tv Squawk on the Street CNBC February 10, 2016 9:00am-11:01am EST
>> it will be hillary for sure. >> think about a debate. >> no scrutiny has been, has befallen trump. >> you would have said there is no scrutiny that can befall trump. >> in the general election. there will be heightened. there won't be fine candidates. two. >> ""squawk on the street"" is next. sorr sorry. >> good wednesday morning. welcome to "squawk in the street." i'm carl cantania. the futures have lost some of their shine, highlights risks to economic growth. when janet yellen speaks, we'll take it live a. part of a buy back consideration of deutsche. nikkei overnight. the ten year, right around 176.
oil is nearly unchanged. we begin with janet general on the hymn, day one of congressional testimony. the market awaits any change in interest rate policy. >> disney and time warner both report earnings but fail to catch a bid. yes, earnings were beat. most stocks sharply lower. we'll fill you in. >> trump-sanders taking the state t. race moves on to south carolina and nevada. but first up, we're less than an hour away from general's spy annual testimony on the economy and monetary policy. this morning, she'll appear before the house financial services committee. tomorrow, of course, the senate banking committee. in her prepared remarks, she says financial conditions have recently become less supportive of growth and a lower path of fed funds rate would be appropriate if the economy were to disappoint. but she adds, she still sees moderate growth ahead 245 would allow the fed to pursue gradual rate increases. we will bring you live coverage
at 10:00 a.m. eastern. she talks about slack in the labor market. weaker exports, the fact that the economic outlook is uncertain. >> and she doesn't take marks off the table. i think as long as you don't taix take marks off the table, you are sitting here, i don't know what she's going to do. we don't need to hear, i don't know what she's going to do we need to in a moment she's fought going to give us a green light to change our narrative of what we think she will do. every time someone speaks. you have a bear rate. and that's totally realistic. we know the world was turned upsidedown. i know a quarter point wasn't supposed to mean anything. it ended up meaning the world. we all know it. we all said everybody said it was fought going to be a big deal. they've all disappeared.
you don't see them anymore. >> we have been waiting for it. for i don't know. two years. so we did believe. we were prepared. >> the company that issues less debt, japan, board of trade, there's a lot of plays falling apart. you couldn't predict the zika virus. >> in terms of flows. >> money is tight. the money supply is tight. they should have sold off their bonds first. they were very uncreative. i think people are now realiz g realizing. wait a second, we're thinking who is going under. we are talking labor slack him has she heard of uber and lyft? these are people that have minimum wage. that's not what they look at. they look at 4.9. i took a course at harvard 1976. that was like an log economy and
he too would type if they were alive. >> are they anar ---istic. >> they're not looking at the right definitions, they're smart people they got more data coming at them than anybody. >> no, they're older people, before we got into an era our kid would say there are no jobs. they are from my era. they said 4.9 means overheat. buy more republic means the more you know what, you recognize, this is not the war we're in.
>> we got the jolts yesterday. private quid rates at a nine-year high. >> i think the labor market is not. these numbers don't capture what we know in the labor market. they don't. when you are over 50. you are fired. when you are under 30, you can't get a job. they're in that noise little window. >> donald trump's victory speech last night had an unemployment rate of 52%. >> when does these people win? this guy from brooklyn, a senator from vermont, i think the federal reserves will think about what's going to happen when they're thrown out by either party. it's nice to meet. hey, listen, guys, we're on borrowed time. we're all fired the moment this election is over. we're all fired. they are like nfl approaches. theying will all fired. because there's 14 more games to play. >> is the bounce this morning about what you said yesterday that people would be trying to
hedge in front of yellen? >> you want to cover your salesforce.com. these stocks have fall an lot. analysts are coming out saying it's not the end of the world. but i'm listening to these guys. did they look at the election last night? it's great. they're all fine. but they're all gone. >> who's all gone? >> either president trump or president sanders. >> correct. >> this federal reserve will not look the same. i'm saying using it as a metaphoric am. they are reacting to a different world. a world where we studied economics and it was all about a curve that caused inflation and that's where they're from and they're rooted in that. janet yellen 69. >> i took the stance. >> your pointed is well taken t. economy is in fundamental ways. therefore. we can't expect inflation to be what we think it would be previously.
>> gary comb gave an interview on bloomberg. everything i said is main stream among people who are active in the business world. he said, listen r, it's not an log, it's digital. if you have young kids in the work force, you don't urns, forget health care. they're just trying to get that minimum wage. they can okay. have you people trying to cobble together the existence to live in a 60 mile radius by having three shifts. i don't know when they sleep. i'll be there tonight. >> good. new shrimp fra diablo. >> let's speak of digital. >> it's a fire pan on fire. >> time warner posted fourth quarter earnings, though, a four
year guidance, fourth quarter revenue, though, was below consensus. disney shares are looking down in the pre market. this is better-than-expected quarterly results. a profit declined at espn overshadowing "star wars" "the force awakens" last night ceo bob eiger said the prescription picture at espn is improving. >> we're going to stay on our calls in a few minutes. we recently seen an uptick. we reference in candor in the august call that we had seen some sub erosion that, in fact, was the case. but the last few months, in particular, have been encouraging. >> the last few months were encourage. although, the numbers they reported for the quarter that ended jan 2 i think it was were down a bit. but that's where the focus is, as you guys well know. we'll get to time warner in a minute.
i know you not only read the call, jim. you linss to the call. >> yeah. >> watching the stock trade below 90 this morning. we've talked endlessly about cord cutting and shaveing. remember bundles that don't include espn. the minimums disney was willing to accept to get a lower minimum threshold of percentage of prescribes i prescribers in the beginning cable system. where do you think things stand, judge dprg mr. eiger's comments, which were upbeat when it comes to the numbers of espn in terms of, hey, we're not losing subs. >> the word uptick whether it be with julia bores sten on page 13 of the conference call uptick. that itself word. we den know what uptick means. you finish the sentence, bob eiger, what we believe we have seen is subscriber trends apated
somewhat. i think that uptick is hurting the stock. it's much better than you thinks, we didn't get that. there was an open rebellion, the company deserves better. >> there has been a sentiment change, listen, yesterday the call at via com turned the stock in a way the numbers shouldn't have necessarily done so. i think it is reflective of frustration on the part of many of these investors. i don't think they believe management or time warner. because when you look at the numbers from time warner this morning, they did miss on operating income. no doubt about it. revenues were in line. they missed across the board film, higher investment costs. they missed on the consensus there. expense were higher at turner
and hbo. a miss on revenues. but the fines number, nim jim, above where they have been. i don't think investors believe these guys anymore. >> they are looking in the case of turner thank you so much, my research guy. literally you are looking at the 2714, 215 year over year. this is per quarter. 2.9. .2. these are in decline, if you want the metaphor of why these stocks are down today. a totally legit guy, he says, he asked bob eiger, would disney split the two businesses? asking about the synergy, the whole reason why you own disney is bus of the synergy.
