(BEGIN VIDEO CLIP)
JANET YELLEN, FEDERAL RESERVE CHAIR: This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.
(END VIDEO CLIP)
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: The wait is over. The Federal Reserve raises interest rates, ending an unprecedented era of zero rate monetary policy.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Tonight, we’ll tell you what that decision means for the economy, your investments, credit cards, mortgage rates, student loans and even your retirement.
All that and more tonight on NIGHTLY BUSINESS REPORT on Fed Day for Wednesday, December 16th.
MATHISEN: Good evening, everyone. I’m Tyler Mathisen, coming to you tonight from outside the Federal Reserve headquarters on Constitution Avenue in Washington, D.C.
And here today, the nation’s Central Bank, in an historic move, voted to begin pulling back its unprecedented stimulus.
HERERA: Good to see you, Ty.
I’m Sue Herera.
Stocks took off in response to that. Tonight, what the Fed’s decision means for your investments and your money.
We begin with the decision itself. The committee voted to raise interest rates by a quarter of a point, and though small, it signals a vote of confidence in the economy, and it ends an extraordinary seven-year period of near zero percent interest rates.
And in response, stocks rose sharply. All of the major indices were up more than 1 percent. The Dow Jones Industrial Average added 224 points to 17,749, the NASDAQ climbed 75, and the S&P 500 gained 29.
Hampton Pearson has more on the Fed’s decision and the outlook for future rate hikes.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: At the Federal Reserve, the end of an era, the first interest rate hike in nearly a decade, because the economy in the eyes of monetary policymakers is strong enough to withstand it. Their decision was unanimous.
YELLEN: We would like to avoid a situation where we have left so much accommodation in place for so long that we overshoot these objectives and then have to tighten abruptly and risk damaging that performance.
PEARSON: Just as important as lift-off, the policy statement said the path to more normal rates would be slow and gradual.
Fed policymakers’ forecast indicate the possibility of four rate hikes next year.
YELLEN: It’s important not to overblow the significance of this first move. It’s only 25 basis points. If monetary policy remains accommodative, we have indicated that we will be watching what happens very carefully in the economy.
PEARSON: Fed officials have increased their growth forecast to 2.4 percent in 2016, a vote of confidence that rate hikes won’t disrupt economic growth, with lower unemployment and inflation as well.
A former Fed official, however, emphasized the difference between forecasts and the real economy.
RICHARD FISHER, FORMER FEDERAL RESERVE BANK OF DALLAS: Let me summarize what forward guidance is in two words — it’s we’ll see. And I think that’s what Janet basically said.
PEARSON: Another X-factor in the timing of rate hikes in 2016, the desire of monetary policymakers to steer clear of the presidential election next fall.
For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.
MATHISEN: Steve Liesman covers the Federal Reserve for us. He was at the press conference earlier today with Chair Yellen, and he joins us now here on who has now quickly become a chilly Constitution Avenue outside of the Eccles Building.
You asked two interest questions at the press conference. We snipped a little bit of her answer there in Hampton’s piece, but I’d like — but it really went — her answers really went to the why now question, right, Steve?
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, two things. I was first trying to get a sense from her of when the next rate rise will come and what the reasoning will be behind it. Why raise rates now and what would be the criteria for the next one?
Didn’t quite get so much on that, because it wasn’t really an economic reason per se. She’s not looking for metrics in the unemployment rate necessarily or inflation. The reason, she said, was because if there’s another shock to the economy, she wants to have a little ammo there. That was the first thing.
And the other thing is, think about the U.S. economy like a tanker. And I just heard this the other day. An oil tanker coming up to the Verrazano Bridge up to New York harbor has to essentially cut its engine off three miles before it wants to stop. The U.S. economy is literally a tanker like that in the sense that it has to stop — if it wants to slow things down, it has to start well ahead of time.
MATHISEN: You know, people have often criticized the Fed for not being transparent enough, but no one, I don’t think, was really surprised by what happened today or what was said today. And I, from where I sit, I would say they get an “A” for transparency.
