Interest rates. They understand the lower bound increases the Downside Risk to employment and inflation. We are prepared to use all of the tools to support the economy. What other tools are they thinking of . Jared there is a discussion, even today, about asset purchases and fed activity in the market. A lot of the facilities introduced this year have not actually been used all that much. Maybe that is because all that is necessary is the signal they are available, or the fact the rates they have been priced at so far are not that attractive to market participants. There is no question that in the crisis, if fiscal policy does not come through this year, we might see the fed become more active as a player in the market than has been so far. , thank youed woodard so much. A big day for the markets as we extend future highs. We are lower for longer, we are allowed to run hot on in tatian. That means the 10 year yield is backup to a 70, potentially new range bound territory. The breakevens are the highest since january. This is bloomberg tv. 3 04 in london, 10 coins are for in new york. 10 04 in new york. Guy i am guy johnson in london. Welcome to bloomberg markets. That was a big speech. Equity markets all over the place. Spend and i are going to much of the next two hours picking apart much of what jay powell said. Be thatis seems to rates will stay lower for longer. That is a good thing. Broadly, what is interesting is the nasdaq is in the red by about. 25 . The s p 500 has a fresh record high. Tiltn the s p, it is a financial real estate, they are leading. Communication services are at the bottom of the pile. That play out with domestically oriented small caps. Guy potentially a steeper yield curve. Will sitoint, the fed on the front end. Presuminginflation, that will lead to a steeper curve, we initially saw bonds moving, yields moving. It is a similar story in breakevens, as well. It was fascinating to watch the poppingmarket reaction, completely the other way. We also saw the dollar turnaround, it is up by. 2 . Gold reversing, as well, now down by 1. 2 . We expected many of this, but there are plenty of details to dig through. We need to figure out a bunch of things. First off, why now . Why not announce this in september . Here is what the fed chair jay powell had to say. Powell our new statement indicates that we will seek to achieve inflation that averages 2 over time. Periodse, following when inflation is below 2 , auditory policy will likely aim to achieve inflation above 2 for some time. Comesets discuss what next and what we just got. Former fed official who was very much on the front lines of my three policy, bloomberg corresponded has been tracking through all of this. Seniorrg economic economist. Your reaction to what we just got from the fed . Roberto thank you for having me. The speech was as expected. Inflation expected concert. We got it. There is one glaring thing that is missing from what he said, how exactly, how specifically is the fed going to achieve higher inflation other than saying we are going to use all of our available tools, which is standard boilerplate language. He did not say anything, that is a little concerning to me. Let me posed that question to you. Is the fed at risk care . What happens if they cant achieve 2 , let alone and overshoot . Michael that will be a problem. That limits their ability to use Monetary Policy when there is a recession because lower inflation levels and lower Inflation Expectations bring down levels of Interest Rates. The answer you get from fed people powell touched on this a little bit today the previous crisis was a financial based crisis and that is different from a standard recession. This is closer to a standard recession. Monetary policy tools should have more impact. When we came out of the great financial crisis, there was no demand for credit, nobody wanted to borrow at that point. The feds efforts to stimulate the economy did not have a lot of effect. This time we can already see in the housing data and the auto data there is some impact of very low rates. They think they can see inflation rise. Obviously the question is does it happen . It did not happen in japan. As roberto says, that will be the main question. Guy what does it mean for wages . Means basically the fed announced the change and they would like to run the economy hot. That means they will allow people to get higher wages and they will keep Interest Rates for as long as the eye can see. Great, the intention is but i totally agree that might not be achievable. Inflation, higher wages. They will hurt their credibility. Another problem i have with this new approach is it could be very for belated. Chair powell has been preemptive in addressing one of the biggest drawbacks of inflation by saying they will not use a particular formula. It will not be dictated by any formula. Actually by setting policy partly with references of the past, the central bank could find itself using policy even in Current Conditions for the reverse. There are a lot of questions with this new approach but it was not unexpected as they were leaning toward that. Kailey michael mckee, to employment. What is the