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Quest Means Business

Fed Hikes Interest Rates. Aired 2-3p ET

Aired December 16, 2015 - 14:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

[14:00:14]

RICHARD QUEST, HOST: Tonight the wait is over. It is 2 o'clock on the eastern seaboard in Washington, D.C. Wall Street and indeed the world's

eyes are now on the U.S. Federal Reserve.

The announcement has just been made that they have -- from the Federal Open Markets Committee. It's coming through on the screens at the moment. Bear

with me while we just take a look and get exactly the number.

The Fed has decided to raise rates by 0.25%. Pretty much as expected.

(BEGIN VIDEO CLIP)

QUEST: The Fed has raised interest rates a quarter percentage point. Now, of course in doing so, this is the first rate rise that has implications

for savers, homeowners, investors, emerging economies, they are enormous, the implications of this.

It's the first rate rise since June of 2006. That started a rate rise cycle that lasted 17 -- or began some two years previously in June, 2004, and

lasted 17 just about consecutive rate hikes.

Now, not surprisingly, of course, you can see this is the way the Dow Jones Industrials. We started the day very sharply higher. Those gains have

dwindled throughout the course of the day. Now we're here at 2 o'clock and we're waiting to see the reaction of the markets as they move forward.

Currently the Dow is just up 32 points. One would expect that to move quite considerably in one direction. It seems to be going down at the moment.

Remember, this quarter point rise in rates was extremely well telegraphed by just about everybody, including a bugler standing in front of the

markets.

Again, the Fed has raised rates by a quarter percentage point. The first rate rise in the United States for some nine years. From the record

historic lows of just about zero, this is the first of a series of rate rises. The question, of course, is how many rises will there be?

(END VIDEO CLIP)

Gillian Tett is with me from "The Financial Times" good to see you.

GILLIAN TETT, U.S. MANAGING EDITOR, FINANCIAL TIMES: Great to see you.

QUEST: You're clearly not surprised by the decision to raise rates.

TETT: I don't think anybody is surprised but you shouldn't lose sight of the fact that this in some sense is a leap into the unknown. Because

never before have we had the Central Bank of America keeping rates so low for so long putting so much money into the economy. Never before have we

had all the Central Banks around the world acting to keep monetary policy so incredibly loose. So the question about how do you get out of these

extraordinary measures we've seen in recent years is a critical one, because the reality is that the markets have become completely addicted to

cheap money in recent years.

QUEST: And I'm just going to - I'm -- I want to read you what the statement says. The committee expects that economic conditions will evolve in a

manner that will warrant only gradual increases. So not - they've not even just saying gradual increases, only gradual increases in the Fed fund's

rate. The Fed fund's rate is likely to remain and some more words in here, for some time below levels that are expected to prevail in the longer run.

The actual path of course is data dependent.

TETT: Well, the critical issue everybody is asking, and everyone who is watching this show will be asking themselves, is, is this a dovish hike or

a hawkish hike? Is this a sign that the Fed does want to -

[CROSS-TALK]

QUEST: Well, there's no doubt that -

TETT: Well it looks pretty dovish to me but we are waiting for Janet Yellen, the chairman of the Fed, to speak to us fairly soon. And if the

hike is dovish, if Yellen signals that they have moved once and they don't want to move too much more any time soon, then in many ways that will be

quite reassuring. But if the Fed actually signals it plans to essentially repeat what it did last decade to follow one hike with 16 more over time

that's going to big implications.

QUEST: I think we can safely say they're not going to do that bearing in mind their wording but we are in a position of passing whether that's two

hikes next year, three hikes you know of the eight meetings that they have, -- eight meetings they have, does that mean a hike every quarter? I want to

show you -- we'll be talking a lot more about this over the course of the program. The dot plot, which I know you're well familiar with.

TETT: Absolutely.

(BEGIN VIDEO CLIP)

QUEST: The dot plot is the way in which they believe rates will proceed. And as I look at the dot plot and we can see it on the screen and we

compare the dot plot from -- it looks as if once again people are pushing a little bit higher than they were before. What do you think?

[14:05:10]

TETT: Well, the dot plot it does indeed look like that. And the dot plot really matters a lot in terms of traders, in terms of looking at the

slope of the curve. It also matters hugely to homeowners.

(END VIDEO CLIP)

TETT: Because let no-one forget that actually most mortgages are tied to a ten-year rate and the shape of that dot plot is critical in determining

that ten-year rate.