LIESMAN: I think that’s probably right when you look at what the expectations were going in. The Fed very much delivered what the market expected. It’s probably why you got the rally you got today. There was a little bit more stuff that was a little bit more dovish.
For example, with its $4 trillion balance sheet, they said they’re not going to begin to reduce it until we’re well into the normalization or rate rise process, so that’s going to take quite a while before they start to sell off some of those assets or allow the balance sheet to decline. That was maybe a little bit more dovish than the Fed expected.
Look, there’s a lot of cacophony out there. There’s a lot of officials who are talking a lot. Ultimately, the market seems to be getting it right and so the Fed seems to be getting the messaging right.
MATHISEN: Let’s talk about the future trajectory of rates. The Fed, in what’s known as the plot of the dots —
LIESMAN: Right, right.
MATHISEN: — basically spelled out where they think interest rates may be. What did we learn?
LIESMAN: Well, they reduced it a little bit.
The history of this is a little bit — it’s not a great history in terms of the Fed has been projecting higher rates than it has been delivering. The market’s been predicting lower rates through the different futures —
MATHISEN: And still does.
LIESMAN: And the market tends to be right. In general, what we’ve seen is that the Fed overpredicts the market, gets it about right, and the Fed has come down to the market. So, the Fed, for example, is looking for a 1.4 percent Fed funds rate next year. That’s the low end of the curve. It could mean that your ten-year or mortgage rates are up near 4.5 percent or something like that, or 5 percent.
I think that that’s probably overstated. And it depends on how the economy blows out. If there’s stronger growth, the Fed will go a little faster, weaker growth, it will go a little slower.
MATHISEN: Steve Liesman, thanks very much. I appreciate it.
LIESMAN: My pleasure, Tyler.
HERERA: Gentlemen, let’s turn to Randall Kroszner now for his perspective on the Fed and what it means for the economy. He is a former Fed governor and now a professor of economics at the University of Chicago’s Booth School of Business and a frequent guest and welcomed guest on this program.
Randy, it’s good to see you again.
You were pretty impressed by the Fed chief. You said she’s very straightforward today.
RANDALL KROSZNER, FORMER FED GOVERNOR: I think she had a message that she’s been delivering for quite some time and then delivered it very well today, and that’s why I think we didn’t see a lot of movement in the markets, because this was largely anticipated, and then I think the equity markets went up because they saw the confidence that the Fed had in the economy.
But she was able to avoid an interest rate scare that, somehow, rates would go up very rapidly. Not an easy thing to do, and I think she did it expertly.
HERERA: You also found it interesting how she used the word “gradual” and what your interpretation of that meant. Tell me about that.
KROSZNER: Sure. So, I was there seven years ago when we brought rates effectively to zero. This is quite historic for — well, for everyone, particularly for me.
But the discussion at the time — and Janet was the president of the San Francisco Fed, so she was participating in this discussion — was, part of it was about exit strategy, how would we characterize — how we would get out of this. And so, the thought was, well, you know, we’re not going to follow the Greenspan at a pace that is likely to be measured 0.25 percent every single meeting and everyone can kind of bank on that.
And it’s seven years later, but I think that’s exactly what she’s conveying. Don’t think this is going to be like what Greenspan had done. This is really going to be varying, depending on how we see inflation in the economy evolve.
HERERA: The market is already handicapping whether or not we’re going to see an interest rate increase in the New Year, perhaps as soon as March. What would your opinion be on that?
KROSZNER: So, I think you can see from the projections of this infamous dot plots that the Fed members have very different views of where interest rates are going to end the year. Some think they’ll end less than 1 percent, others think they’ll be over 2 percent.
And so, I think that the lower end of that projection is the more likely end, and so, that means that there’s some possibility of March, but I wouldn’t — I certainly wouldn’t bank on it.
HERERA: And you say, as we wrap things up here, that wage pressures are going to be key.