significance of the shift . Michael they are making unemployment much more specific part of the policy procedure. For the last 20 years or so, it has basically been based on the idea that in price stability, the 2 inflation target was how you should manage policy, you would set your target rate based on where you thought inflation was going. Because they believe inflation dynamics have moved and will move slowly, they will set policy based on where they think they can get unemployment to. They will have a target, Something Like the idea that you get to this level and prices will start to rise, but it will be lower. They will let inflation run for a while, rather than reacting when it starts to rise, if they have not gotten to the target. It will be a qualitative effort on their part, rather than a quantitative effort. To try to give equal weight to bringing unemployment down further, along with the price stability mandate than they have in the past couple decades. With ais clearly comes great deal of risk. The fed is doing something it has never done before. We will see whether or not it is successful. How are investors to navigate this process . Give theyou have to fed credit for saying they will do a review every five years in case things change. Moment, the overwhelming market implication is the fed has otherr rates and ways to achieve them. This idea of overshooting inflation implies that if it was zero for xtay at 0 years the average expected federal funds rate. Component of a big how the fed plans to achieve higher inflation will be for purchases down the road. Those will continue at the minimum and quite possibly will increase. Downwardlso put pressure on longerterm rates. The 30 year moving up today. That is a hope more than a reality. Think everything we know points toward lower rates. Kailey we have talked a lot about the decoupling of the market and economy. If the fed does let inflation run hot, do we risk exacerbating that dynamic . Roberto the first question is whether inflation will actually run hot. It is not just a u. S. Problem, it is a global problem. Hard for the central bank, even with Monetary Policy, to achieve higher inflation. That is very much questionable. If inflation comes up, i think the fed has all of the tools to deal with it, and it is much easier to bring inflation down then it is up. I think the main problem is the have to bring inflation up. Other Central Banks have not succeeded. Guy what do we still need answers to when it comes to september . Yelena i think we need a little bit more clarity on how they will allow how they will achieve this flexibility around the approach. Is, thisly puzzles me is definitely more like rulebased policy. What kind of period will they take into account in the past . Whether it will be a one year period that they take into account or a longer one. It is still not clear to me how they will introduce judgment into policy, even though chair powell clearly stated there is some room for them to adjust policy based on if inflation runs really hot, they will not hesitate to apply the brakes. That is one thing. Also, it willis, be very interesting to see in september, the new policies, the new Economic ForecastGoing Forward. Framework,in the what happens to the inflation forecast in the long run and how the whole set up for policy rates. Obviously, i totally agree that the first rate hike will not be coming for years. Had the fed adopted rich inflation targeting with inflation rate targeted over a oneyear window in the last economic cycle, the first hike after the Great Recession would have been pushed back to 2018 instead of early 2016. I would like to see what that means for their forecast moving forward. Mckee, on thel topic of september, is that when we will actually get something on outcomebased forward guidance, because powell did not discuss that . Michael at this point, i am going to punt the reason i say that is because all of the fed officials we have interviewed said given the Economic Conditions we are seeing, we dont think we need it. You want to get some bang for th e buck. Hereu have the status quo and you dont see a lot of movement in the markets, the economy is not giving us strong signals one way or the other in a big move in either direction, you can hold off. We probably want to wait until we are closer to try to get a handle on that. The august employment report will tell us something. The fed will look forward on that. Washe point that yelena just making, i am not sure it will be formula based in this case. In the actual statement, they used the same language that jay powell did, saying they would allow inflation to run hot for some time. I think they are giving themselves a real out here, the idea they are giving you the market and idea it will run hot, but they do not want to be tied down to any particular number or time period. I go back to the Old Supreme Court definition of pornography i dont know what it is, but i know it when i see it. That is what they want to keep doing. Guy roberto, where do you think that number is . Roberto i completely agree with michael they want to be flexible and they do not want to tie their own hands. 