Course. The feds ability to predict where rates will go is limited, because she says disturbances continues to buffer the economy. Yellen adds the federal funds in the longer3 run. That is higher than most people would put it. Much of the rest of the speeches on the fed policy actions and how they have actions and recovery. Yellen goes on to say that at this point we need those tools going forward, although she says the fed is not at this moment studying the idea of targeting higher inflation or nominal gdp. She goes on to talk about the need for some fiscal policy going forward, but doesnt make a big deal of it. Yellen says in the future, the economy should grow. Interestingly, the fed chair also makes a defense of the ability to respond to the next recession, even with low Interest Rates. She says in the past Interest Rates has started with the fed higher than it should be. Interest rates so low, that is not going to be a problem. Vonnie we have seen the twoyear Interest Rates rise. The curve has flattened a little bit. I want to bring and keene, host bring in survey tom keene, host of bloomberg survey. Yellen is seeing inflation rising over the next few years, so not as immediately as we might have thought. That is not rapid enough to improve the labor markets, but not necessarily to get to that 2 inflation hike. Tom it is like the fed minutes, they are killing themselves here to not stay in anything that will be market moving. There is a twoyear yield up to. 81 i can look, let me throw this right here. This is great. This is bloomberg on a cell phone. This is great, im coming from radio. I dont have a terminal, i have this. Alix it is your vonnie it is your dashboard. The five year was up about five basis points. Mckee, the fact that the number run neutral rate is 3 , is that a surprise . Michael it is not a surprise because that is what the fed has said in its summary of Economic Projections it is. And i have talked to some fed officials who say dont worry, it is going to come down. It is still higher than wall street thinks. It would be implied that the fed would have to raise rates farther and faster than people on the street expect. That is a story a little later in the year or 2017. As the economy develops they have to get that next move in before they Start Talking about where they stop. Mark i want to talk about what is happening to European Assets in the wake of yellens statement. This is the 10 year yield, trading lower. Point,up about a basis since the statement was released. The pound was trading positive. We are down about 1 10 of 1 . U. K. 10 year yield. We are up about one half of 1 . The stocks are rising. What stood out to me is yellen is talking about a better talking about a broader range of asset buys. Here i am, the bank of england pulling out all the stops. What sort of asset buys . Tom i dont think we are talking about european ranger. The key is experts on what the bond will do. We are beginning to see some movement, and even with weaker yen, that gets my attention as we recalibrate. Make too big of a statement on a few basis points move, but it is interesting to see Foreign Exchange depth and adjust. Michael you have a situation where you are depending on Economic Data to come in for september. The rate increase in september is probably going to wait on that. Yellen has left the door open vice just in the case has strengthened for an interest in recentease months. To adjust starting and that will move more rapidly as we get more data. Thatk from today we get jobs report from august and if it is strongly you will probably see people move much more the direction of a rate move. He just upgraded the Third Quarter from Morgan Stanley from 2. 3 to 2. 8 . Vonnie that is a big difference. Our ability to raise the fed rate has passed the fed rate past is limited. When she says our ability to predict the fed rate past, it she moving towards bullish . Michael not really. Will give you we this view of where the terminal fed funds rate is, we cant guarantee that is going to happen because that is over the longer run, two or three years. A lot has happened to the economy that has changed our forecast. She is not saying she is going to make a forecast, but she is saying we cant have a lot of confidence in the forecast. Mark we had a great story yesterday, and i was titled masters of the universe. Phil was discussion the fed lost a lot of credibility because it is trying to tell markets not to be but actions speak louder than words. Are we moving towards a position where actions will speak louder than words . Michael that depends on what the action is. Is it defies basis point raise, i dont think that will cure the problem. The problem is deeper than that. The fed is subject to the same uncertainties that wall street is. The fed comes out and says we think were going to move, and it doesnt. They dont have any real better information on what the economy is going to do than people on trading. That uncertainty gets transmitted through their comments, the idea that 17 different people have 17 different views. There is only Alan Greenspan to worry about. Vonnie stocks continue to hold onto their gains. Bonds are seeing some movement in yields. The 10 year, 1. 57. Is she has also said future policy makers may look at the possibility of expanding future assets. It could be next year. Tom she doesnt have to do it now, we are not anywhere near recession. We did the charts this morning. The four year moving average is ofn 58 from the morning america 1999. Bond market,at the and as we quoted these the spread, wes, are really beginning to break down near the june curve flattening that was a recent low. If we gete profound further curve flattening. Data is more important than this yellen speech. Vonnie should we read any more into this . Could she be saying this is her turn . Michael i would consider that a throwaway line. The fed could look at other things to buy, because they really cant. What Legal Authority on they could buy is extremely limited and they cannot by any anyties cannot buy equities. That is more theoretical comment from her point of view. Maybe instead of at the short end, the fed buys 10 year treasuries. Any kind ofally suggestion that the fed wants to move into uncharted territory. Mark thank you for joining us. Tomne taking it out keene breaking it down. You can follow us live for more analysis. I love this function, i have been absolutely glued to it. We are getting ongoing commentary to yellens speech, which is taking place in jackson hole, wyoming. Henry peabody, Portfolio Manager 23. 