KROSZNER: Because that’s really what they’re going to be looking at now. So, I think Janet Yellen did a superb job of managing the committee to get no dissents on this first move. And clearly, there are people on both sides wanting more, wanting less, but the way she described things I think got people on board.
But now, they’re going to have to see some evidence of inflation, because we really haven’t seen the evidence yet. And so, they’re going to see that evidence only when we’re starting to see some wage pressure, and then that might feed through to overall price pressure.
HERERA: All right, Randy, thank you again, as always. Randy Kroszner with the University of Chicago’s Booth School of Business.
Ty, down to you.
MATHISEN: Sue, shortly after the feed announcement, some of the nation’s biggest banks said they were going to increase their prime rate. The prime rate is the interest rate used to price lots of consumer products like auto loans, credit cards, home equity lines. So, if a bank raises its prime rate, it means your credit card rate will also rise. Citi, JPMorgan (NYSE:JPM), PNC, U.S. Bank, and Wells Fargo (NYSE:WFC) all raised their prime rates to 3.5 percent, but Wells Fargo (NYSE:WFC) also said it won’t raise its rates on deposits.
HERERA: Which, Ty, brings us to our next segment. Staffing cash in a savings account has yielded nearly nothing for years, aside, perhaps, from peace of mind, and that’s not likely to change very much.
Our senior personal finance correspondent, Sharon Epperson, explains the real impact the Fed decision may have on your finances.
So, let’s start with savings accounts. Wells Fargo (NYSE:WFC) says, you know, it’s not going to increase the rate on your savings deposit. Why? Why is that not automatically —
SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s not tied to the prime rate. As Tyler mentioned, the prime rate is really what we’re watching here, and anything that’s tied to that, you’re definitely going see an increase. But that’s not true of savings accounts and deposit accounts, so you’re not going to necessarily see that rise in interest rates, and we are looking at rates on savings at very, very low levels still, and that may continue for some time.
And then the other bad news, I must point out that as they do start to slowly rise, you may see fees rise as well, so it may be a wash.
HERERA: I forgot about the fees.
EPPERSON: Can’t forget about the fees.
MATHISEN: You know, Sharon, the biggest purchase most Americans make is their home. How is this little mini rise in rates likely to affect rates on mortgages and maybe even more tellingly on home equity lines?
EPPERSON: Yes, well, that’s why I love fixed-rate mortgages, of course, Tyler, because you don’t have to worry about the Fed increasing rates and what that will do because you’ll have a fixed rate.
But if you have a variable rate with an adjustable-rate mortgage, that’s something you need to look at very carefully. You may start to see that rise quickly. But again, as the guest said, it will be gradual.
Then also keep in mind, with the home equity line of credit, that’s what a lot of folks are looking at their HELOCs right now. Those are definitely going to change as well. They’re tied to the prime rate, so as we saw the prime rate go up, then that means right away for those of us — I’m not going to raise my hand, but I should — they’re going to see their HELOC rates go up very quickly.
HERERA: What about credit cards, Sharon, because they are notorious for having some of the highest interest rates. This gives them license to raise again.
EPPERSON: Right. So, there are fixed and variable-rate credit cards as well, but most of us have variable-rate cards, so you will see an increase there. Pay attention to your bill. A lot of people don’t do that. This is the time to open that bill and really see what the rate is, and if you need to pay down that credit, look for zero percent balance transfer offer and try to get rid of that debt.
HERERA: That’s a good idea.
MATHISEN: And how about student loans, Sharon?
EPPERSON: Most borrowers have federal loans, and those federal loans are fixed for the life of the loan. That’s good news. But if you have a private student loan, that’s usually a variable-rate loan, and there you may see an increase rather quickly there as well on your private variable-rate student loans.
So, you want to, again, look at what those terms are. It’s likely going to be a rate that’s still relatively low, but it can start to go up, and that’s something to pay close attention to.
HERERA: Retirement portfolio?