2 fore have been under a long time. Period of a hope inflation will be over 2 will be measured in years, not quarters. 2. 5 is probably reasonable. There is a committee that probably have at least 34 different opinions on what the number is. I think that is a reasonable number shared by leadership. Kailey everything we have talked about this morning indicates we will stay lower for longer. Rates will be on hold for a long time. How long do we stay at zero . Yelena i think three years, five years. It will take a long time for the Unemployment Rate to come back to a more normal level. The recession is real and we are not going to get back to where we were in february anytime soon. Economico restore activity to the previous level, it will take at least three years. You need to get back to the gdpious trends to make sure was, ors as fast as it maybe even faster. A lot of people who lost their jobs, probably left the labor force altogether, coming back to the labor force again. It will take years to achieve. Thisroberto, what does mean for Financial Stability . What does it mean for the stock market and the feds perception if value is getting out of whack . We talked about this earlier on but i am curious to the weight the fed will put on its various mandates at the moment. Roberto what the fed has done since the beginning of covid19 forn extraordinarily the supported market and economy. A lot of that is that if you look at where equities should be, or Corporate Bonds should be, they are quite a bit higher of what theesult fed provided to the market. That has generated higher equity values. For now, that is a desirable result, that helps the economy. Continues,ad, if it forink it does, problems Financial Stability. Over valuations can last for a while. They are probably not sustainable in the long term. I think the send will certainly discuss this issue i think the fed will certainly discuss this issue. Right now, they want to help the economy in any way they can. It is not an issue or today, but down the road. Kailey roberto makes a good point about helping in any way they can. How much more can they do to help . Is there anything more substantial or tangible left in the tool kit . Michael it is mostly in fiscals court and powell made that clear. The problem is the fed is that zero. Unless they want to go into negative rates which they dont the most they can probably do is an additional qe that would push more into Financial Markets. That is already concern those are becoming unbalanced. Use are more likely to their tools and the talk of the tool kit in the ways to keep the benchmark rate where it is, to keep market rates down, rather than to come up with a way to get more demand in the economy. They are doing what they can to generate demand at this point. Guy roberto, what is this mean for the bank of england and other Central Banks . Everybody isnow, in the same boat. Covid andterm with longerterm with a lack of inflation. That means the same type of a policies will be applied across the board. Is staging its own policy review. It is a single mandate, versus the dual mandate the fed has. The outcome of their own review abe along the lines little bit more flexibility toward inflation. Think everybody will probably end up doing the same routine, that means policy across the board. Guy we appreciate your time today. Thank you for spending it with us. Much, indeed. We will bring you more from jackson hole as we work away to the next few hours. We will hear from a European Bank chief economist in the next hour. We have the bank of england governor andrew baileys preaching virtually, as well. Andrew bailey speaking virtually, as well. Diamond will be joining us shortly. Kailey i want to have a quick check on the markets in light of the powell speech. Outperformingow. 8 . A fresh record high for the s p, same thing for the nasdaq. You are seeing money come out of downraditional gold is 1. 4 . Money comes out of the u. S. Treasury market. 71 basis points. Whipsawed,is getting seeing Dollar Strength stronger against everything in the g10. This is bloomberg. You doing okay . Yeah. This moving thing never gets any easier. Well, xfinity makes moving super easy. I can transfer my internet and tv service in about a minute. Wow, that is easy. Almost as easy as having those guys help you move. We are those guys. Thats you . The truck adds 10 pounds. In the arms. Okay. Transfer your Service Online in a few easy steps. Now thats simple, easy, awesome. Transfer your service in minutes, making moving with xfinity a breeze. Visit xfinity. Com moving today. Guy welcome back. I ame live from london, guy johnson with kailey leinz. With Financial Markets not expecting banks have been taking the brunt of the environment. Lets talk about what powell just said and what it means for the banks. Financials are rising today. They are the best performers in the s p 500 after chair powell said the fed will allow inflation to rise above 2 . If you go back since 2018, falling rates a been the story. It has done a lot of damage to the sector. No surprise according to the latest bank of america survey, investors have a net 8 underweight in banks. The sector faces a double whammy. 