Transcripts For CNBC Power Lunch 20150522 : vimarsana.com

CNBC Power Lunch May 22, 2015

For that rate hike. She sees moderate growth this year and beyond. The economic head winds out there that include housing and budget spending have been waning. On the labor markets, its approaching full strength. First time i believe they said that with the Unemployment Rate to fall by year end. It is close to the long run level although she does point out that it will be not fully healed along with a slack such as people working parttime. She said inflation will rise as the economy strengthened and importantly as temporary factors were received which is what she expects in the forecast. A couple of things she said the european recovery is on firmer footing, but has concerns about global on the u. S. Economy. An important economic point that we can talk more about another time but said recent productivity is disappointing and thats something they watch at the Federal Reserve. Back to you. Thank you very much. Along with mandy drury, welcome to power lunch. More breaking news with david. David . Thanks very much tyler. A great deal of noise with sales first. Com given reports about potential talks involving the company or nontalks. We wanted to come back to people and given the sense as to what toopz. Microsoft and sales force. Com did have talks earlier this spring about a purchase of sales force by microsoft according to a number of people familiar with the situation. While the two did fail to reach a deal and have not reengaged, the talks advanced to a level of detail that indicates they were serious. They remain far apart on price. My sources told me microsoft was said to be willing to offer 55 billion while the founter said to have kept raising expectations and may have gotten as high as 70 billion. 55 billion still would have represented the largest deal of all time. They represent 95 billion in cash, but some discussion of allowing them to roll his 5. 7 stake into microsoft stock. That would have been a part of the deal. They would have had a management role at least under the terms that were negotiated according to people close to the talks. They were involved in take over rumors when bloomberg reported on an approach of an unnamed suitor that was not microsoft. They reported on may 5th that they said that no talks were taking place. In addition the disparity and price, there was a sense this the ceo who has been on the job only for about 18 months might be reluctant to pull the trigger on such size and consequence for his company. A number of people posted it and believe they had momentum and think they might have been able to reach a deal until price became a defining roadblock as it can be in deal talks of this nature. Sales force that has a leading position is thought to be a good fit which is focused on gaining scale. A bit more clarity on a lot of different reporting that took place. Right back up to the levels it inhabited when many of these were first emerging. Back to you. Thank you very much for shedding light on all of that. Lets go down to the floor of the Stock Exchange and join bob pisani to see how they are commenting. Bob . And not a lot of movement. Take a look at the s p. Etf and spider here. We improved a point and a half here and i think the reason we are not seeing a big reaction is this is pretty much what was expected. The focus seems to be on improving employment picture. A little bit of slightly hawkish comment with the labor market and full strength as steve mentioned and economic head winds. She coupled them with dovish comments and the fed would take several years for the funds to return to normal. And the pace of hikes will be gradual again. Her words. Take a look at Interest Rate sensitive sectors like banks. The bank etf with not a lot of movement. The treasury etfs that i watched and the shortterm and the longterm ones. The shy or the tlh and any of those out there. Again, with those, not Much Movement overall. A muted market move. A slight move to the downside in the tlh. A slight move up in yields and a shorter term out there. The to threeyear and shy is essentially no movement there. I think given the situation, the focus on the employment picture. Back to you. Lets bring Steve Liesman back into the conversation here. We wait for yellin to begin her speech at the Greater Chamber of commerce. She is on the stage. Whats holding her back from raising rates sooner. A clarity that the economy is improving. Lets listen to janet yellin. Let me say how grateful i am to the chamber for inviting me today. Honored by the presence of so many distinguished guests. I am really pleased to be with you and its good to be back in providence. As peter noted, i attended brown and the city i see today is very different from the one i remember from my time here in the 1960s. Many of those differences reflect dramatic and at times wrenching economic changes in rhode island over those years. Especially since the financial crisis and the great recession. As ever, providence faced these challenges and im impressed by the revival and renewal evidence downtown. That brings visitors and commerce here. I would like to speak with you about the outlook for the u. S. Economy. I should note at the out set my remarks reflect my own views and not necessarily those in the Federal Reserve system. As you all know the economy is still recovering from the great recession. The worst downturn since the terrible episode of the 1930s that inspired its name. The recession began more than seven years ago, the result of the collapse in the Housing Market and the financial crisis that it sparked. Rhode islanders are well aware of the great toll taken by the recession. The Unemployment Rate hit 10 nationally and reached 11. 