QUEST: They're still holding the longer term rate in terms of two, three years out, they're still getting it roughly between 3% and 4% so there's no

longer term shift in that.

TETT: No. And that's in a sense like saying well actually we're not willing to accept that the economy has fundamentally changed. You know we

think actually we can get back to a normal - a normal rate.

I mean there are plenty of people out there in the markets right now who say well actually the risk is having raised rates a bit, there could be

another recession on the horizon and they'll have to start cutting again before they raise too much further.

QUEST; When I heard Janet Yellen speak at the Economic Club in Washington just a few weeks ago, she actually said if he don't get ahead of it we will

have to raise further and faster and she actually used the "r" word - recession. Which I thought was sort of a bit mellow dramatic.

TETT: Well here is the image that they all love to hold onto which is what Yellen's doing, is acting like the pilot of an airplane. Who's setting out

on a very carefully planned gentle descent and they hope it's going to be so gradual and gentle that the passengers on board will barely even notice

and they'll manage to land the plane before they have any nasty squalls in the rest of the global economy.

The reality is they're trying to land a plane where the radar, the economic data is pretty poor, and there's lots of cross currents. It's going to be

tough.

QUEST: Gillian, finally, I can hear some people saying a lot of economists are playing it down they say it's only a quarter point, it's only a quarter

point, don't get too excited. But you know and I know that what we are seeing today is historic, if only because it reverses unprecedented low

rates.

TETT: It is historic because what we've seen for the past nine years is historic. And if they manage to get out of these extraordinary monetary

policy experiments, quantitative easing and all that, in some ways that will be an even greater achievement if they do it smoothly than actually

unveiling all the crisis measures they produced after 2008.

QUEST: We are so grateful that you are here with us to help us in this moment of historic proportions.

TETT: It is indeed historic.

QUEST: Good to see you, thanks very much.

TETT: Great to see you, thank you.

QUEST: Now, the Fed Chair, Janet Yellen, will be speaking to reporters.

(BEGIN VIDEO CLIP)

QUEST: As Gillian was saying, we're going to be listening, once she starts speaking, we're going to be listening to the statement and to the questions

and answers and to see if she gives any further indications over this dovish versus hawkish hike.

It looks on the basis of the statement that it's a dovish hike, but we'll have to wait and see and see how they work on that. So to the markets and

how they reacted.

(END VIDEO CLIP)

QUEST: When we started the program, they were about up 20 -- up 30, give or take. As they moved through, remember how I pointed out at the start of the

show we were up here and then we were up about 30.

(BEGIN VIDEO CLIP)

QUEST: In the ten minutes or actually 8:11 since that, they've rallied by more than 100 points. Now, arguably you might say that would be expected

and you might even be surprised it's not more than that. 17,661.

(END VIDEO CLIP)

QUEST: Alison Kosik is at the New York Stock Exchange. Alison, they got them, everybody got the result that they expected. I can hear the floor is

much noisier than normal.

ALISON KOSIK, CNN CORRESPONDENT: Oh, yes, Everybody certainly was aflutter before the announcement and then after. And you heard people yell things

like ladies and gentlemen, we've got liftoff. And the sentiment here is that finally we've got liftoff because the Fed has been promising this rate

hike for the better part of one year. And many investors and traders that I've talked to said the Fed really had to make this move today and raise

interest rates for many reasons. A couple being that it wants to save its credibility because it's been talking about that the economy is ready for

the rate hike.

(BEGIN VIDEO CLIP)

KOSIK: And secondly, many believe that the rate hike, the path of raising rates gives the Fed more wiggle room should the U.S. economy go through a

downturn, then that would give the Fed more tools in its tool shed because it could up - (inaudible)

QUEST: Alison Kosik at the New York Stock Exchange. Not many days -- for those of us who cover these sort of things, this is a bit like Christmas

coming early in terms of the excitement of the day.

Now, I wanted to show you how the market is actually reacting in terms of the individual Dow components. The Dow is up 111 points. The only stocks,

and this would be expected. You've got down for Chevron, down for Exxon Mobil and that of course is on the back of lower oil prices so that's to be

expected. Same with Dupont which of course is involved with its own merger issues.

