Fed Test: Is the Economy Really Improving?

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April 30 (Bloomberg) -- Pimco's Mark Kiesel and Bloomberg's Mike McKee discuss today's policy statement from the Federal Reserve's Federal Open Market Committee. They speak with Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Did the economists get it flat out wrong?

Is janet yellen right?

How do you interpret it?

This was not a really big miss.

The data are a collection of actual data the government has and projections.

The projections could easily be off, and the government is only guessing at what the trade in inventory figures are for the last month of the quarter.

This will be revised three or four times.

Maybe it will look better eventually.

It probably will.

Things that were bad in this report are things we have indications are changing.

A lead of stories about businesses starting to ramp up their spending into the second quarter.

Inventory building, it was big in the fourth quarter and small in the first quarter.

You have possibility of a rebound there.

There are a lot of things that suggest maybe the fed is right to watch this.

We got better than expected adp.

The last time adp was right is, i don't know when.

Jeff rosenberg, we are up -- we are up 35 points there, s&p up another quarter of a percentage point.

If investors were really worried about this number, they would have eased off.

Not the case today.

Our investors seeing something that the gdp reports does not capture?

Investors are looking past the numbers and realizing this is a fed under yellen that will be pretty accommodative.

What gives her support to be very accommodative and holding off in raising rates is the low inflation.

The core pce came in at one percent year-over-year, the employment cost index is less than two percent.

There is no wage inflation.

With no wage inflation, that allows the fed to be very patient.

No wage inflation, and she's cutting by $10 billion a month.

Is she being overaggressive here?

Should we be keeping up, in light of the fact that we get nothing when it comes to inflation, mark?

I think there's two decisions here.

One is the overall size of the balance sheet.

In that case, the consensus there is that the cost-benefit is now towards the economy healing.

You do not need the fed to be buying assets.

The tapering is based -- baked into the cake.

The second question is what bill gross alluded to in his most recent investment outlook, which is what should be long-term policy rate be.

We think it should be zero percent real or two percent nominal.

We see a lower policy rate going forward than the market.

It's a function of secular headwinds and the slow inflation we see.

We have a fed that says it will keep rates low.

They will continue on this taper program.

Yet you get data -- you cited a number of more recent reports -- data that really does not support strength in the economy.

Do you anticipate things will look different three months from now?

We are going to see a significant rebound in the second quarter, and then it will settle out to a higher level of growth than we had seen going into funny 14. here is something interesting about the fed.

Nobody noticed that the fed is tapering, at least no one has told the bond markets.

The 10-year note yield is lower than it was before the fed started tapering.

The fed tapering had no effect on the cost of money at this point.

Adding more to it will not help.

To what do you attribute that?

Our investors that worried about the global situation right now?

I think that's right rate the global economy is slowing.

The u.s. economy is healing, but it's not taking off.

We are looking at an economy that will grow maybe at 2.5% real.

In a world where the fed maintains short rates low for an extended period, it only gets to a two percent real or two percent nominal.

I think that is really what the market is realizing and if that is the case, low interest rates will also support the healing process in the equity market.

Low interest rates as far as the eye can see.

And a market that continues to move higher.

And equity market that is up so far this year, was up a time last year.

Not a lot of economic data to support it.

I guess i'm only asking the question, at what point might we see the market start to catch up with economic reality?

It looks like economic reality could change.

The market is what is more likely at this point.

We do not know where the markets are going to go.

They have plateaued and paused for a while.

They have a lot of strategists wondering if this will be a correction we go into.

There's no reason to think that earning power of corporations will diminish over the years.

We have the report coming out on friday.

Is that the next thing we will be watching out for?

Ism tomorrow is a pretty good predictor of where the economy is going.

We will look at the jobs subcomponent of it.

The markets tend to love the payroll report on friday, and it is forecast to be above 200,000, which would give people a reason to believe that things are getting better.

Mark was just pointing out that we have not seen any wage inflation right now.

Adp -- i made a wisecrack about it earlier -- adp coming out better than expected, is that a good sign?

Can we say that the jobs report will be above 200,000? we cannot say certainly.

Adp in five of the last six months has undercounted what the department of labor comes up with.

If you take that, you're looking at a range of 255,000 based on the bloomberg consensus forecast of 215,000 jobs created.

You are still talking about fairly healthy job growth.

At this point, adp is a contributor to the feeling that it will be a decent report.

You look pretty deeply into housing.

What does all of this mean for the housing market?

The pace of gains will slow.

We are still bullish but less bullish.

We think the best theory right now is building materials.

They are raising prices, high single digits, and we think they will see double-digit volume growth because of the remodel cycle.

The time is to move out of home builders towards rolling materials.

-- building materials.

We are going to leave it there.

Thank you very much.

Coming up, mark zuckerberg takes

This text has been automatically generated. It may not be 100% accurate.


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