3 here in rhode island. Nationally payroll shrank by 8. 5 million. About 6 . 41,000 jobs lost in rhode island represented 8 of the states employment. U. S. Economic output fell 4 nationally, the most since the great depression. Many of the hardest hit Industries Including Housing Construction and manufacturing are important to the rhode island economy. The Federal Reserve took action to help stabilize the Financial System during the crisis. We supported the economic recovery with Monetary Policy actions designed to hold down longer term Interest Rates. With this help the economy made significant strides. The pace of job gains is gradually strengthening and payroll expanded by more than 3 million in 2014 alone. The Unemployment Rate came down to 5. 4 in april. One sign of a stronger labor market is the number of job openings that has risen impressively. Another is that more workers are quitting their jobs signalling greater confidence in their ability to find a new job. Rhode island is sharing in this recovery, but im well aware that Economic Conditions remain difficult here. Rhode islands Unemployment Rate improved slowly in the recovery and for a time it was the highest of any state. The jobless rate has come down a lot over the past year or so but unemployment here remains above the national average. Payroll employment is yet to regain the prerecession peak. In recent months some Economic Data suggested the pace of improvement in the economy may have slowed. A topic i will address in a moment. Even with the significant gains of the past couple of years, its only now, six years after the recession ended, that the labor market is approaching its full strength. I say approaching because in my judgment we are not there yet. The Unemployment Rate came down close to levels that many economists believe is sustainable in the long run without generating inflation. But the Unemployment Rate today probably does not fully capture the extent of slack in the labor market. To be classified as unemployed, people must report they are actively seeking work. Many people without jobs say they are not doing so. That is, they are classified as being out of the labor force. Most people out of the labor force are there voluntarily, including retirees teenager, young adults in school and people staying home to care for children. I also believe that sisignificant number are not seeking work because they still perceive the lack of good job opportunities. In addition those too discouraged to seek work a large number of people report they are working parttime because they cannot find full time jobs. I suspect that much of this represents labor market slack that could be absorbed in a stronger economy. Finally the generally disappointing pace of wage growth suggest that is the labor market is not fully healed. Higher wages raise costs for employers, but they also boost the spending and confidence of consumers and would signal a strengthening of the recovery that will ultimately be good for business. In the aggregate, the main measures of Hourly Compensation rose at a rate of only around 2 through most of the recovery. And in rhode Island Average Hourly Earnings have not risen at all in the past year. Nationally there at least encouraging signs of a pick up so far this year. The fact that some Large Companies such as walmart and target have announced wage increases for their employees also might be a sign that larger wage gains are on the horizon. This improvement in the labor market has brought the economy closer to one of the two goals of Monetary Policy assigned to the fed by the congress. Maximum employment. Progress has been made towards the other goal price stability. Consumer Price Inflation remains below the feds stated objective of 2 . The notion that inflation can be too low may sound odd. But overtime low inflation means that wages as well as prices will rise by less and very low inflation can impair the functioning of the economy. For example, by making it more difficult for households and firms to pay off their debts. Overall, consumer Price Inflation has been especially low, close to zero over the past year as the big fall in Oil Prices Since last summer lowered prices for gasoline, heating oil and other energy products. Inflation excluding food and energy which is often a better indicator of where overall inflation will be in the future has also been low. Below the feds 2 objective both now and for almost all of the economic recovery. Inflation has been held down by the continued economic weakness during this slow recovery and more recently by lower prices of imported goods as well as the fall in oil prices. With oil prices no longer declining and with the publics expectations of future inflation apparently stable my colleagues on the federal open market and i believe that the consumer Price Inflation will move up to 2 as the economy strengthens further and other temporary factors weighing on inflation. A number of economic head winds have slowed the recovery and to some extent they continue to influence the outlook. These head winds include first the fact that the housing crash left many households with less wealth and higher debt weighing on Consumer Spending. Many homeowners lost their homes and many more ended up under water, owing more on mortgages than their homes are worth. Economists noted that areas of the country