[14:10:10]

QUEST: Bit of an odd one that Intel is off but the main thrust of the market, GE heavily up, United Technologies, Merc, Coca-Cola, big companies

obviously there in the Dow but obviously in the heart of the U.S. economy and they are showing strong gains. We will have more on what's happening in

a moment. The decision on the rates, the Feds joined another range of countries, all moving in their different ways and we'll give you the

analysis on what different countries are doing after the break.

(MUSIC PLAYING)

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(MUSIC PLAYING)

QUEST: The Fed's decision to raise interest rates now puts the U.S. on a very different path to other major economies around the world. And we want

to show you the countries that have either raised or cut interest rates, or to give you a feeling of exactly what the situation is.

So if you take, for example, the continent of Europe and the Eurozone, now, obviously in the Eurozone, you're still seeing interest rates that are

falling, because obviously the ECB has embarked on quantitative easing and you have also other rates that are down with the exception of the Bank of

England. In terms of Asia, Russia, China and out towards Asia and Pacific, again, you're still seeing interest rates that are falling. And even if you

come - (inaudible), down over towards Australia, you've still got a situation where rates are under pressure and coming down because of the

commodities movements that have taken place.

Georgia and Kazakhstan interestingly back over here they're the only economies that have raised rates.

Put it together, look at the Americas, which is where I am now, and no economy in the region has cut rates for obvious reasons. You've got Brazil

that is continuing to battle with inflation. You've got a crisis in Argentina with a New President that has got entirely different

diametrically opposed policies.

Put it into a global context and you've either got interest in the Euro Zone either close to zero or negative, you've got sluggish growth in Asia,

and now you've got the United States which is raising rates.

[14:15:02]

QUEST: For the Euro Zone, there are some serious problems.

(BEGIN VIDEO CLIP)

QUEST: Back in 2011, the European Central Bank decided to raise rates, believing the worst of the recession was over. The result was a disaster

for the European recovery.

Jose Manuel Barroso was the Commission President then and he joins me now from Princeton in New Jersey.

(END VIDEO CLIP)

QUEST: Everybody along with Sweden and the (Ricks) Bank raising rates. Everybody agrees that they were - they were errors in monetary policy and

now we've got to see whether the Fed has made the same error. What do you think, sir?

JOSE MANUEL BARROSO, PRESIDENT OF THE EUORPEAN COMMISSION: I really believe that the Fed has taken the right decision. I think it will be quite strange

if you will not have taken this decision because this is the decision that is most coherent with the state of the United States economy.

(BEGIN VIDEO CLIP)

BARROSO: Of course there may be some kind of impact on other economies, but I believe that to a large extent markets have already priced in this

possible impact. And, frankly, I think that others, including in Europe should look also at other instruments not only to monetary. Monetary policy

is very, very important but you cannot always be so much dependent on the decisions of the Fed. There are other issues that you can do in our

countries from Europe to Asia to support economic growth.

(END VIDEO CLIP)

QUEST: Now, since so to speak you're not in office, you are able to be a little bit more expansive in your thoughts on the ECB. But the ECB clearly

-- maybe it's for valid political reasons of the Bundesbank, I'll grant you, but they have allowed themselves to get behind the curve and are now

playing catch-up.

BARROSO: Now as you say I'm no longer in office so my level of sincerity is increasing day by day. What I can tell you - what I can tell you is that I

think the ECB is doing the right thing.

(BEGIN VIDEO CLIP)

BARROSO: I think quantitative easing is necessary in Europe now for reasons that are evident, considering the fact that we are very far from our, let's

say, medium term objective in terms of inflation. What we define in Europe as price stability.

And also because of the fact that - I mean we still need more growth. So I expect the ECB to continue with quantitative easing and in fact the

statements made so far by Mario Draghi and by the ECB have been consistent and coherent in that decision so I support that policy. But there's also

another let's say probably collateral effect, I don't know how much collateral it is, but it supports the competiveness of our exports, namely

from some countries that are more vulnerable, the south European countries, including, by the way, Italy.

So if Euro goes a little bit down, that's not bad for the European economy. And also because of the price of oil, this is also helping the recovery

that's going on. We are recovering in Europe. Of course it's not enough yet in terms of growth but never the less we've left now, I hope the recession

behind us.

(END VIDEO CLIP)

QUEST: Jose Manuel Barroso, thank you for joining us from Princeton, good to see you as always.

Our coverage will continue. Let me remind you. The U.S. Fed has raised interest rates for the first time in nearly a decade. Just a quarter point

on the Fed fund's rate, but it starts a process.

