Member wasonly one that dovish. Plus the committee now expects to raise rates at a slower pace to not only is the fed more dovish, but it has grown more dovish since the last meeting in april and remember from the minutes that most of voting members were ready to june as inflation continues to strengthen. Thef course we have disastrous jobs report and here is what the fed said. Andpace of improvement labor market has slowed. Inflation compensation declined. In other words, not enough to justify a rate hike the are notably, no mention in the policy statement of the grexit risk. The fed is on hold and giving no sign how soon it may move off of the quarterpoint p are we hope to in the press conference with janet yellen. That begins at 2 30. We have seen a major market move. Given me the data screens if you would. I want to show here at the moment on the screen. The market is up 84 and the vix plungers. That is a complacency that will support the fed. Michael mckee reversal. T goes right back bring on the second data screen as well. Moment. How it in the a strong end. Michael, very quickly. I know you have got an important, it. All you need to know is down we go. This is crushing. There is no other way to put it. Are you ready . It is already updated. You can see what. Is just talking about. A number of people have moved the forecasted down and now the consensus is basically, if you are looking at the median, one more move will take us to a range of 50 or 75 basis points. We are not expecting to more moves this year. There is a substantial number of people who think we should have att went all the way over the lefthand side. It looks like theyre pricing in four moves just over 1. 6 and then you go all the way out to the longerterm and you are 2. 95. G at line. N see the purple you can see the market expectation has moved up a little bit as well as they digest what the fed has seen. They want to move closer together and the market wants them to move down maybe not as much as they have. It was the fed that came down in that market went up. The markets went up a little bit in the out years of 2018, but not as much as the fed had. The function measures probability. Chance, july 27 meeting. Compare that with 15. 8 . Further,of going out the market does not really see the rate hike increase to more than 30 . It is versailles we have seen 40 increase. Your paper, all of those conversations did not exist. Elite economists know where they are trying to take this . Sure. Thebig change compared to crisis of understanding is that Central Banks need to take a stand or a folk us and get a sense of where natural is. It is also a Risk Management approach close to zero. I think this is a harder problem they are trying to solve. A question. His is not popular that is the traitor sitting on 46th street. Come on, this is not what they planned. Massive outliers. Has beenerik schatzker coming through and you noted a couple of changes in chair yellens stance, her language from december until now. I am looking more at the dots. Remember in december when the fed got off zero and raise rates , it anticipated raising rates four more times over the course of 2016. How much more dovish this fed has grown in that six months, in december, 14 of the 17 voting members sought rates at 1 or above by the end of 2016. In december, 12 of those are 2 or above by the end of 2017. It is truly incredible. I want to point out one other thing. The fed is sticking to a gradual rate increase over time. Getting the fomc and the economy back to a normalization. Janet yellenwhat says in the face of the fed sticking to the idea that gradual is even wanted at this point. That word needs to be in the statement and whether the fed can contemplate normalization at this time. They are gradual in the forecast to next year and only 1. 5 . Pretty bland about what is going on. Why they have coming down so much. On details. Y short gradual was the were using back in december. If you define gradual in december, it was more or less a one of every two meetings. We have had the fed on hold and it janet yellen and company are giving us no clue and we may get another clue when we get in the room, but giving us note lou when we expect the next rate hike to come. They are concerned about credibility. That word crept into the minutes. It has to be concerned of the use of the word gradual given where we are today relative to where we were in december when they were using the same line which. Scarlet that means the contrast is pretty dramatic. Rich is still with us. The Interest Rate was cut 3 . The Business Cycle we are in now is different overall. That is the case. 4. 25. That was at it is now at three. It has fallen substantially. That as well. This is what we call for Monetary Policy. It will not only be gradual, but it is to a much lower destination. This is an acknowledgment by the fed that this is the world they are navigating right now absolutely. Rate. Here is the terminal john published a note three days rate, which iinal find socially and politically unacceptable for the nation. In your estimation, where is the terminal rate, all the users in all of the people watching who would go hit them over the head, where are we going in three or five or even 10 years . There is a new neutral, which we have defined as a fed funds rate of two or 3 and given where the fed is now, it is probably the lower end of the range and with a 2 inflation, that means a real return on cash 20 compared with 200 basis points on that crisis. In five or 10 years, we will probably have a recession. If we do, the fed will be hiking. That is the other factor to take into account as well. We have talked about the feds economic forecast. They made significant changes this year. Down the forecast going out to 2018, they see the economy growing 1. 92 percent this year. In march, they had seen 2. 12. 3. So they see Slower Growth but at the same time, they see rich and faster inflation. Theyre calling for the price year. Of 1. 7 this in march, the only saw 1 to 1. 