500. Is the pandemic, s p then you have the percent low Interest Rates. He looked at the fallout on financial stocks after the fed makes emergency rate cuts. Believe it or not, since 1998, there have been eight cents cuts. Time, it was six months under. As a result, these are cheap stocks and they trade below value. It seem like they kept getting cheaper. They are expected to stay around . 84 on the dollar and 2021. Even Warren Buffett made big cuts to his bank holdings. He said banks are Good Business as long as they dont make big mistakes. Hemmed his space in did build a stake in bank of america. He trades at a lower price than the other big banks. One thing to keep in mind when you listen to analysts, they point out that this time around, the mistakes that are being made problems. E banks they are part of the solution. Kailey thank you so much. For more on this, we are joined partneriamond, founding and ceo and farmer barclays ceo. It is great to have you. I am going to toss it right to you. Did anything we hear from the fed and powell change the calculus for banks . Bob that is a very good question. I dont think so at all. Announcementtoric by chairman powell. On the other hand, there is nothing new. It is very consistent with exactly how the fed has been behaving through the pandemic in terms of hyperfocus on getting veryyment back, very, relaxed if i can use that term that some inflation could be positive. 2012 witharp back to an inflation target, that was the first time for 2 , which was probably a recognition that some inflation would be ok after the financial crisis and as the economic start to falter a bit. 1980s and at that time the danger of high inflation. I am not surprised. I think this is the codification of the policy we have seen implement it by the fed and i think certainly for the near term, i dont think it changes a lot. The challenges that the big banks and the National Banks have, which really comes around with low Interest Rates. It is for quite a bit of time as we look out. Where is the net Interest Rate margin going . In the Second Quarter for u. S. Banks, it was at an alltime low. For all the challenges, for the u. S. Banks, can we repeat the trading environment of the Second Quarter . Unlikely. For many banks not in the u. S. , they dont have those trading operations. Banks, european and u. K. It will be an extremely challenging period in which to find earnings. The banks are safe, i think the capital levels remain high, but the key question is where are the earnings coming from in this environment . Guy lets talk about the shape of the curve. Do you think the curve stays incredibly flat. Judging by what you said, i expect you do. Do you not expect this focus on inflation overshoot at some point to be priced into the market . Bob it might, but the key is very much rates will stay low. I think the fed would like to see a little inflation. I dont think it is certain they will see that, but i think it would like to see a with of inflation. If we saw any of that, we would see a reaction to the curve. Until then, i do not think it will have a big impact on the margin. It is the short end of the curve that matters with that. Kailey what about elsewhere in the market . Is the fed supporting asset bubbles in your view . Bob it was so Crystal Clear today to me it was Crystal Clear their number one priority is to get employment back. The way i looked at this, they probably prioritized unemployment more than it is important to have an average of 2. 5 inflation. In the past, the fed has acted to offset employment levels going above or below what they consider to be full employment, which has recently been about 4 , or technically 4. 1 . They are getting away from that and are going to address any shortfalls to full employment. Even when full employment prior to the pandemic fell below full employment, we did not have inflation. What this says as they are welcoming a bit of inflation. To your question of asset bubbles, we are talking today in our morning meeting in new york we are sitting here one year ago looking at 2020. We were shocked to see projections for 2020 meant United States for the first time in its history might have a budget deficit above 1 trillion. Today, we are looking at a budget deficit above for trillion dollars, with over 3 trillion in stimulus coming. Is there a possibility of that with easy Monetary Policy and things we are seeing . Certainly, there are possibilities. Policy will become more and more important. Central banking Monetary Policy has gone a long way, but probably does not have much further to run in terms of actually providing new stimulus. What else can the Central Banks rules,ugh, to tweak the particularly from the Banking Sector . You talk about needing to get employment up. Look at the lending standard surveys in europe and United States. There are tricks that the Central Banks are still missing. Is there a focus on that bank channel that needs to be made a little greater . Bob i will answer that two ways the first way is this playbook we are seeing play out in the u. S. , i think we could use a bit more of that in the europe and the u. K. , other