6e he oversees about billion. He joins us from boston. Early take of what yellen has to say . Henry i think the key take away is the theme of the speech, which is the Monetary Policy toolkit. The fed is in a position where nice to be creative. Anys to generate inflation and keep the dollar under control. Yellen said specifically they would not think about an increased target but the fed has been studying this for a while, whether yellen has or other parties has. Thinking about a 2 target in an inflation fighting regime doesnt necessarily fit todays environment. Pushed is looking to rates, help pensioners. Beh this we think we need to focused on being away with rate risks. There are ways to get around this market. Mark looking at the reaction, the twoyear yield is now unchanged at 78 basis points. Yield fractionally lower. 2. 24 . Atyou know we havent been the sort of level since 2008. Is the yield curve flattening . Is very possible. With the degree of negative yielding out the curve, it is possible you could see further flattening. U. S. Is the highyield or high yielder. This is something participants havent acknowledged for a long time. Whether the fed goes in september or december is largely irrelevant to us. We take a very longterm view with the multi sector fund. There would be pressure on the curve wouldd that flatten out. It is important this would not signal recession as it has in the past. This is a technically driven market. The question is who is the buyer on the long end . Is this a long term holder of a negative yielding bond . Or is this more of a momentum player or a renter of the market yet to which could lead to potential snack backs potential snack backs. Right now it is dangerous to hold a rate risk in our mind. Snap backs. L snack right now it is dangerous to hold a rate risk in our mind. Vonnie 75 of the bond universes in negative territory. Henry the difference is to focus on total versus relative return. Thinking about a 3 to 6 yield, doesnt eight years smack to us of a very risk of a very good risk return. Loanse been favoring bank at the margin, which offer similar yields to the highyield market, but with zero duration. We are seeing that rise and libor now rise in libor now. The key is to have a flexible toolkit. The key is to look at different. Evers to pull there is a great deal of embedded risk in this market. Buying a high quality bond at these yields requires an extreme degree of confidence that yields will remain here or lower. That implies a failure to generate any meaningful growth or inflation. Fact we are talking about an expanded toolkit. Vonnie is there a point in which investors need to get out . Henry it is hard to forecast that. Right now the 10 year yield looking at core inflation is negative on a real basis. That is not sustainable to us. Movement ont is any the part of the japanese to partly reduce that. That could bring about a higher Risk Appetite in the market. There is going to be a solution at some point and timing that is very difficult. Mark what is more likely, japanese coming out with a measure to permanently reduce or the japanese coming out with helicopter money sort of measures . I think the two are one and the same. Debt financing or Debt Reduction would be direct fiscal stimulus into the economy. Boj owns a very large portion of the debt. Virtually every bond out. There talking about 40 year debts. It is similar to helicopter money without being called that. I dont know what move it would take to get it efficiently make it take to get it efficiently announced take to get it officially announced. Mark Henry Peabody there, Portfolio Manager. Morekes place at a penalty on pit u. S. Stocks bouncing back after a twoday slide. Pretty much as forecast, you can see stocks are rising. The dow is up 6 10 of a percent. The 10 year yield, 1. 53 . This is bloomberg. Howie lets get a check of stocks are reacting to headlines from janet yellen. The dow is only 76 points away from a record. A gain of 14 points to the s p 500. The actionstingly is in the dollar. It is being weighed down. No release therefore dollar gold following janet yellen. Vix. Drop for the mark employed to give a straight market check. This is the stocks year of 600 index. A little changed at three 00 local time, 10 a. M. New york time. Movement has been equity indices. Gain. Ck for a weekly it has alternated between gains and losses for the last five weeks. This is the u. K. 10 year yield. Back up. Moved it is literally down by a basis point. And there is the pound against the dollar, which has been swinging around. But the big move has been in equities. You are watching bloomberg. Mark to investors flocking to index funds and etfs, is this trend toward passive investing . Eading to marxism Digging Deeper into a controversial report this week is bloombergs ramy inocencio. Eric, passive management. Walk me through this, who actually put this out and what does it mean . Eric you put marxism in the title of anything it will create some buzz. The numbers that are happening are really threatening the livelihood of a lot of people in the financial industry. We have seen 1. 