The Fed governors say that the committee expects conditions will evolve in a manner that will warrant gradual increases in the Fed fund's rate and

that it will remain for some time below levels that are expected to prevail. What does that mean? We'll talk about it after the break.

(MUSIC PLAYING)

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(MUSIC PLAYING)

[14:21:30]

QUEST: Along with the actual interest rate decision, the Fed has released its latest set of projections. This is known as the dot plot.

(BEGIN VIDEO CLIP)

And the bit that we're most concerned about, obviously, is this part here. It shows where members of the FOMC believe interest rates will be. Midpoint

of target range for the Fed fund's rate during 2016 or at the end of 2016 . And as you see you have a very large range of between over 2% right the way

down to just under 1%.

Furthermore, you also have longer term ranges as to what happens. Randall Kroszner is a professor at the University of Chicago Booth School of

Business and Former Governor of the Fed.

(END VIDEO CLIP)

QUEST: He joins us now from Chicago. You are part of this history, sir, having been at the Fed during the last cycle into this historically low

rate for the last nine years, so it's a bit of history for you as well today.

RANDALL KROSZNER, PROFESSOR UNIVERSITY OF CHICAGO: Yes, it's really quite amazing that seven years ago I was sitting there with many of the people

who are still there. Although there are still some -- there are some new people, and we brought rates down to effectively to zero. And the big

debate was not going effectively to zero but was how we were going to characterize that. Were we going to say something about how long we were

going to keep rates low. There was a lot of debate, what we ended up putting in the statement that would keep rates low for some time. No one,

even the most pessimistic person thought that for some time was going to mean seven years. It's really been quite amazing to see that over this long

horizon.

QUEST: And as we look at that horizon, and now, of course, if you had been in the room today, I assume you'd have been part of the vote that says yes,

now is the time to raise rates?

KROSZNER: I think it's perfectly reasonable. The labor market has certainly seen a lot of recovery. There are questions about the direction

of inflation, but I think one of the reasons why Janet Yellen wants to be able to do a very gradual path is to maybe move slightly earlier than

otherwise might be the case, but that then allows a very gradual path out to make sure there aren't disruptions down the line.

QUEST: Now, if we look at the dot plot and we see the prognosis for rates of next year.

(BEGIN VIDEO CLIP)

QUEST: We see a large range. I mean it's quite an impressive range of above 2% to just under 1%. Where do you believe rates settle end of next year?

(END VIDEO CLIP)

KROSZNER: So I think as Janet Yellen is probably going to talk about, it will depend a lot on the -- how inflation evolves, but I think my forecast,

which is probably broadly consistent with where the Fed is, we're going to see a very gradual increase in inflation and so that would leave them to

raise rates gradually. So I think rates at the end of next year will be towards the low end of that range, not towards the high end of that range.

QUEST: Randall, thank you very much indeed. Joining us from Chicago Booth School, always good to see you on a day like today. Thank you.

Now, with rate rises on the books, Wall Street's focus is on the shift and the speed of the increases. You heard Randall talk about how long and how

far. The phrase being used by the FOMC is gradual. Over some time. But what does that mean? To get some idea of the different tightening cycles, Claire

Sebastian is with me and has been looking at the big rate rise cycles of recent past. Claire what have we got?

[14:25:14]

CLAIRE SEBASTIAN, CNN INTERNATIONAL CORRESPONDENT: Well so these are the past three tightening cycles that we've seen from the Fed and you've been

looking at the dot plot, that's the future path of how interest rates could go according to the FOMC right now.

(BEGIN VIDEO CLIP)

SEBASTIAN: This is the past path of how tightening cycles go. We're going to start from 1994, around 20 years ago. This was a very steep rise as you

see, the rate actually doubled in just 12 months, seven rises. So not every meeting, you didn't see a rate rise at every meeting and the S&P 500

that rose just 2.5% in the first 12 months after that tightening cycle started. So they weren't that impressed. Most of that rise was toward the

end of the cycle.

Let's move on to the Clinton administration. The boom years, unemployment was at a 30-year high. We saw six rises over the course of 11 months. You

see from 4.75% up to 6.5%. That caused a 12% rise over the first 12 months in the S&P 500.

And finally the most recent one that you were talking about with Randall Kroszner just now, 17 rate rises over the course of 24 months. Every single

Fed meeting saw a rate rise and that caused a 10% rise in the S&P 500 over the first 12 months.