big developed economies. It is ok to have some inflation. We have a little more fiscal stimulus. Had its firstrope integrated Fiscal Program across once the single currency can, so they are moving in the right direction, but i would say a little more of that. In terms of the u. S. , i would ask people to think not just about banks, but Financial Services. We have a wonderful investment in a Company Called south street securities, a brokerdealer, not a bank holding company, it is Financial Services print they have had an incredible nine months of 2020. There is a lot of volume in the market, a lot of customer activity in the market. When we talk about Financial Services, we should just not think about we should think about more of the big banks. They are becoming more intertwined with public policy. A lot of the activity and Investment Opportunities are outside of the larger National Banks and outside of the bank holding companies. This is for some of these Financial Services companies has been from very good to actually quite extraordinary in 2020. It is not just about bank holding companies. Kailey you have been speaking politics, it is rnc this week and we are looking at the prospects of two very different president s. The market has seems to adjusted to the idea of a president biden. What about the threat of a blue wave . Bob i think right now in the very short term, if you look at the Financial Markets and the reaction there, whether you are on the democratic side or the republican side, the focus has very much been just as we heard today about getting employment back, about getting stimulus. Howchallenge in terms of will the world look, or the u. S. Economy look with the democrats or the republicans Going Forward has to do with . How do we tighten fiscal policy . Stimulus wet, the will be putting into the economy, we will have a 4 trillion plus deficit in the u. S. Both sides are pulling back a little bit. We both believe we need stimulus. The amount of stimulus they are talking about seems to be pulling back over time. What wille is the policies be in terms of Going Forward post the stimulus . If you recall, after the financial crisis, there was at that time a lot of stimulus put in i think it was less than 700 billion. Contrast that to the 3. 3 trillion since the pandemic, that was the big issue. When they began pulling back on that, the economic recovery slowed down. We have to be prepared for the fact that at some point, we have to move from fiscal stimulus to fiscal tightening. We will see a slowing of the economic recovery when that happens. We have already been seeing some of that as the debates have gone on. Guy do you think society will tolerate that . Yes, i think you flip that on its head, on the other 3. 3 can we continue to do trillion in fiscal stimulus every six months . We will have to look at ways for the economy to generate that kind of Growth Without that kind of fiscal stimulus at some point, right . Guy yes. How we get to that, i dont know. Economy morethe productive seems to be something maybe policymakers could spend a little more time focusing on. Bob, always great to get your time. Thank you for sharing some with us today. We will have more on the fed, the speech that was just delivered from jackson hole. A professor of economics, a farmer fed governor will join us a former fed governor will be joining us in the next hour. We will continue looking at what is happening hurricane laura. It is now a cat 3. Devastation massive. It is reporting now is a cat 1. This is bloomberg. Guy coming up on bloomberg markets, we will be joined by a guest at 1 00 p. M. Eastern time. Live from london, i am guy johnson, with kailey leinz in new york. Angela merkel is speaking, referencing germanys response to the virus, saying in the last couple of minutes that germans should not travel to high risk areas. Also that the government has agreed to a penalty of 50 euros for not wearing a mask. We take infections very seriously. She is commenting that a News Conference in berlin. Germany has dealt with the crisis so far in a good way. Major events prohibited until the end of this year. Kailey lets pick it up on what is going on on this side of the atlantic. Hurricane laura went through louisiana earlier this year. It is one of the most powerful storms to ever hit the state. The storm had fallen to category 1 about 90 minutes ago. Joining us now is stock watson. Joining us now is chuck watson. The storm has weakened significantly. What is your read on potential damage . Charles right now it looks like 25 billion is our target value. Of the storm most surge actually went the storm landed about 20 miles east of where it originally forecasted. The highvalue targets in port mess, it is probably a it will take it a while to bring it back online, but i doubt they got flooded. Lake charles is a mess. The big buildings you see where the buildings are blown out, the through the interior of a structure. The structure looks good, but inside it is a total loss. Of 25 billion, that is what we are looking at. The federal Flood Insurance program will take a little bit of a hit. At least it is less Populated Areas the took