they put out a moy. you go into the theme park. it's extra. put the company up. that's why you like disney. >> that is a rebellion call. that's a rebellion. >> is that dessert? >> absolutely not. i think that was a totally inappropriate question and i caner says, i'm not going to talk about separating those assets. i listened to that. you are on the call. there is like a stunned moment where like bob eiger, have you no decency, sir? he didn't say that. >> do you also believe that i caner's notion that the idea, the bundle is in its demise, is just ridiculous? >> i thought ridiculous. i wouldn't have said it like that. i would have said, look, we have so many things that are going on that you know to look at it as a snapshot. i would have gone with it as a diplomatic less political. he does seal to be operate income this reality as opposed
to the ceo and chairman of via com. it's unclear. he's in kirby's fourth world. that, by the way is according to many shareholders who i spoke to yesterday. that's what they're saying to me. which is why they abandoned that stock. via com was down 21% today. >> wow. i mean, these stocks, look, i tell you, these guys ought to say, listen, there is a reset. you got to bear with us. right now what they're doing is making it look really good t. time warner, that stock was up three at one point. should they separate and break out hbo? categorically, that would be trading assets. >> it's an inside joke. >> i'm saying these greiss all comfortable with what they're doing. they're all comfortable. the stocks are telling you. this is not u.s. steel and bethlehem steel is dukeing it out. it's better than that. they ought to say, listen, we're
trying, we're figuring out what's going on. you have to bear with us. we had disney with abc. we came through it. okay. now, look, frozen is, we could be in a whole another world just talking about "froenz" and talking about the tv schedule, the "star wars" that are coming out with time warner, saying, listen, we make money on these things, no matter what. it's already paid for and amortized. analysts are in control of the narrative. by the analysts just have turned in a way that it's to the finland station, you know what i mean? >> kind of. >> lenni le nonist. these guys are like czars, they live in another country. lennon gets to a finland state. it's an extremist. i saw who won last night in new hampshire t. democratic party is a socialist. so we fought against lennon
theoretically. >> where does turner chevski come in on this? >> seminole test >> we're not done talking about disney by a long shot. speaking of media names. we have breaking news on twitter. >> good morning, charm. twitter announcing long ans the pated changes, a move away from the chronological time line to make it easier and faster for people to catch up on what's happening right now. beginning today, twitter users will have the option turning on a tool designed to show the best tweets first. these will appeart the top, in reverse chronological order. although there was an outcry earlier this week twitter was abandoned its feed, it stresses
it's not a dramatic overhaul, more like an extension of its while you were away feature. the company is saying people have used the feature and tend to retweet and tweet more. carl. >> that makes a lot of things more clear, thank you very much, when we come back, a big win for donald trump and bernie sanders, as jim said in new hampshire last night, how does the leaderboard look no you? a downed day today for the dow. the first four-day losing streak since august, believe it or not. more "squawk on the street" from post-nine in a minute. at baird, we approach your wealth management strategy the same way to create a financial plan built to last from generation to generation. we'll listen. we'll talk. we'll plan. baird. i'm in charge of it all. business expenses, so i've been snapping photos of my receipts and keeping track of them in quickbooks. now i'm on top of my expenses, and my bees. best 68,000 employees ever.
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all this time the polls were right, donald trump and bernie sanders scoring major victories in last night's new hampshire primary. let's talk to john harwood, who's already made his way back to d.c. >> good morning. there is a pop lift message that one victory for donald trump and bernie sanders. they came from different angles. bernie sanders addressing his supporters with a winning coalition of liberals and students boxed down by debt. pointed toward the top 1% in wall street. >> tonight we serve notice to the political and economic establishment of this country
that the american people will not continue to accept a corrupt campaign finance system that is undermining american democracy and we will not accept a rigged economy in which ordinary americans work longer hours for lower wages while almost all new incoming wealth guess to the top 1%. >> some overlap, major differences in the message of donald trump targeted yards alienated blue collar workers, he pointed toward external threats. >> we are going to do it the old fashioned way, we will beat china, mexico at trade. we will beat all of these countries that are taking so much of our money away from us on a daily basis.
it's not going to happen anymore. >> neither of the winners have an easy path forward. the race guess to nevada, south carolina on super tuesday. hillary clinton hopes to come back against bernie sanders if south carolina and the republican establishment has to find an alternative. they have not clarified that situation yet, guys. >> 14 primaries and caucuses. when we come back, we will get cramer's mad dash, take another look at the pre market. which is off the highs as yellen with her comments titling some risks for the economy. we are back in a minute.
>> we don't have much time for a mad dash. so let's dash to it. we will talk solar city. >> it was a disappointing quarter. the company the ceo, saying, there's a lot of moving parts a. change in net metering in nevada that was really bad. what mainly happened is that people are tired of getting blindsided. i'm tired of putting everything into the prison. no, i know the president doesn't appoint the federal reserve. i'm saying, this is crony capitalism. because the only way these guys make money is in tax credits. you can imagine under either candidate right now in the lead, you are not going to have tax credits. >> it's important. >> so there is going to be a clash and, yes, again, do i think sanders will win? he won last night. do i think the federal reserve will be fired en masse?
i am seeing the political regime with the trump presidency. you don't want to be that, mr. us the fact that they missed again. people are tired of these companies that are really set up. >> the numbers are horrible. >> the guidance? >> they were so far. they were so off. and they basically admitted. the call was a call that was like let's put it on the plane. mickey rooney. put it on a plane. this was like a bad plane. summer stock. this is a summer stock conference call. okay. i'm not talking shakespeare and the better ones. i'm talking genuine home spun summer stock. >> all right. we will be putting on the big show in a little bit when the opening bell rings. we will be keeping an eye on everything. yes, everything. here on "squawk in the street."
wednesday. yellen begins two days on the hill in front of the house financial services committee. we are keeping our eye on media, inventories at 10:30. jim you were talking about taxes. coal stocks will have a good morning after scotus yesterday got in the way of that clean air act. >> i saw that. a lot of my travel trusts owned american electric power. these companies, remember, 38. you got to be careful. it keeps going down. about 35% of the country is heated by coal and this was a big slap. because of the president. remember, you are dealing with natural gas being so cheap that it's really happening with or without the president. the issue is that you have all these plans that were built when jimmy carter said we were in saudi arabia, those were coming up. those would not be renewed. those will come in after that. >> consol will open up. this translates to rails as well
or not? >> i know i saw that. guys, will you please do homework? they don't do anything. the rails union pacific has been going on, don't get too excited. natural gas is keep. >> that's a look at the big board, the american heart association, highlighting the go red for women campaign national heart month. asset manager based in -- we will keep our eyes on others. the aka mark. >> they reported the last quarter and the quarter was just horrendous and they won so many different lines. akamai. they have been obscured.
obviously, over the top. akamai is over the top. don't get too carried away t. stock was down a deal ahead of time. that was a return to akamai the previous quarter it had been a previous stock. >> more discussion there about customers cutting their enterprise spend. i talked to customers that went from 13% of sales to 6%. >> the lbt picked up a lot of that business. that's a company back from the dead. that's one of the things i want to work on. remember lbt when it was a level? >> jim crow. >> new people now. >> you remember that business? >> i think he's doing all right. >> i meant the nice guy on the real list. he's no bumbleer. >> two nice guys.