EPPERSON: Your retirement portfolio, you’re going to see a lot of volatility — we could see a lot of volatility in the year ahead with rates if they continue to rise. Be very careful to look at your — the bond portion of your portfolio. A lot of folks are very concerned about what’s going to happen there. Know what type of bonds you own and know that you may see more of a reaction in some types of bonds than others, so you want to look closely there.
With stocks, volatility in the stock market may end up being a wash, you know, kind of a lot of folks out there saying we may have a rather flat 2016.
Another part to look at, though we talked about cash in terms of the savings account, if you have a money fund, and that’s where you’re keeping your cash right now in your portfolio, that’s a good thing, because those rates will slowly start to rise. We’ve actually already seen them rise since October. So, that’s a place where you may want to keep it —
HERERA: Let’s leave it on the bright spot.
EPPERSON: Exactly. No, it’s a good spot, good spot.
HERERA: All right. Sharon, thank you very much.
EPPERSON: Sure, anything that makes you pay more attention to your money is a good thing.
HERERA: That’s a good thing. That’s true.
Ty, down to you.
MATHISEN: All righty. Still ahead, Wall Street rallies, but what are the best places for your money now that the Fed has started the gradual process of raising rates?
MATHISEN: Housing is an important part of the economy, and today, we learned that homebuilding ramped up last month. The Commerce Department reports that housing starts rose 10.5 percent in November, rebounding from a seven-month low. Permits rose to a five-month high.
Meantime, mortgage refinancing applications were up 1 percent last week as borrowers may have looked to lock in rates ahead of today’s Federal Reserve meeting.
EPPERSON: And industrial production in the U.S. declined for the third straight month in December. According to the Federal Reserve, industrial output, which is the broadest measure of everything produced by American factories, slipped 0.6 percent last month. The reasons include low oil prices, warmer weather and soft demand for long-lasting manufactured goods.
MATHISEN: Sue, so, what will the Federal Reserve rate hike mean for the U.S. stock market and your investments?
Michael Farr is the president of Farr, Miller and Washington, and he joins us now here in D.C.
Michael, as always, great to see you.
Did anything surprise you today, in either what the Fed did or what Chair Yellen said?
MICHAEL FARR, PRESIDENT, FARR, MILLER AND WASHINGTON: No. I thought that they were wonderfully transparent and have been for a long time. They did what they said they were going to do. The only surprise that caught me was on that dot chart, where the various voting members of the fed plot where they think rates will be a year from now, they came a little bit lower for 2016 and ’17. I thought they’d come a little lower still.
So, while the language was dovish, they really didn’t put the money where their mouth was quite yet.
MATHISEN: Is there anything in the Fed’s statement, in this move today or in the way the market has been reacting that will change your outlook for 2016 or what you’re doing with your clients’ money?
FARR: I think that the fed has basically said that there is — maybe this isn’t necessarily a huge change in monetary policy, but this is the end of really accommodation and more money and the fed back-stopping any market downturn. So, if the fed’s not going to be there to make sure that markets really don’t go down too much, then I think you have to take a different look at risk. You have to look at the FANG stocks, the Google (NASDAQ:GOOG) —
MATHISEN: Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) —
FARR: Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), yes, Netflix (NASDAQ:NFLX) —
MATHISEN: Amazon (NASDAQ:AMZN).
FARR: Yes, Tesla.
You have to say, wait a minute, these have been really risky investments, the P/Es are very high, and I think you take a different look at risk, or a slower growth environment where rates, as the prime rates of the banks went up, you reported earlier, car loan expenses are going to go up, so —
MATHISEN: So, does this mean I need to get more defensive? And if so, where does that lead me as an investor or where does it put you as a portfolio manager?
FARR: Yes, you get more defensive. Well, we were there ahead of time. We’ve been anticipating this, so we were getting our ducks in a row early, but I think you own health care, I think you own consumer staples, I think that you own some of the technology stocks, and you should take a look at some of the financials.