This in particular Richard is worth focusing on because this is not what we expect to see from the current cycle.

QUEST: No, this is exactly the opposite. This would not be considered to be gradual by any definition.

SEBASTIAN: Right. Even if we go with the median of what they expect from the dot plot over the next year, about 1.5%, that will be maybe be five

rate rises at a maximum next year.

QUEST: But this went from 1% up to 5.25%. If we take a look here, at Clinton, this 4.75% to 6.5%, it still gives a 12% rise in the S&P 500.

SEBASTIAN: Absolutely, I mean we know the markets are not part of the Fed mandate, they're not responsible for market stability but that doesn't mean

they're not watching. And of course we saw in September when the markets went haywire, they didn't raise rates. So this is crucially important and

we look at these shapes Richard, the shapes of the path of interest rates, and that's why the dot plot matters so much.

QUEST: And that's why we'll be looking at these. It won't be this. It might look a little bit like that, possibly a lot more like that but that was a

much shorter period of time. So we've -- thank you, Claire.

(END VIDEO CLIP)

QUEST: We've seen the decision. We're preparing to hear from the chair of the Federal Reserve herself, Janet Yellen, who will be holding her press

conference where she'll read the statement and clearly, obviously, take questions.

(BEGIN VIDEO CLIP)

QUEST: Most importantly, the issue of the day will be what does the Fed mean when it says gradual, over some time. When can we expect the next rate

rise? "Quest Means Business" on a day when the Fed raised interest rates.

(MUSIC PLAYING)

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(MUSIC PLAYING)

[14:30:02] QUEST: Breaking news. Janet Yellen is about to start her press conference.

If we just listen in to what she's saying as the start - she begins.

(BEGIN VIDEOCLIP)

JANET YELLEN, CHAIR, U.S. FEDERAL RESERVE: -- one quarter percentage point, bringing it to one quarter to one half percent.

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.

It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardship of

millions of Americans.

And it reflects the Committee's confidence that the economy will continue to strengthen. The economic recovery has clearly come a long way although

it is not yet complete.

Room for further improvement in the labor market remains, and inflation continues to run below our longer-run objective.

But with the economy performing well and expected to continue to do so, the Committee judged that a modest increase in the Federal Funds rate target is

now appropriate.

Recognizing that even after this increase, monetary policy remains accommodative. As I will explain, the process of normalizing interest

rates is likely to proceed gradually.

Although future policy actions will obviously depend on how the economy evolves relative to our objective of maximum employment and 2 percent

inflation.

Since March, the Committee has stated that it would raise the target range for the Federal Funds rate when it had seen further improvement in the

labor market and was reasonably confident that inflation would move back to its 2 percent objective over the medium term.

In our judgment, these two criteria have now been satisfied.

The labor market has clearly shown significant further improvement toward our objective of maximum employment.

So far this year, a total of 2.3 million jobs have been added to the economy, and over the most recent three months, job gains have average and

estimated 218,000 per month, similar to the average pace since beginning of the year.

The unemployment rate at 5 percent in November is down 6/10ths of a percentage point from the end of last year and is close to the median of

FOMC participants' estimates of its longer-run normal level.

A broader measure of unemployment that includes individuals who want and are available to work but have not actively searched recently and people

who are working part-time but would rather work full-time also has shown solid improvement.

(BEGIN VIDEOCLIP)

QUEST: Janet Yellen who is reading the prepared statement before taking questions. The interesting thing of what she says there is she uses the

word to describe the quarter point rise today as `modest' and she again refers to the fact of future rate rises will be gradual.

Remember the FOMC statement actually says, "The Fed Funds Rate is likely to remain for some time below levels that are expected to prevail in the

longer range."

Well, it's no longer a question of when the Fed raises, of course it is how. What the Fed actually does of course is control how banks lend to

each other.

The Fed Funds Rate is the rate at which the banks - the Fed can take money out of the system or put money into the system, thus controlling the amount

of liquidity that's out there.

Traditionally it does it of course by raising rates and selling treasuries into and out of the central bank

Now, banks' reserves go down, interest rates will go up. But today's situation is much more difficult - their banks have big reserves, they are

stuffed to the gills in many cases thanks to quantitative easing.