two questions. >> time warner. the loss of market value in media over the last couple days. time warner is down 11% and now 13-plus percent for the year. you may remember early this year i had introduced the idea that activists were looking at this stock. when it was in the mid- to low 60s. icon may have been in there briefly. got out. nothing came of that. i didn't do further reporting here on air. others did some things. it didn't look at all clear as though there would be anything that really came of it. no, there were a lot of different ideas being bandied about, bankers get involved. they see a potential fee. what can they do? well, time warner, would they leave hbo and the movie studio behind in a tax free manner. you can't sell turner. the tax base is so low so it
really, you'd have a big tax hit there. as they like to say tax leakage. none of it will go anywhere t. reason i bring it up, though, you are 56 bucks on time warner after what was not a bad quarter. they did miss on the operating income line, higher expenses and the like. they gave guidance on the year seen as better than had been the case but nobody seems to care, jim. >> i mention it because at 56, 57, you do wonder whether this stuff will come around. any activists in there. >> listen, they may own a little bit. but it don't mean anything will come of it. either a being hurt and b bringing up yet again, will somebody try and do something? i have no idea. >> did you see the share buyback? the end of 2014, they had 882
million shares. 811 million shares. i mean, that's like 10% of the company. >> buy backs are what was driving the stocks through, 13 and 14 and a little of 15. >> no one is buying buybacks here. >> talk about buybacks, via com. it's down another 3-plus percent after that incredible move down yesterday. 21% on in a different world news that certainly many would have said should not have brought that kind of a decline. >> it's not coal companies. they're not wasting assets. >> they have a 12.5 billion market cap. >> they're not wasting assets. >> that i have debt. >> they have debt. via com levered at 3.5 tons. >> on the good side, netflix is up 3%. there was some speculation that did eiger lean forward to operating espn in these smaller
bandments? >> i know we spoke with him, the ceo of verizon would say, hey, listen, we're doing over the top him come on, isn't this like illegal? don't have you the vios bundle for 50 bucks vie lative violat your contracts? he says, it's fine. he's been the winner. verizon. my hat's off to verizon. >> at least this year. it's up for the year. >> i was making the case isn't that a violation of the contract? he made me feel i was an log. >> disney is down, having an impact on the do you as you might expect. time warne has come back on this idea a bit. down 5%. >> the tax flow of these companies is extraordinary.
their unwillingness to say listen i know what you hate, we get it. we will adjust is a little unnerving. because people keepting to say, it's almost as if on these calls, you want the ceo to say, look, listen, we know what you are upset about. we see it too. we will adjust it. not unlike a piece, all right. i will put out. the good example. zuckerberg says we know we are all mobile and we're going to adjust. no one gives them a chance. the stock goes down. ten he adjusts. i think they need a zuckerberg moment. >> what would that be? they don't have the ability to create that moment. >> that's the thing, you don't think so? >> no. >> you don't think you have a zuckerberg moment? >> how do you as todd younger said of bernstein how do you get a kid to stop watching their ipad and go back to watching television linearly? >> i don't know. beat them. >> it doesn't happen. >> that was a joke.
i'm not in favor of beating kids. yeah, they watch. when are you out at apple, it's very clear, they're saying do you watch a man on a icastle, the amazon movie? do you watch it on your pro or do you watch it on your imax with the great resolution? no one is talking watching sport. literally. that's the discussion how do you watch narcos? apple tv, on the pro or on your iphone 6? that's the discussion out there. like they don't talk about the stuff? we're like, they don't talk like us. >> we're like the feds. >> they're like one-fifth of the country. >> a bunch of old guys signature there, oh, what's that? >> panera's quarter last night 1.88 beats like a.com. this is a stock, jim, in a tough year up almost 9, 8.5%.
>> my travel crust owns it. paner 15a 2.0 and the regular. when they do panera 2.0 it has dramatic comparable growth. as they convert, you are getting better and better numbers. so this is the beginning of the conversion. he told you panera 2.0 is going to work. it is generating from chipotle being hurt. i would tell you the benefit from the comp stores, he guaranteed this would happen. he had a zuckerberg moment on "mad money." he said, listen, my kid went into a panera, it was like getting into a more than pit. it was disappointed. whoa, that's your kid on behalf of panera. he had a zuckerberg moment. these guy versus to have a zuckerberg moments. you are not buying the sumer berg moment theory. that's because again how do you
get your kid to go back to using the smith krona. >> this was there for the taking. it was up to them. >> panera -- >> i don't see the ability. >> you don't? virtual reality. he is dog virtual reality? i wouldn't go to the mall, the mall many your bed. wow, oh, no, i don't like that store. i can go into victoria secret. how about buying a car, going on a sales floor. going to an fba game, right? >> it's so much more exciting. it's much cheaper. unless you are going to the nets. nets are very cheap, a nine-game package. it's incredible. it includes the 76ers. so it's, the 6ers beat the nets. that was not in reverse reality. >> you should be paying to go see that. >> i was in a virtual mall i was watching the game. >> lesler has an upgrade.
>> you saw that? >> i mentioned it because they did goldman sachs. they sold it for hess. a week later they upgrade the stock. i don't know. what happened to elliot spitzer? he's walking around town somewhere. >> i'm not sure. >> yeah, it's below where they did the deal. someone has to report it. >> that's true. >> why not the underwriter of the deal last week? >> who else? you just told people to buy it. i'm recommend a sale after the 25 million shares you just bought from me. you think that will happen? that will be counterintuitive. >> that would be a zuckerberg moment. >> we'll get to bob here. the dow is up 56. it will be a lot higher if it weren't for disney. good morning, bob. >> to the overall market would be higher if it weren't for yellen. take a look at the s&p futures. we were around 1870 when yellen's comments came out.
i remember she said, financial conditions have become less spertive. you think that would be dovish overall. i guess it wasn't dovish enough for the markets. you can see we probably lost 12 or 13 points. the dollar rallied as well. so overall, very modest market reaction here. in terms, it's nice to see techs bouncing back a little. a lot of beaten up names in that sector. financials doing better. the banks are up again, that's nice to see. utilities are lagging. we talked about them yesterday and the pitfalls of investing in them. energy is down. new lows on oil. so murphy, marathon, cog, all the usual names are down 2%. over in japan, i want to point out another new low since 2014 for the nikkei. a lot has been driven by the yen strength. a lot of the corporate profits are driven by that. that's a real concern over there. speaking of japan, did you see what the head of nomora said a
guy spoke to the fc about sovereign wealth funds. nomura. he came out clearly saying japanese shares due to their high liquidity. he said once they solve the funds they have a decline of stock prices to himco a bottom. there have been investments the funds made hold about 6% of japanese equity. here is a major figure in japan holding the figure. over in europe, banks are higher. deutsche bank has a great day up % on the rumors. still rooum rumors.. those stocks are on the upside. carlisle came out and announced a 200 million share, $200 million buyback, that would be
about 5% of the shares fully executed. look at these names. a lot of the big corporate names have been down about 50% in the last six months or so. so buybacks are making a bit of a comebook. not only carlisle, apollo did. the outside of that particular space slumberge announced one. general motors. a lot of the companies feel their stocks are cheap and now they're starting to put their money where their mouth is. there is at least confident by some companies they might be able to invest their stocks. they're definitely an anomaly here. finally, i want to point out another, in fact, two ipos were postponed overnight. we were expecting ott, an airport concession operator to come. they announced a postponement as well. advanced proposal overnight announced. so far this year, basically, six ipos have been postponed.