saw a larger boom and bust in housing have subsequently fared worse economically than other areas of the country. Rhode island is one such place. The housing bust was not as large as in florida, nevada and parts of california it was larger than average and the largest in new england. This factor likely has contributed to the fact that the overall recovery here in rhode island has lagged. In some respects this head wind diminished. Home prices have moved up appreciably alleviating the burden for many homeowners. Though the improvement is including rhode island lagged nationally the share of mortgages that are under water fell by about half between 2011 and 2014. In Credit Availability for mortgages has improved as well ago mortgages are still hard to obtain for would be homeowners without pristine credit records. I would score this head wind as still a concern, but one likely continue to fade. A second head wind also quite important here in rhode island has come from changes in fiscal policy to reduce budget deficits. At the federal level, the fiscal stimulus of 2008 and 2009 supported economic output. The effective stimulus fell by 2o 11 and fiscal policy actions became a drag on output growth when the recovery was still weak. States and municipalities faced with Serious Problems due to the recession and required by law to balance budgets were forced to cut spending and raise taxes. The rhode island i know was among the areas still facing budget strand. Overall, fiscal policy actions at both the federal and the state and local levels electric like they are no longer a significant drag on Economic Growth. This head wind i hope is mostly behind us. It and i wont say as much about this factor b, but i will make a few observations. The euro area crisis was the biggest head winds coming from the rest of the world. Supported by monetary stimulus reduced fiscal drag and significant institutional reforms, the recovery and the euro area appears to be on a firmer footing. However growth in 19 other parts of the Global Economy including china and some other emerging market economies has slowed. Weak growth abroad with the accompanying implications for Exchange Rates has dented u. S. Exports and weighed on our economy. This head wind should abate as growth in the Global Economy firms, support by monetary policies generally remain highly accommodative. With the weaning of the head winds i discussed, the economy seems well positioned for continued growth. Households are seeing the benefits of the improving job situation and Consumer Confidence has been solid. In addition the drop in oil prices amounts to a sizable boost in household purchasing power. The annual savings in gasoline has been estimated at about 700 per household on average. In savings on heating costs, essentially here in the northeast where it was so cold this winter are also large. Given the Energy Savings on top of the job gains, real disposable income has risen almost 4 nationally over the past four quarters. Households and businesses are benefiting from favorable financial conditions. Borrowing costs are low, supported by the feds accommodative monetary policies and Credit Availability to both households and Small Businesses has improved. In recent months as i noted earlier, there has been some softness in the Economic Data. Recent indicators of spending and Business Investment have slow and industrial output has declined. The commerce departments initial estimate is that the real Gross Domestic Product was nearly flat in the First Quarter of 2015. If confirmed by further estimates, my guess is that this apparent slow down was largely the result of a variety of transitoriy factors that occurred at the same time. Including the unusually cold and snowy winter and the labor disputes on the west coast, both of which likely disrupted Economic Activity. Some of this apparent weakness may be due to statistical noise. I therefore expect the Economic Data to strengthen. All of that said they have not fully abated and as such i expect the continued growth. Despite the recovery i noted in home prices and a greater number of home sales, Residential Construction activity remains quite low. I mentioned the ongoing issue with mortgage credit. More generally many years of a weak job market and slow wage gains seemed to have induced many people to double up on housing. Many young adults continue to look with their parents. Population growth is creating a need for more houzing. Whether to rent or. They had a continuing job in wage gains will encourage the pace of Business Investment has been only modest in this recovery. Some of the reasons might persist a while longer. More analysts suggested that uncertainty not only about the strength of the recovery but also about Economic Policy could be a significant factor. The fact that many businesses seem to be holding large amount of cash may suggest that risk aversion is playing a role. Weak investment in the Energy Sector is likely to persist. This represents the negative side to the fallen oil prices and its being felt by the Oil Producing regions of the country. New Domestic Oil Drilling has plunged over the past few months. We have also seen a slow down in activity in sectors that supply Oil Production including steel and certain machinery. I would add and we are still a net importer of oil. Putting it all together, the Economic Projections of most members of the fomc called for growth in real Gross Domestic Products products. A little faster than the pace of re

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