollar, we've gotten a much stronger dollar.
And in fact, the dollar was stronger today. Uh, interest rates were higher. When when US interest rates move higher, that often strengths and strengthens a dollar. Uh. So you know that that's going to be a curious problem over the next year, to the extent that we get a stronger dollar higher interest rates. Uh, that's gonna work against the whole idea of of revitalizing trade. But it would reflect the relative dynamism of the US economy campaign aid
with the Eurozone compared with Japan. Yeah. Absolutely, And in fact, the US has been doing essentially better than the rest of the world by by a good measure, and that's why the dollar has been strengthening alright, Steve, we'll leave it there. Thank you very much for being with us today. Thank you a pleasure, and we'll look forward to your coverage of the new era for the Fed and Donald
Trump in the next year. Benchmark will be back next week and until then, you can find us on the Bloomberg terminal and Bloomberg dot com, as well as on the newly redesigned Bloomberg app, where you can also find all of our other excellent podcasts from Bloomberg. You can also look on iTunes, pocket Casts, and Stitcher. While you're there, please take a minute to rate and review the show so more listeners can find us. Let us know what
you thought. You can talk to us and follow us on Twitter at Scotland at Steve Matthews twelve and I have a new handle, Moss Echo. Thanks for joining. Brought to you by Bank of America Merrill Lynch. Seeing what others have seen, but uncovering what others may not. Global Research that helps you Harness disruption voted top global research from five years running. Merrill Lynch, Pierce, Fenner and Smith Incorporated