theres is list, so far, it's been a dismal start to the year overall. right now the dow up 34 points. disney is down five. that's 30 points off the dow. back to you. >> all right. thank you very much. let's go to chicago. check on the bond pits. good morning, rick santelli. >> good morning. oh, there is a lot of yelling going on behind me as well. option pits get a bit rambunctious when questions and answers come into play. is it all about janet yellen? i can't tell you that. what i can tell you is with regard to the pre-release of her testimony the economy certainly isn't too high. now the real issue is that she didn't underscore that. that's too cold. that's my read t. reason that's important. i continue to say the biggest miscalculations of investors for 2016 may be that they look at what's going on within the
economy and the global xi and decide that's enough to stop normalization. i think the feds embrking on normalization for many reasons, not necessarily all of them fall under conventional wisdom. look at it into today at five. it's a little bit long. a little bit short. a little of the cocoa bond. a little bit dead. a little equity. can you see it bounded around the time most of the reward were hitting the screen. open it up to a one week chart. this is fascinating. you notice the way we're holding 115. not interday on a closing yield basis. open the chart up to august of 2011. i've talked about the repeatedly the last couple of weeks t. five-year lead rate's down. now the long end has somewhat taken over. it's stopping right at a significant level. somewhere between 115 and 120. watch this maturity. it can put a breaker on the falling in rates, if you look at the difference between tens and boones, this is also something
fascinating. one of the big reasons rates go down may have nothing to do with fundamental also, more logistics as european rates move lower. however, the distance between the two is starting to fall a bit. this is something you into ed to pay attention to. you can see the greinkeout as we dip under 150. now we look at the euro versus the dollar, everybody knows how strong that's gotten. look at the euro versus the yen. if you want to look at currencies, to garner more knowledge about the future. it's the yen you need to be looking at against the major currency. carl, back to you. >> rick, we'll check in with you later. rick santelli in chicago, rates, market volatility, global slow down concerns play a role in janet yellen's economy. the house financial services will have a lot of questions. of course, we will bring you live coverage when that begins at the top of the hour.
twthd, whole foods and tesla. jim, a lot of the names are going into the print. >> tesla has been unberable. my travel trust owns a position. a lot of people worry about the cloud. he's not worried about it, a lot of people worried and the world wide slow down. someone said profits in china, people say the problem is with the dollar. you have to buy their equipment. chuck robinson is doing a lot of shadow boxing. it's a time where he can show some numbers. put up numbers. the stock yields 3%. it's an attractive opportunity. there is little faith for it right now in anything hardware. >> chuck robins. i'm 20 tomorrow. twitter in the 10:00 a.m.. the journal saying they should learn from yahoo's mistakes in mass passing up that bid from microsoft this month. >> i saw a good aronson, yahoo
to facebook literally, you get that, yahoo was facebook. yahoo is these guys. i started doing a periscope for facebook. it's interesting. right before my show. "mad money." in the second one i got five times the number of people. it's like the first, second time. facebook, twitter is like you can't. you are wasting your time with your periscope versus facebook. >> facebook the an incredibly powerful platform. which is why they have incredible top line accelerating growth and 7% ebitda margins, frankly none of which twitter has. >> frankly no company has. maybe i'm being unlike the warden in shaw hank. maybe the issue is facebook vs. time and disney, it doesn't come up in the coal. is that like pinnochio? >> on the nose. on the nose. >> bingo. baby facebook should come up with the calm. maybe zuckerberg should photo
bomb these calls. have you ever heard of me? ha. >> they will have their zuckerberg moment. >> maybe that's what we're doing. facebook versus the world and maybe amazon. we're not watching. talk to clorox, man, he gives a check to facebook. he used to give it to tv. 30% of his spend. he's the most successful google tech in the world. in the world. >> a long way away from gm sayingbook is not worth our time. the dow is up 70 points don't go away. at ally bank, no branches equals great rates.
he's been a big one. i will go with salesforce.com and adobe, two big funds that blew up last week, we can tell. they go from buying a strong buy. this is important, jeffreys which hated the stock went from sell to hold yesterday. remember, there was a big takeover premium. microsoft was able to buy them. which did not occur. sales force is actually selling as a reasonable multiple to its growth a. lot of stocks are bouncing. none the least which is disney. i'm a little more sanguine about these entertainment stocks. it's come down so much. everyone else would kill for that franchise. so you may think espn is killing them. i do think that there is a longer-term case. >> not many people talking sub $2 gasoline and theme parks going into the summer. >> oh my gosh, some say the
theme parks are peaking. it's a jobe-like call. what has to happen? the business is good. they'll figure it out. why does eiger get no credit, his birthday today, too. i got wyndham, a hotel chain. no one wants that. david aldrich, skyworks, no one wants that. no one wants these stocks. no one. don't you look at me like that. >> happy birthday, by the way. >> is that good or bad? >> happy birthday. >> "mad money." >> meet me. we'll celebrate. >> fra diablo shimp. >> when we come back. janet yellen's fed testimony on the hill. don't go away.
testifying before the house financial services committee pretty soon here. the hearing is just getting under way. we will bring your opening comments and take the q & a. in the meantime the markets hanging on to a triple digit gain for the u do. oil recovering some of its losses now at 2784. in the meantime, goetz go over to hampton pearson with the latest on what yellen will say. >> in her prepared testimony, janet yellen will tell the house financial services committee that when the fed looks at monetary policy, it is by no means on a pre-set course. the fed funds rate path will depend on the data. if the economy were the disappoint, a lower path to the fed funds rate would be appropriate. she also says the fomc anticipates economic conditions will evolve in a manner that award only gradual increases in the fed funds rate. the economy the prepared
statement says in her view made maximum employment. inflation is low primarily did you to declining prices. the fonc expects a 2% inflation target in the medium term. there are several comments in the category of economic head winds. there is still some slack in the labor market. fourth quarter growth has slowed down, basically due to weak net exports, negative investments, especially cuts, of course, in the drilling and mining sector. financial conditions she says are less supportive of growth as we speak, including declines if equity prices, higher risks for a borrowers and a further appreciation of the dollar. but she also believes that the u.s. domestic economy could weather these storms and essentially offset those head winds, if you will, by further gains in employment, income growth and increased consumer spending and she makes the case
that global growth should pick up because accommodative monetary policies are more accommodative globally as well. the fomc does expect gradual adjustments and economic activity will expand in the coming year. the economic outlook is uncertain, foreign economic developments, especially in china could pose a risk to the u.s. economy. back to you. >> hampton pierce, thank you for breaking that down. steve leishman back at hq on what the meaning of it all is. steve. >> thanks very much. taking off where hampton left off. the best comment i seen in the wake of fed chair janet yellen from pantheon, dr. yellen did not sound dovish enough for the doves or hawkish enough for the hawks. >> that itself to say. yellen gave a little to both side here in the great policy debate.