6 . I think this recognizes the potential growth rate in the economy has really slowed and i think in their view, they have got a slow rate of potential growth and micex are closing and their models are telling them they should get give a pickup in inflation, as i said. This is a fed that one tire inflation. A fed that is hiking rates and wants higher inflation. That is when the way the model instructs them. Will continue with us. Let me do a data check. A major move in the fixed income market now. The two year yield those roundtripper over the last 48 hours. We went from. 67 and we go right back down in the low end of a recenta major move in the fixede market now. Range. The 158 level, good morning. Earlier call of 1. 50 percent. Stated, the nfl on a 577, you really wonder how japan will wake up on thursday morning. Scarlet this is the weakest of the dollar against the ansys september 2014. I want to bring in the cohead of the global fixed Portfolio Management goal Asset Management. Are you changing how you are allocating your funds and are you changing how you are putting your money right now given what you have just learned . The statement will not cost will not cause us to change portfolios. We can think about where the news was. The news was in the jobs report in the news was in the lower Inflation Expectations in the marketplace and in slower corporate earnings. Fundamentals causing us to change our position in the portfolios. It is also in the way the fed interpreted and framed the data weve all been reacting to. As all of you and some of your speakers have said, the fed is just catching up with the market here with the fed is doing is reporting the news and following the market in our view. One more rate increase this forecast,ring growth at this point, you are going to be able to go on vacation in july and just forget that eating . There is a lot going on across the markets. You think about grexit and china risk and the Slower Economy in the u. S. Those keep us up at night more than a single fed meeting. The risk of rates, i would say the opposite is the risk. The risk is that the session risk is higher now. That gives us a little more concern. Your trade background, what will be the stability when you have a jump condition . 28 years old, they just took level two and level three, do they have all of the answers . They have not been tested like you have here when you get the jump condition, how will the markets react . Peopleave more and more with gray hair. We have a ton of bloomberg. Actually coaching them but they are students of history. Very much focused and much more concern about where things go in terms of the risk of a slowdown and the economy. We are trying to coach him people. What i want to know from you is the july meeting and the september meeting, it is not commercial paper. In the trenches at Goldman SachsAsset Management . Of things. Number one, the thing the fed is watching most closely as financial conditions. We watched index very closely. Goldman sachs happened to have one as well. If you look at where the financial conditions are now, they are at about the same place they were in december when the fed tightened for the first time. That is number one. Number two, were looking for an increase in nation at dictations. We watching wage data very closely. What you have seen a number of surveys recently is Inflation Expectations. History has always been the best start in the best start in they go too much and too fast. With the way they brought it are, he finally willing you finally going to accept the gradually question absolutely. Gradually . Absolutely. You have to think about how the world will operate. The other thing was a presumption of all students of the Central Bank Policy was that an europe the u. S. Was economy. What happens in general does not matter. Sure anymore. Capital flows are significant and have a big impact on the market. Tom on the actual trading and doing of things in the market, i have got one question for you. Was talkingavid about four standard deviation moves and i was talking about ois for that. How close that is the wrong question. How deep is the market now to withstand standard deviation shock . Incrediblyy is challenged across the markets. Though that you would have more and more marketsrm blips in because of changes in liquidity. In the end, real Money Matters and economics matter. In the event we have a moderate level of growth and a moderate level of inflation, Something Like grexit and a credit concern in china will not blow up the financial system. In the long run, it will be the fundamentals that matter. Starlet volatility and liquidity and economics. That talks are millennialse to highs. How do you reach that . Is an indication investors are pricing in . I do not think it is necessarily a recession but it is prudent in markets where you have had some spread compression, two or three weeks at 13 and youas had 21 the other day. You have to have cash levels reflecting liquidity but you think pricing evaluation makes good sense to be running higher than average cash levels in these markets, absolutely. I would agree 100 purity if you look at what has happened in the credit markets, they are performed incredibly well because rates are negative everywhere else and rates in the u. S. Are positive. Our view is that there is risk in the economy. And you look at the perspective. The fed seems to be on a hold for quite some time here and i l ask you and i will at ask rich, are you getting to the point where caches unacceptable substitutes . Is the fed distorted the market so much that people do not need to buy assets . The debate around Generating Positive returns for investors will become a bigger and a bigger issue here at a big issue in europe and japan, and with rates so low in the u. S. , it has become big here. In the event the fed is more dovish and we will be in a Slower Growth environment but a low risk of recession, you will see more and more money come to the market to generate positive yields. You do not want to take too much direct economic risk but still try to find highquality ways to generate returns. Are we getting to a point now where