When you look at the banks, be careful, because a lot of this increase has been priced in — increased profitability. You saw that they’re going to raise what they’re charging, but they’re not going to raise what they’re paying customers.
FARR: So, immediately, banks can make more money.
MATHISEN: Very quickly, any temptation to go into energy?
FARR: I think you have to be tempted to look at energy. If the rule is to buy low and sell high, $35 a barrel is historically low. You have to look at it and run the math.
MATHISEN: Michael, great to be with you.
FARR: Great to be with you. Thank you, Tyler.
MATHISEN: Terrific as always to see you.
Michael Farr, Farr, Miller and Washington.
HERERA: Ty, an embattled pharmaceutical company cuts its revenue and earnings guidance, and that is where we begin tonight’s “Market Focus.”
Valeant said its outlook for 2016 would be lower than previously expected and it blamed the end of its relationship with Philidor, which is a mail-order pharmacy. As we reported last night, Valeant struck a 20-year drug distribution deal with Walgreens. Shares of Valeant rose 8 percent to $118.47.
CVS (NYSE:CVS) Health hikes its dividend and issues an improved profit outlook. The nation’s second largest drugstore chain also plans to buy back $4 billion worth of its shares next year. Shares of CVS (NYSE:CVS) Health were more than 5 percent higher to $97.56.
Joy Global (NASDAQ:JOYG) slashed its dividend to a penny a share from 20 cents, as the slump in commodities persists. The mining equipment-maker issued a downbeat outlook for the current fiscal year and reported a sharp loss in its fourth quarter, but that loss wasn’t as bad as predicted. That helped send the shares up 6 percent to $12.16.
Honeywell is forecasting sales and earnings above analyst expectations, despite a slump in the industrial sector. The conglomerate has been helped by cost cuts and also marketing of new products. The stock was nearly 6 percent higher to $104.08.
MATHISEN: Sue, General Electric (NYSE:GE) unveiled a bright outlook for 2016. The company predicts a double-digit increase in operating earnings and said it will return about $26 billion to shareholders. Shares up 2 percent today to $30.98.
And Canadian Pacific sweetens its hostile offer to buy Norfolk Southern (NYSE:SO). Canadian Pacific’s CEO says he remains committed to the deal and wants Norfolk Southern (NYSE:SO), those shareholders there, to decide whether to pursue a tie-up. Shares of Canadian Pacific up nearly 3 percent on the session, Norfolk Southern (NYSE:SO) off more than 1 percent.
And Oracle (NASDAQ:ORCL) reported better-than-expected profit, helped by strong performance in its cloud business. The business software-maker’s overall sales, however, were slightly below consensus because of headwinds from the strong dollar, says the company. Shares soared initially after the close. During the regular session, the stock was nearly 2 percent higher to $38.91.
HERERA: Ty, Federal Express (NYSE:EXPR) reported a higher quarterly net profit, thanks to cost-cutting and a lower effective tax rate. The package delivery company earned $2.58 a share. That’s better than estimates which came in at $2.51. Revenue also better than expected and rose more than 4 percent from a year ago. Those results sent shares higher initially in after-hours trading.
Morgan Brennan has more on FedEx’s results and the one key takeaway investors need to know.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, FedEx (NYSE:FDX) delivering an early Christmas present to investors on Wall Street today after reporting better-than-expected quarterly results and reaffirming full-year 2016 earnings guidance.
The delivery company is, despite continued weakness in industrial production, poised to benefit from the restructuring of its express unit as well as e-commerce growth, and it is all about e-commerce. That’s largely tied to FedEx’s ground segment, and ground really was the bright spot of today’s results.
That unit enjoyed a 9 percent jump in average daily package volume and revenue for that unit surged 32 percent. That’s also likely to continue as the peak shipping season plays out. CEO and Chairman Fred Smith saying, quote, “a record number of holiday shipments fueled by the steady rise in e-commerce are flowing through the FedEx (NYSE:FDX) global networks.”