did not give everything each side wanted. to hawks, yellen maintained a positive labor market and confidence inflation would move towards that 2% of the fed. most important, she stuck to the policy, next move is what, a hike. not a cut. for the doves, yellen offered up market and hampton says posed risk and inflation will take longer to hit the target. rate hikes essentially will be delayed until the outlook clears up. doves did not get a policy reversal orca pitlation from the fed. hawks have to think at least march is unlikely. where several analysts did agree in the wake of the testimony, is june remains in play. >> that means there is a wide gap between a market that expects no rate hikes and a fed that thinks the next move is a hike sign. >> let me just ask you. what are you expecting from some of the members of congress here in terms of questioning? how informed do you think they going to be on what's happening with the global economy and some
of this mark turbulence? >> well, you know, the history is the senate tends to be a little better informed than the house or a little less political. what i think the house wants, they want to go after this issue they have been on for a long time which is that the fed needs to operate on a rules based policy and follow some sort of formula. something the fed and most people who follow the fed have generally rejected in terms of the best way to make policy. so expect a lot of that from some of the other republicans. i think what democrats will wonder are hey why are you raising rates when the economy is weak. so i expect yellen to get it from both sides. not quite a lot of support or t vitriol we've seen. the director of floor operations at ubs joins us here. good morning. >> good morning. >> dny yellen puts it
maintaining the integrity of the last meeting. >> i think shy is trying to do a middle of the road as steve said. a little for both side. >> that itself course she actually has to take. obviously, she can't come in and say things have gotten bad. so we're not going to do anything until june so she's leaving it all open and giving you enough hint that march is likely off the table and you will probably get four more pay rolls before we get any consideration. >> but still a fundamental divergence as to whether or not they will capitulate on interest rates. >> yes. and you know my feeling. i think, well, you didn't think they'd go in december. >> they did. >> so if december, i did. because they made it obviously. but i said that i think we'll be back at zero before we see 1%. >> for those critical, saying she could have gone further. she could have said maybe march is off the table. they're sy thinking of pausing.
wouldn't that be problematic? in some sense they made a mistake in debris by raising interest rates, pre commenting on monetary policy? i don't get that argument that people are making that she should have talked a little more about the "options action" in march. >> i agree with you wholeheartedly, you hear the phrase around policy error when people talk about where they've gone. so i don't think she wants to do anything to reenforce that concept so she'll stay away. it all depends if our elected officials do some careful questioning here. maybe we will find out something. >> what else are you looking for? >> i'm looking right now, right up against some resistance here. s&p. 1868 to 1872. we're right in that zone. that's where we stopped yesterday. we'll see if they can push that through. and yesterday we started what looks like a trial celebration
from oil that oil went down, the market didn't react. i want to see if that reasserts. if wti breaks down below 27, i think it will be critical to see how the market reacts. >> you have a substantial bounce after that report that stifel nicolaus might buy back some of its troublesome bonds. the high yielding bonds. had that basically taken europe off the agenda as a cause to move lower do you think here? >> i think that's probably temporary. i don't think the entire issue is resolved. i think you got a lot of shorts, we're in deutsche bank and several other of these things. not unlike the way they began in 2008. i don't think the two terms are analogous. i think the behavior of some traders is. when they made that announcement. when the fp said it was being considered. i think deutsche came in and covered. >> that has given us a day of respite. i don't think it will be more than two, three days. >> none the lest, goldman said
yesterday, what is happening is not systemic. is that at least the belief of people here? it won't really affect us in a major way moving forward? >> that may well be true, in fact. people still have that emotional feel about contagion that picked up if 2008. >> the day after the new hampshire primary has been positive, five out of seven, i wonder if the results are starting to boil around here in terms of sediment? >> well, i don't really think so. i think they will see who drops out. how narrow do things go? as i said before, i think politics will begin to affect the market around the south carolina when we hone in on that and see and start to look at who is survivable. whose policies may come in. so, once we get to south carolina, i think it will mean more. >> thank you very much. >> we're keeping our eye on
capitol hill, where fed chair janet yellen is said to be testifying there before the financial services committee. in a few moments, before that, though, we are talk to governor randy clausener joining us live with his take on how janet yellen needs to walk a fine line in this testimony. "squawk on the street" will be right back.
washington. we are waiting capitol hill janet yellen. for more on what she could say, we wantco welcome a former reserve governor himself and a professor of the economics of chicago school of business him good see you again, janet yellen did flag some of the ricks out there, the financial markets have tightened, conditions have tightened, she said. but she didn't explicitly say whether or not they were going to pause in march. i assume it was the right purpose. was at this time right move? >> i think she wants to leave all "options action" open. she's not sure how inflation will evolve, how the economy will evolve. so she also has some management issues of the foc. some want to move rapidly. others that don't want to move at all. she doesn't want to pre commit. she will say it's on the data i
don't see she will keep it on the table. >> there is virtually zero chance according to fed funds futures. they are going to raise interest rates. there is a barely 20% chance they move once this entire year. how does she reconcile market expectation and what the fed wants to do? >> i think she will say, as they talk about the data, where it is now. where it's likely to be going, it's i think will be consistent with a very low probability of moving in march. but as i said, she also has issues of managing different members of the xhi committee. she doesn't want to commit to a move in march. >> janet yellen is about to start her testimony. let's go to capitol hill. >> in the annual monetary policy report to the congress, in my remarks today, i will discuss the current economic situation sand outlook before turning to monetary policy. since my appearance before this
committee last july, the economy has made further progress towards the federal reserve's objective of maximum employment. while expectation is expected to remain low in the near term, in pashtd because of further declines, the fed market open committee expects inflation will rise to its 2% objective over the median term. in the labor market the number of payroll jobs rose 2.7 million in 2015 and posted a further gain of 150,000 in january of this year. the cumulative increase in floimt employment since its trough in early 2010 so more than the jobs. the unemployment filled to 4.9% in january. a tenth of a percentage point
below it's level a year ago and in line of the median of fomc participants most recent estimates of its longer run normal level. other measures of labor market conditions have also shown solid improvement with noticeable declines over the past year in the number of individuals who want and are available to work but have not actively searched recently and in the number of people who are working part time but would rather work full time. however, these measures remain above the level seen prior to the recession suggesting that some slack in labor markets remains. thus, while labor market conditions have improved substantially, there is still room for further sustainable improvement. the strong gains in the job market last year were accompanied by a continued moderate expansion in economic activity.