the brunt of the eye wall. Guy how quickly does it decay . Where does it go next . Charles with this storm, the sheer we were hoping that would keep it from becoming a category 4 did not kick in until the last few hours. In a few minutes, it will probably be down to category 1. Broad wind field moving in, we are worried about some tornadoes. You will see Power Outages and some damage all the way into arkansas the little rock area. If you look at the track, this storm is supposed to Stay Together all the way across into the northeast and maybe even a Tropical Storm that ends up in the canadian maritime. There could be several billion dollars of more damage to come. Kailey more than 80 of production has been offline. How long should we expect those to be offline . Charles there probably is into a lot of damage to offshore infrastructure. Rita, ivan destroyed a lot of the older infrastructure. The newer resources out there have been built up to a higher standard. The onshore is what we have been worried about. I expect offshore production will come back quickly, within a few weeks. Onshore, the port arthur refineries should be back online within a month. The lake charles refineries, those might be down for two months. Youre only using 80 capacity right now, anyway. I think we may have gotten away with the longterm impacts of this not being so bad. Mark whation will happen with the economy the rest of the year . Up so fast, ticking it will take the Chemical Industry some time to get this cleaned up and back online before demand hits. You see these pictures, and they are alarming, but over the last few years, we have seen pictures like this again and again. Are we prepared enough for an increase in these kinds of storms . Is the industry doing enough . Is society doing enough . Charles that is a big topic of research and something i have been involved with for over 20 years, both nationally and internationally. We dont take these as seriously as we should. Part of the problem is we have allowed a lot of development in the coastal zone. The reason you are seeing more damage is more because we have built more stuff that close to the coast rather than an increase in the severity of the storms. We do think we are seeing an uptick in storms, particularly intensity at landfall, but the biggest factor is we have built a lot of stuff right on the shorelines. Federally subsidized Flood Insurance, people want to live close to the coast and they are building more there. Regulatory and investment standpoint that people want to be on the coast and have put more stuff there to get knocked down by the storms. Guy we will leave it there. Thank you very much. Thank you for giving us a heads up on how much damage this will do. More later. We will continue to track the storm damage. This is bloomberg. Kailey it is time now for futures in focus. Joining us now is a bloomberg strategist. You have been telling us all week, the oil market will look past laura. Picture for big natural gas is inventories are almost at the highest ever for this season. All about heating season, gas prices elevated. It has had its bounds but it will probably dip lower. Guy what is having the biggest effects on oil prices . Michael unfortunately, the hurricane had a little bit of an effect, but if you look back, crudences in prices oil can only go up so much. The key thing to remember about crude oil, there is so much supply, we need demand. Fed,y along with the goals are weaker, why . Michael gold is fundamentally powerful very strong, but it is overbought. It needs some r and r. Guy we are going to leave it there. On gas andn update gold. We will digest what we have learned from the fed and what we need to understand. A professor of economics will be joining us. , it is fascinating to see the dow up more than the s p, and the s p up more than the nasdaq. That tells you there is a rotation taking place. We will see a big turn in yields. We sought markets whipsawed by what we got from the fed. There is also a big question why did the fed decide to do this now and not wait until september . This is bloomberg. Businesses are starting to bounce back. But what if you could do better than that . Like adapt. Discover. Deliver. In new ways. To new customers. What if you could come back stronger . Faster. Better. At comcast business, we want to help you not just bounce back. But bounce forward. Thats why were helping you stay ahead and adapt with a network you can count on, 24 7 support and Flexible Solutions that work wherever you are. Call or go online today. Where you can find games, news and highlights. All in one place, right on your tv. The xfinity sports zone. Use your voice to search every stat and score. Follow the teams you love. And, even get notifications with breaking news alerts and more. With the xfinity sports zone everybody wins. Now thats simple, easy, awesome. Say xfinity sports zone into your voice remote today. London, alix steel has the week off. We are counting you down to the european close. Alix seel hs t wk of. We re cunting ydown to teuropean close. We tking at tfed and t n aproach t sing policy. 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