FedEx (NYSE:FDX) has said that it expects a 12 percent jump in holiday shipments between Thanksgiving and Christmas Eve.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.
MATHISEN: And meantime, here in Washington, a compromise has been reached on a $1.1 trillion federal spending bill that will fund the government’s operations. House Speaker Paul Ryan called it a bipartisan compromise that among other things lifts a 40-year-old ban on crude oil exports, extends some popular tax breaks and includes a two-year delay of the so-called Cadillac tax on health care premiums.
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REP. PAUL RYAN (R-WI), SPEAKER OF THE HOUSE: We’re increasing military spending. We are tightening security requirements under the nation’s visa waiver program. We are permanently reauthorizing the critical health care benefits for our 9/11 first responders in a very fiscally responsible way.
(END VIDEO CLIP)
MATHISEN: The White House reacted positively to the deal, saying it appears to meet the president’s priorities.
HERERA: Ty, one of the big winners today from the spending bill — solar stocks. The package includes an extension of investment tax credits through 2019. That bill also allows solar projects to qualify when construction begins, rather than when they actually produce energy.
SolarCity, SunEdison, Sunrun and SunPower (NASDAQ:SPWRA) all soaring, as you can see, on the news.
Coming up, if you’re thinking of buying a new car or truck, what the rise in interest rates may mean for the cost of your purchase.
MATHISEN: Here’s a look at what to watch tomorrow:
Economic data comes out, including initial claims on unemployment benefits and the Philly Fed survey. Russian President Vladimir Putin will hold its annual year-end news conference. Usually goes on for about three hours. He’ll likely address that country’s economy. And following today’s Fed decision, former Federal Reserve Chair Alan Greenspan will speak. And that is what to watch for Thursday.
HERERA: Ty, California taking a cautious approach to self-driving cars. That state’s department of motor vehicles issued new draft rules which would require a licensed driver be in the car and ready to take over control if the machine fails. The DMV can change the rules over the coming months, but those rules are being closely watched because California is the largest auto market in the United States.
MATHISEN: Well, Sue, with the Federal Reserve raising the fed funds rate by 0.25 point, borrowing will become slightly more expensive, certainly not welcome news for millions of Americans who are looking to buy a new car or truck, but will higher rates slam the brakes on demand for new vehicles?
Phil LeBeau takes a look.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Americans are buying cars and trucks at a record pace. And while sticker prices have climbed to an average of more than $31,000, low interest rates have made financing a car relatively cheap.
That’s starting to change, now that Janet Yellen and the Federal Reserve have raised the Fed funds rate a quarter point. It means interest rates on auto loans and leases will edge up a little bit, though the average loan is expected to stay under 5 percent.
But if the Fed continues raising rates and they go up 1 percent in the next year, one auto consultant thinks it will force car-buyers to cut how much they spend by $1,000, and reductions will be greater if interest rates move substantially higher in the years to come.
MARK WAKEFIELD, ALEXPARTNERS: The interest rate’s going up has a really big impact on that monthly payment, which means they can afford less car or they just can’t afford a new car and go to a used car, and those sort of things hurt the automakers.
LEBEAU: How much rising interest rates will impact the auto business is debatable. Historically, auto sales have improved slightly or stayed virtually unchanged when the Fed raised rates, perhaps because rates move higher when the economy is stronger and more people are working, so they can afford a new vehicle.
MARK FIELDS, FORD MOTOR COMPANY CEO: When you think about all this talk about a higher interest rate, first off, let’s take a deep breath. That means the economy is doing well. That means that the labor market is doing well, they’re having wage and income growth. That’s good for the car business.
LEBEAU: Ford and other automakers believe the U.S. will approach and maybe even set a record for annual auto sales in 2016, even if interest rates move gradually higher.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
HERERA: Thanks for joining us tonight. I’m Sue Herera.
MATHISEN: And I’m Tyler Mathisen from Washington. We’ll see you tomorrow.