u.s. real gross domestic product is estimated to have increased about one and three quarters percent in 2015. over the course of the year, subdued foreign growth in the appreciation of the dollar restrains net exports. in the fourth quarter of last year, growth in the gross domestic product is reported to have slowed more sharply to an annual rate of just three-quarter percent. again, growth was held back by weak net exports as well as by a negative contribution from inventory investment. although private domestic demand appears to have explode somewhat in the fourth quarter, it has continued to advance. household spending has been supported bid steady job gains and solid growth and real disposable nng aided in part by declines in oil prices. one area of particular strength
has been purchases of cars and light trucks. sales of these vehicles in 2015 reached here highest level ever. in the drilling and mining sector. lower oil prices have caused companies to slash jobs and sharply cut capital outlays. but in most other sectors, business investment rose over the second half of last year and home building activity has continued to move up on balance. although the level of new construction remains well below the longer run levels implied by democratic trends. ful conditions in the united states have recently become less supportive of growth. with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers and a further appreciation of the dollar. these developments, if they prove persistent could weigh on the outlook for nick activity in
the labor market. although, declines in longer-term interest rates in oil prices provide some offset. still. ongoing employment and faster wage growth should support the growth of wale incomes and therefore consumer spending. economic growth should pick up over time supported by highly accommodated monetary policy abroad. against the backdrop, the committee expects gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and labor mark indicators will continue to strengthen. as is always the case the economic outlook is uncertain. foreign economic developments, in particular, pose risks to u.s. economic growth, most
notably. recent economic indicators do not suggest a sharp slow down in chinese growth. declines in the foreign exchange value over have intensified uncertainty about chooin china's exchange rate policy and the prospects for its economy. this uncertainty led to increased volatility and global financial markets and against the backdrop of persistent weakness abroad exacerbated concerns about the outlook for global growth. these growth concerns along with strong supply conditions and high inventories contributed to the recent fall in the prices of oil and other commodities. in turn, low commodity prices could trigger financial stress in commodity exporting economies, particularly in vulnerable emerging market economies and for commodity producing firms in many
countries. should any of these downside risks materialize, foreign activity and demand for u.s. exports could weaken and financial market conditions could tighten further. of course, economic growth could also exceed our projections for a number of reasons, including the possibility that low oil prices will boost u.s. economic growth more than we expect. at present, the committee is closely monitoring global economic and financial developments as well as assessing their implications for the labor market and inflation and the balance of rick to the outlook. as i noted earlier, the committee runs below the committee's 2% objective. overall, consumer prices as measured by the price index for personal prices extend pendtures increase a half percent over the
12 months of 2015. to a large extent t. low average pace of inflation last year can be traced to the earlier steep declines in oil prices and in the prices of other imported goods and given the recent further declines of prices in oil and commodities as well as the further appreciation of the dollar the committee expects inflation to remoney i main low. once oil prices stop falling, the downward pressure on domestic inflation from those sources should wane and as the labor market stretches further t. labor market is expected to rise gradually to 2% over the median term. in light of the shortfall of inflation from 2% the committee is carefully monitoring actual and expected progress towards its inflation goal. of course, inflation
expectations play an important role in the inflation process. in the committee's confidence in the inflation outlook depends importantly on the degree to which longer run inflation expectations remain anchored. it is worth noting in this regard that market-based measures of inflation compensation have moved down to his torically low levels. our anam sills suggests -- analysis suggests the liquidity premiums over the last year-and-a-half contributed significantly to these declines. some survey measures of longer-run inflation expectations are also at the low end of their recent ranges. overall, however, they have been reasonably stable. turning to monetary policy, the fomc conducts policy to promote maximum stability and price stability as required from our
statutory mandate in congress. last march, the committee stated it would be appropriate to raise the target range for the federal funds rate when it had seen further improvement in the labor market and was reasonably confident that inflation would move back to its 21st objective over -- 2% objective over the median term. they said they had been satisfied and decided to raise the target range for the federal funds rate one quarter percentage point between one quarter and one half percent. this increase marked the end of a seven-year period during which the federal funds rate was held near zero. the committee did not adjust the target range in january. the decision in december to raise the federal funds rate reflected the committee's assessment that even after a modest reduction in policy accommodation, economic activity
would continue to expand at a moderate pace and labor market indicators would continue to strengthen. although, inflation was running below the longer-run objective. the fomc judged much of the softness and inflation was attributable to transitory factors that are likely to abate over time and the diminishing slack and lo bor and product markets would help move inflation towards 2%. in addition the committee recognized that it takes time for monetary policy actions to affect economic conditions. if the fomc delayed the start of policy normalization for too long, it might have to tighten policy relatively abruptly in the future to keep the economy from overheating and inflation from significantly overshooting its objective. such as abrupt tightening could increase the risk of pushing the
economy into recession. it's important to note that even after this increase, the substance of monetary policy remains accommodative. the fomc anticipates the economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. in addition, the committee expects that the federal funds rate is likely to remain for some time below the levels expected to prevail in the longer run. this expectation is consistent with the view that the neutral nominal federal funds rate defined as the value of the federal funds rate that would be neither expansionary or extractionary if the economy was operating near potential. it is currently low by historic am standards and is likely to rise only gradually over time. the low level of the neutral federal funds rate may be partly attributable to a range of
persistent economic hid winds such as limited access to credit for some borrowers. weak growth abroad and the significant appreciation of dollar that have weighed on aggregate demand. of course, monetary policy is by no means on a pre set course. the actual path of the federal funds rate will depend on what incoming data tell us about the economic outlook. and we will regularly reassess what level of the federal funds rate is consistent with achieving and maintaining maximum employment and 2% inflation. in doing so, we will take into account a wide rage of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. in particular, stronger growth, or a more rapid increase in
inflation in the committee currently anticipates, would suggest that the neutral federal funds rate was riesdzing more quickly, making it appropriate to raise the federal funds rate more quickly as well. conversely, if the economy were to disappoint, a lower path of the federal funds rate would be appropriate. we are committed to our dual objectives. we will adjust policy as appropriate to foster financial conditions consistent with their attainment over time. consistent with its previous communications, the federal reserve used interest on excess reserves and overnight reverse repurchase operations to move the federal funds rate into the new target range. the adjustment to the ioer rate has been particularly important in raising the federal funds rate, in short-term interest rates more generally in an
environment of abundant bank reserves. meanwhile, overnight, rrp operations compliment the ioer rate by establishing a soft floor on money market interest rates. the ioer rate and the overnight rrp operations allowed the fomc to control the funds rate effectively without having to first shrink its balance sheet by selling a large part of it holdings of longer term securities. the committee judged removing monetary policy accommodation by the traditional approach of raising short-term interest rates is preferable to selling longer term assets because such sales could be difficult to calibrate and could generate unexpected financial market reactions. the committee is continuing its policy of reinvesting proceeds from maturing treasury
securities and principle payments from agency debt and market backed securities. it's highlighted in the december statement. the fomc anticipates continuing this policy until normalization of the level of the federal funds rate is well under way. maintaining our sizable holdings of longer-term securities should help maintain accommodative financial conditions and reduce the rick that we might need to return the federal funds rate target to the effective lower bound in response to future adverse shocks. thank you. i will be pleased to take your questions. >> the chair now recommends himself for five minutes. i know you were familiar with the oversight reform modernizationing a the reform act passed by the house in november is designed to bring about greater transparency and accountability at the fed.
respect the fed's independence, but to insure that the fed lets the rest of us know the variables used in monetary policy and their reaction function so that working families can plan out their family economies. i know that are you not a fan of the format, because i have a letter dated november 16th that you sent to the speaker. in that letter, you called the act a grave mistake. i have another letter thar describes it as an important reform 679 your letter mentions or complains that monetary policy would be forced to be strictly adhered to by the prescriptions of a simple rural. my letter says the legislation does not chain the fwed to any rule and certainly not a mechanical rule. your letter says that the act would undermine the independence of the fed. my letter said, in no way would
the legislation compromise the fed's independence on the contrary. publicly reporting a strategy prevents policy makers from bending under pressure and sacrificing independence. your letter states that the form act would quote severely damage the u.s. economy were it to become law. my letter says, the new lenls laixlation would improve economic performance. by definition, your letter is signed by you. my letter is signed by dr. lars hansen from the university of chicago nobel laureat in economics. also signed by robert lucas, university of chicago nobel laureat in economics. edward press scott, arizona state university, nobel laureat in economics. george schultz, former secretary of the treasury, robert heller,
former federal reserve governor, jerry jordan, former president of the cleveland federal reserve bank. william poole, farmer president of the st. louis federal reserve bank. former member of the council of economic advisers. michael bosskin, stanford university. former chairman of the president's council of economic advisers. charles calamaras, columbus university, federal reserve board of novembers. marvin goodfriend, carnegie mellon former research director for the federal reserve board of richmond. allen metser, carnegie mellon john taylor of stanford university form you are under secretary of the treasury the countsome of economic advisers, arthur the taylor rule. there's about 15 others sicktorisic
signaturetories. we have a host of former federal reserve officials, some of the most renowned and respected economists in the country pretty much disagree with nk you asserted in your three major missive against the reform act. i know you are not a fan but i would caution you chair when you use hyper bollic language you might consider whether or not this undercuts your credibility as fed chair. i have one question. in your testimony, chair yellen and characterizeing the fed's strategy to increase policy rates, you testified, quote, removing monetary accommodation by the traditional approach is preferable to shrinking the fed balance sheet which holds almost as much in treasuries as china and japan do combined.