2 trillion going into it hedge funds and etf into hedge funds and etf passes. When hedge funds swings to passes, it means a decline in revenue. I think everyone is on edge. But what this is saying is hes making the case that everyone has a social role. He thinks regularly are getting a little to cheerleaderish. They allocate money properly where an acid fund market puts all the money into the index. That is what the report as saying. You say the report looks at a couple of different things. Eric activists still have a large chunk. Passiveything that is is passive. There he is very actively. They trade more than stocks, there is a lot of act of management going on in the etf. They actually use fundamentals to screen away the stocks. The bigger point here is it is not an active passive trend. It is a high cost trend. They have developed a trust with their clients that they are still getting money, so there are places where activists are bucking the trend. And i think this is more of a high costlow cost trend. Remy bank we will have to leave it there. we will have to leave it there. Back to you. Vonnie thank you. This is bloomberg. Hey hows it going, hotcakes . Hotcakes. This place has hotcakes. So why arent they selling like hotcakes . With comcast Business Internet and wifi pro, they could be. Just add a customized message to your wifi pro splash page and youll reach your customers where their eyes are already on their devices. Order up. Its more than just wifi, it can help grow your business. You dont see that every day. Introducing wifi pro, wifi that helps grow your business. Comcast business. Built for business. Vonnie from bloomberg World Headquarters in new york and london, i am vonnie quinn. Mark i am mark barton. You are watching bloomberg markets. Vonnie lets turn back to Michael Mckee live in where janet yellen just set the case for a rate hike in the u. S. Have a look at the function and you can see that traders are not necessarily agreeing we are going to see a rate hike in september. Definitely the odds for a september increase have gone down. Does that surprise you . Michael it is a little bit surprising. Janet yellen was perhaps as direct as she ever is in saying in her speech that the economy had improved and her quote was i believe the case for a rate hike has strengthened over the is really as previously as july she said they. Ould not height hike rates we heard from Stanley Fischer and bill dudley, who did the walk with her this morning. They thought the case had strengthened so you have the core three saying rates could go up, and you add that they are a data defendant fed and what they are probably waiting for is the jobs report that friday, the cpi report in september before the fed meeting. If the data is supported than a september move becomes more likely. Vonnie that move that meeting is on september 20 and 21st. If you look at treasuries, we are looking at lower yields and a flatter curve. Well so itties as does not look like the markets believe that the u. S. Economy will grow more quickly than it has been growing, or that it will reach that inflation target anytime sooner than janet yellen , in the next few years. That does not bode well. Michael she is making no promises because their position is, we do not understand what is going on in the economy either. She made a specific reference to the bond market and the idea that the fed does not know exactly why rates are so low and the sovereign market. There are a number of explanations including money flowing in from overseas, and the fed is not sure why rates are so low and why the markets are doing what they are doing. It is maybe a little bit surprising that they are reacting this way but it is part of the whole conundrum fed faces in trying to figure out what to do. If you do not understand what is happening, it is hard to figure out the prescription. Mark the headline across the bloomberg is low neutral rate to. Ive fed less go for cut lets push forward to inflation, a lot of the discussion has been lifting the inflation target. What sort of flexibility with this give the fed . Michael if you let the inflation target lift the inflation target it gives you more room to cut. Yellen pushed back against that saying they are not actively considering that even though it has been brought up by some members of the fomc. She did note that the fed is considering 3 the long run range for the federal runs rate although wall street is pushing it much lower. She says the fed cannot pushes back against the fed not their reaction has been removing the excess tightening. They could still lower rates from where they are. If you get into the bloomberg, look at function tayl. We will be speaking with john taylor later. You can see the spread between where he thinks the rate should be and where it actually is. Michael mckee, we have to leave it there. Mark earlier today from jackson hole mike challenged jim bullard on the feds data model, particularly efforts to generate inflation along with kathleen hays. The datalard stands in interpretation and policy implementation. Time to rethink our normalization plans and the way we are presenting our normalization plan. Plotou look at that dot which has them going up any moment 200 basis points, i think that is the not not the right characterization so that is where we came up with this idea of, lets not pretend we have a lot of certainty about where the long run outlook is. We are in a low productivity growth environment and a low real rate return on government player paper, and those are the parameters we are working with. And then keep an eye out and see if those things twitch in the future. One of the things people are talking about, what is going to happen for the next recession . By 400 to 500 basis points. With the rate already so low, what is going to happen in a recession as the fed seems to be at an impasse . I am not one that talks about, lets raise Interest Rates so we can lower than later. If you look at this paper by david schneider, a board staff person, he said there probably is quite a bit of ammunition out there so that is the best way to look at it. Some of it would be lower rates, quantitative easing, and forward guidance. If we deployed the things we have deployed last time we could probably get through a recession and even do well. Is your goal to put a floor under the recession because you have done qe, you have cut rates to zero, and we still do not have any measurable inflation . Inflation is low but not that low, maybe half a percentage point or less below our target. Is that 9 10 right now. But some ofair, that is driven by energy pricing. It is pretty low. But unemployment has come down below 5 . We are basically right on target for that. Inflation is a little low, we