markets are still distorted and you do not want to buy a negative rate instrument because you have got to pay to get it, is the safety not worth it . Exactly. Negative rates, we have thankfully avoided that in the u. S. Negative rates are a distortion this of thered to world of insecure stability. The world appears to be stable but that is deceptive. World, it makes sense to focus as much on preserving capital as it does to deserving on capital. To return under capital in this world, i think that should guide investing. As we go to asia, if i look at european banks, they are performing miserably. Do you see liquidity in the European Market off of this economic mumbojumbo that will allow these banks to try to shield themselves as Goldman Sachs and american banks shield themselves years ago . Is there a trading stability when you look out of new york and out of london . There is very limited credit creation going on in europe because of the capital challenges of the banks. Unless the banks in the countries that support a lot of these banks by the bullet and decide to recapitalize the banks, we are in a situation where we continue to see low levels of growth and potentially deflation in europe. Tom i go back to your skill set in the trenches here. That you have to compete with mario draghi for paper, am i right that that is what is going on right now . You are essentially pricing the banks out of a highquality market here when the banks generate earnings, they will rely on more risk here the problem is it is a vicious cycle going on in europe. With continued slow growth, theres too much concern about regulation and Political Risk in europe. Youre finding companies are not extending. Tom it is great to see mike in the trenches. Versus firstclass flying at 50,000 feet. Not a bad place to be. Lets look at dollar yen. Keeping a close eye on it. As 105 643 against the japanese yen. Down, down, down for the dollar versus the yen. Was at yen was wet 187 and before april, 11131. We are all friends here. Call an audible. That is tricky. Scenes, theynd the have learned in the past and are not intervening. Obviously, they will weaken the np or my gut tells me if we are at 100 or through it, that would be a magic number that would probably trigger some intervention. It would be the minister of finance. Something to keep in mind is the u. S. Treasury has been term in saying do not do that. How far will they let them go . In the past, we have cooperated. Does the rest of g7 let japan just go down the tubes . If you look at the diplomatic language, there is always volatility and unstable markets. Knows that. If you move at 122 not too long ago, it is a brutal move. Shock me. Would not understand we see that level but if we do, it will not check me if we saw some intervention. Identifying the yen to one of 561. It is remarkable. It is a two year yield. Standardside two deviations, is janet yellen losing control of her management of people like you . Not think so. If i had to look at a single piece of news and did not have the benefit of reading the report, the key point is six members of the fed decided to move their expectations of two increases in 2016 21. We think one of those people is chair yellen. We actually think the probability of two hikes, has gone down. It will impact the two year. The 10 year will be much more relevant to the future path for rates. Scarlet before we let you go, what is the number one thing you want to hear from janet yellen in her News Conference . Very much a glass is halfempty statement. I will look for janet yellen to indicate some positive. It is a very dovish statement. We will see if she tries to create a twoway read of her intentions or if she tries to reinforce the dovish statement . I figure you will see a little bit of clarifying ballots to offset a little bit of dovish. The market is really taking it as a dovish move. It will be reliant upon the data. We are spending a little bit too much time. Richard ofto thank pimco. Thank you for joining us. Lets get a data check. We need to be reminded to check the 10 year yield as well. Moving dramatically after this statement. The Michael Mckee now volatility here and what it would mean for the markets. I suggest the press conference would be the most interesting. I think you can say it. Michael this is not the fed funds. He can see the twoyear taking out. Two moves this year, 56 basis points, roundup to 57. Right now, we are trading around 37 basis points. You are not even in the midpoint of a move up. Tom cole and Bloomberg Radio as well, worldwide. Of course across our many channels. Interesting and surprising announcement. Theseggest that one of. Ovish janet yellen you think there is a shift in the forecast, and that is the news here. Is he going to have to markdown his view of gdp off of what we heard today . You would have to ask him that question. We did not have a dissent this time. George from the Kansas City Fed went along with everybody. She is probably higher on the list. Has been arguing the fed would race rate. Matter among it fed officials . Not at all. The fed is not the news here. What is the news . The news is the job number, is it real or not. We look at what has happened . Decades working in fixed income, is the news that we are in a great distortion, near negative Interest Rates, where nobody knows what to do, is it true . It is a risk that the issues occurringin japan and throughout the world are having a significant and disproportionate impact. That our economic model has ever full us. Tom can i ask you a dumb question . Trade make money when you negative Interest Rate paper . There is no question you can. You can make money in the event that rates will rise. Tom he lights up. That is amazing. We like to make money. Actually, we have that making german bonds. We actually own them. There have been negative rates and i think it will be a terrible event but in the near term, you see inflation. My question then, can you to knock aast enough killed . Or any of the other traits that are based on this . Of course we can. The question is price. Happen you hedge