i'm trying to figure out what precisely is traditional about this current approach, where the fed and the ranking member i think brought this up in her opening statement subsidizes deposit rates for some of the biggest banks in our country, which can distort as you well know real asset allocation who and constrained economic opportunity and last i look as we speak the feds fund rate is just above 30 basis points. you're paying banks 50 basis points for excess reserves. which would seem to be above the market rate. you have previously testified that this does not involve a subsidy for banks. it appears to be a subsidy and it appears to distort real asset allocation. so what is traditional about this approach? >> the tool that we have used to raise our target for short-term interest rate, namely our key tool being interest on excess
reserves is widely used by central banks as a key tool of monetary policy and it is the critical tool that we need to rely on in order to adjust the level of short-term rates to what we regard as the appropriate stance to achieve congressionally mandated goals. i would point out that although we are paying interest to banks on reserves, those reserves are financing our holdings, a large portfolio of holdings, of longer-term trashry securities and mortgage-backed securities of which we earn substantially greater interests and because of that large balance sheet, this past year, the fed transferred back to the treasury and to the
american taxpayers $100 billion. >> but it is true, chair yellen, is it not? you have the fed 30 basis points. >> it's necessary for us to raise benchmark rates in order for a whole host of short-term interest rates abroad. >> my time has long sense expired. the chair recognizes the ranking member for five minutes. >> platform. chair yellen, continuing on the discussion that was just initiated be i the germans, as you continue to embark on the path of raising rates, i want to explore the alternative approaches that may exist for the federal reserve to do so in a manner that does not rely so heavily on paying massive sums to private sector bnks, to hold onto the reserves they maintain at the fed. while the fed pay close to 7
billion on reserves in 2015, as the economy strengthens and rates are further increased, the amounts paid could increase dramatically into the tens of billions of dollars. can you expand on why you believe that paying interest on excess reserves is particularly important? the raising rates in the current environment and discuss how alternative approaches that may exist and if you talk about what you believe is to be the mandate of congress and how you don't have the authority for alternatives, i want to hear more about that. and what you do have the authority to do. >> well, prior to the financial crisis, the fed adjusted the level of short-term interest rates through small variations in this supply of reserves to the banking system.
following the crisis is our balance sheet expanded reserves became abundant and traditional approach which is no longer feasible. congress had debated the wisdom of giving us the tool of paying interests on reserves for many years and decided to do so in 2006 and then speed it up, implementation in 2008. the knowledge that we had that tool and would be able to use it when we domed it appropriate to begin to raise the short-remember the level of interest rates as we did in december, the knowledge that that too many was available as i just mentioned the tool that is critical to our control of short term rates widely used loosely, that was an important fact when we considered all the actions that we took the unconventional
actions that we took to produce the decline in the unemployment rate in improvement in the labor market that we have achieved. so if we were denied that tool, at the plent present time, we would not be able to easily raise the level of short-term rates. >> i would direct i for a moment. are you saying that you are limited only to that action or do you have the authority to make some other decisions relative to what the interests you are playing no these banks? have you have flexible here? >> we would like to gain effective control of short-term interest rates need to shrink our portfolio from this current large level back to the current levels we had before the crisis
and we set out over several years a plan for how we would normalize policy that relies, not only selling long-term assets, but on adjusts short-term interest rates. i believe that if we were to follow the plan of selling off long-term assets, it could prove very effective to the expansion. it's a strategy that i think could harm the economic recovery and it certainly is not what we have set out to the public. we said we would shrink our balance sheet in a gradual and predictable way so as not to be disrupted. >> we have to design this approach. congress could if it decided to take it away as an approach you would use even though you do not think it would be helpful.
>> i think it would be very disruptive to the economy and i really, i want to point out several things about this. first of all, although the banks are rern e earning this interest on the excess, on the reserves that they hold, as the level of short-term rates rises, first of all, on their wholesale funding that many of these banks rely on, they're also paying more to gain that funding. eventually, this will be the mechanism that will lead as well to higher deposit rates to reward savers and finally, i really want to emphasize that from the taxpayer's point of view the federal reserve has transferred since 28 through 2015 roughly $600 billion back to congress to the taxpayers to the treasury funds that have
contributed importantly to financing the government and that has only been possible because we have a larger stock of reserves in the balance, in the banking system and correspondingly hold a far larger some of interest bearing assets that pay in larger amount, prior to the crisis a typical level of transfers from the fed to the treasury was on the order of $20 billion. for the past two years. we have transferred $100 billion a year. >> thank you very much. we need to talk about this some more and go back to the balance. >> chair now recognizes the gentleman from south carolina, mr. mulvaney, vice chair. >> thank you, chairman a. quick follow up janet yellen on the chairman's question. you mentioned that using the
ioer and the r, if they were traditional tools. you mentioned that other central banks have used them before. have you ever used them? no. >> has the federal fund rate, which i understand is trading on the market of 30 basis points ever been below the ioer which is now set at 50 basis points? >> has it ever been below? >> yes, ma'am. >> it's since we set the, when we were first given the power to pay interest on reserves, we set it at 25 basis points t. federal funds were raised below it. when we set it to 50 the fed funds rate moved up roughly 25 basis points the amount of the increase in ioer continues to trade below it. >> so your testimony is those are traditional tools? so let's move then to a different discussion with that as a background. you have in the past been a
proponent. though a reserved proponent of a rules-based system. back in 2012, you gave speech where you said, quote, why shouldn't the fomc adopt a rule as a guide post? the answer is that at times by no means normal now and simple rules that perform well under ordinary circumstances just won't perform well. two years ago to this committee, you said something similar, in response to a question about rules, you said the conditions facing the economy are extremely unusual. i've tried to argue while a tailor rule or something like it has a sensible rule under current situations it's not appropriate. so that's your testimony in 2014. you gave a speech in 2012. here we are in 2016. you by your own testimony are using traditional tools of monetary policy. your written testimony begins by
saying that the economy has made further progress towards the maximum employment. you go on to say inflation is low in the near term. it will rise over the medium term. are we in normal times? >> the economy is in many ways close to normal in the sense that the unemployment rate is declined to levels that most of my colleagues believe are consistent with full employment in the longer run. and inflation while it's below 2%, i do think there's a god reason to think it will move up over time. and in that sense, things are normal. but what is not normal is that the so-called neutral level of the federal funds rate that i levered to in my testimony and we discuss in the report is by no means normal.
in other words, we have needed for seven years to hold the federal funds rate and both in nominal land inflation real terms, inflation adjusted for real terms at exceptionally low levels to achieve growth averaging 2%. >> sorry to interrupt. >> in that sense, it is not normal. the economy is held back by head winds. i would point out a tenet of the tailor rule is that it tangs, it assumes and embodies in it an assumption that the equilibrium level of the feds fund rate with the 2% objective is 4% or that the real equilibrium fed funds rate is 2%. >> that simply isn't the case. >> madam chair, i'm surprisingly not pushing the tailor rule.
i'm showing a system. have you shown support for it in the past. i guess my question is this, what does the world have to look like? because i think admittedly, employment is better inflation it seems to be under control. yes you say the fed funds rate is low. what does the world have to look like in order to start considering transitioning to a rules based system? >> i think the benefit is it's systemattic and understandable and the federal reserve has attempted to engage in the systematic policy. >> i get that. >> what does the world have to look like? when you come back next year, what should the world look like for to you say, you know what, we're considering a rules based system? what has to change? >> the committee think itself, looks at guidelines from rules a usual benchmarks as it considers
the apreept stance of policy, but i believe and i think most of my colleagues would agree that we shouldn't mechanically follow that rule or any other rule but that we need to take into account a large, a large set of indicators of how the economy is performing. >> the time for the gentleman expired t. chair now recognizes a young lady from wisconsin, a ranking member of the monetary policy and senate trade subcommittee. >> thank you very much, mr. chairman. again, welcome chair yellen. take us in a little different direction on, many of us here on both sides of the aisle are really concerned about what's happening with our smaller backs. we understand because of that we had a lot of concerns, we dewitted that, frank and
including provisions like voelker, they were difference by the concerns of the large banks, inactive capital markets. and i know that you are not the regulator overseeing dodd/frank. i'd like your opinion on how the rules may have been tailored or should have been tailored for small or community banks. capital standards are stilling our small banks, compliance, officers that were -- where they don't have the additional staff. just your thoughts on what should have been done or how has it been tailored? >> well, let me say that i think community banks and their vitality is exceptionally important. they provide enormous benefits to the country and to the economy. i recognize that the burden on community banks is intense. >> they are shutting down.
>> regulatory burden. for our part they're focused on doing everything that we conceivably can to minimize and reduce the burden on these banking organizations. we've been conducting in a gripper review to identify potential burdens that are regulations imposed on these banks, and we will do everything that we can to respond to the concerns that are identified there to reduce burden. we're looking for many ways. first of all, we have tried to tailor our regulations to the size and complexity of institutions. the smaller community banks are not subject to stress testing requirements. many aspects of basel 3 capital requirements and liquidity rules
do not apply to those banking organizations. we've tried to simplify those requirements. we're, in addition to that, trying to reduce the duration of the time that we spend reviewing banks during exams. we're trying to simplify and be more targeted in our requests for documentation. we try to identify for community bankers what is relevant to them and what they can safely ignore. and we're looking for ways to conduct exams that are more focused on the actual risks that are relevant to a particular organization. so i recognize that the burdens on those banks have been very intense and pledge that we are doing and will continue to do all we can to reduce burdens on them. >> thank you.
on this committee we spend a lot of time talking about moral hazard. and so i guess i would like your view on whether or not you think there's any moral hazard on not a single person involved in the 2008 crash having gone to jail. they get fines. they get sort of compliance letters where they can clean up their act and avoid prosecution. and i am wondering if you think that it's important for us to seek, you know, so what? pay a fine. that is not -- that doesn't stop anyone from doing the next crime, unlike other of our criminal laws. >> i agree with you. i do not think that individuals who were guilty of wrongdoing should escape paying appropriate
penalties. for our own part, we are not allowed, obviously, to put in place criminal penalties that's a matter for the department of justice. for our part, we can, when why find individuals to be responsible for wrongdoing, make sure that they are not allowed to work at the banking organizations where they committed misdeeds and in many cases, we can make sure that they are banned from the business of banking. and when we've been able to identify individuals who are responsible, we have put in place those sanctions and will continue to do so. and we always cooperate with the department of justice in their investigations. >> time of the gentle lady has expird. the chair recognized mr.
mchenry, vice chair of the full committee. >> thank you chair yellen. so does the federal reserve have the legal authority to implement negative rates? >> i'm sorry. do we have the legal authority to -- >> implement negative rates? >> so this is a matter that the federal open market committee considered around 2010. and we didn't fully -- as we were exploring our options to provide accommodation, we decided not to lower interest rates either ioer to zero or into negative territory. and we didn't fully look at the legal issues around that. i would say that remains a question that we still would
need to investigate more thoroughly. >> one of our document requests, that 2010 memo that i assume is connected to that policy discussion. >> that's right. >> raised significant doubts about the fed's authority that they currently have to charge -- to pay interest on excess reserves. and whether or not that same authority would allow you to demand payment for that. >> so i don't know of any restriction that would prevent us from doing that. that memo indicated, was intended to indicate that the legal issues had not been seriously considered. >> have they been seriously considered since 2010? >> well, in the spirit of prudent planning, we always try to look at what options we would have available to us, either if
we need to tighten policy more rapidly than we expect or the opposite to loosen policy. so we would take a look at it. but the legal issues -- i'm not prepared to tell you have been thoroughly examined at this point. >> so at this point, it's unclear whether or not the fed does have legal authority to implement negative rates? >> i am not aware of any -- anything that would prevent us from doing it, but i am saying we have not fully investigated the legal issues that would -- that still needs to be done. >> so let's move to regulation, right? significant part. you run the largest regulatory organization in the united states of america, perhaps on the globe, likely on the globe. and as such, you know, i believe in the independence of the fed to make monetary policy. but as a regulator, congress
should have significant oversight of your regulatory action, should they not? >> yes. >> okay. and as such, as a matter of regulation, the chairman raised this question with you the last time you were here about federal reserve regulators, bank examiners demanding to be a part of board of director meetings. and member banks. and you have exchanged multiple letters on this matter. we still hear that this is, in fact, taking place. would you pledge to this committee that you would direct your bank examiners and regional bank examiners to stop this practice? >> well, i will look into -- >> you've already looked into it. you've exchanged letters and gave the chairman the assurance last time you were not aware of it. i assume you are now aware of whether or not this is taking place. are you not? >> i think there are occasional situations in which that occurs.
>> do you believe that's appropriate? >> i'm not -- i'm not certain that it is inappropriate. i want to get back to you on that. >> well, this was raised about six months ago by the chairman. you've exchanged multiple letters. i'd like to have some greater assurance. this is not meant to be a gotcha. this is a well-warned question. and we are hearing, and, in fact, there's a press report that the fed directed one of your member banks to incorporate two additional members of their board of directors. the fed directing a private enterprise to change their board of directors seems somewhat perplexing. do you believe that's appropriate authority for the fed? >> well, i think it is appropriate as a matter of supervision to -- >> to direct -- >> to ensure that a board of directors of a financial company that we supervise is
appropriately constituted and fulfilling its corporate governance functions. that is a part of supervision. >> my time has expired. >> time of the gentleman has expired. the chair recognizes the gentle lady from new york, ms. maloney. >> chair yellen, you raised interest rates in december and said that any future interest rate increases, if they happened, would be gradual. i'd like to ask you about the recent turmoil in global markets. as you know, equity markets around the world led by china have plunged since the beginning of the year as global economic growth has weakened. and the u.s. has not been immune. u.s. stock markets have fallen over d% since the beginning of the year. and treasury yields have