And what the Fed has to do is to tell banks whether you will get higher interest rates by borrowing with or without the Fed, hopefully persuading

banks to make loans elsewhere and not necessarily through the Fed.

Stephen King is joining me. He's the senior economic advisor at HSBC. He joins me now from London. Stephen, we expected the results that we've got

today, but there's no question, this monetary policy is exceptionally tricky at a time of low inflation and when banks are stuffed to the gills

with money.

[14:35: 07] STEPHEN KING, SENIOR ECONOMIC ADVISOR, HSBC: This is absolutely right. It's a huge challenge partly because with inflation so

low, not just in the U.S. but also elsewhere in the world, many people I think outside the U.S. would say what's this going to do to try to battle

the problem of deflation or disinflation that we've seen on the global basis.

And of course the Federal Reserve admits although inflation is heading back towards target, it is still below target. And we discovered from other

central banks over the last few years that the ability to actually forecast accurately future inflation have been mostly very poor.

What's discovered is that inflation has been lower than has been expected.

QUEST: And into this environment she talks about gradual for next year's interest rate rises, at HSBC how many rate rises do you think we will see

out of the Fed next year.

I mean, I know it's slightly - it's sort of how long is a piece of string, but how many rises do you think?

KING: Well we're currently forecasting two increases next year, both a quarter a point. One in the second quarter and one in the fourth quarter.

As you say, it is a bit like sort of how long is a piece of strong. The problem of course is that everything is still data dependent. And the

Federal Reserve is talking about gradual.

But that gradual indication is partly based on the view that the economy will not be that strong during the course of next year.

Other inflation will struggle to -

QUEST: Right.

KING: -- get back to target. But if it turns out that things are disappointing compared with that, (AUDIO GAP) of course it was even more

gradual rate increases.

QUEST: The - because we're starting from such a low base, effectively zero and it's just moving up just a tad. The sort of ECB fiasco or the Riksbank

fiasco of raising rates only to have to reverse again is highly unlikely here do you think simply because rates are - even at this higher level,

elevated level - accommodative?

KING: Well that's certainly true and the Federal Reserve will be desperate to avoid the kind of mistakes that the ECB and the Riksbank made and of

course they raised rates then they cut them a year or so later.

One of the big uncertainties the Federal Reserve has is not so much what's happening in the U.S. itself, but what's happening elsewhere in the world.

Remember that over the last year or so, the reasons why the Fed didn't raise rates earlier were all to do with the strength of the dollar, shocks

coming through in China, worries about weakness elsewhere in the world.

So the rest of the world matters more perhaps to the Fed now than was the case -

QUEST: Right.

KING: -- maybe 10/20 years ago.

QUEST: Now we always say that the Bank of England was waiting for the Fed to move. The Bank has always denied that and Mark Carney the governor has

always has pointed to at least numerous occasions when the Bank has moved before the Fed.

When do you now expect the Bank of England to join the rate-rising party?

KING: Well, it's interesting, I mean, certainly next year at some point. And I think that some of the hawks have been hiding in the aviary over the

course of the last two months will now come out of the closet.

Because they propose (ph) a situation whereby the situation looks easier than was the case before the Fed had raised rates.

But at the same time, we had some today some very, very soft wage data in the U.K. and the U.K. is still struggling to find the kind of inflation and

prices that justify raising interest rates.

So probably the first half of next year, but we'll have to see what happens with those wage numbers.

QUEST: Stephen King, thank you for joining us from London this evening.

Now we'll take a quick look at the Dow Jones Industrials and how it has traded over the course of the session. So this is obviously where we get

the announcement. We were up 30-odd points - 20 to 30 points - when the announcement came.

We rocketed up over 130 points and now those gains are starting to evaporate. We're just up 80, but we've still got an hour and a half to go

before the end of trading.

As the rate rise filters through the global financial system, some economies, particularly emerging markets - emerging countries - will be

extremely concerned. They're worried about the flight of capital and of course seeing their currencies come under pressure.

We'll talk to the Colombian finance minister after the break. It's comprehensive coverage on a day when the Fed raised rates.

(COMMERCIAL BREAK)

[14:46:56] QUEST: The rate hike is set to have a big impact across the world. It strengthens the dollar even further and that puts pressure on

emerging markets.

You can see how the currencies of some of the markets and countries have fallen against the U.S. dollar in the past year.

Many cases of course they have individual issues which exacerbated the trend. The South African rand with the problems in the African - South

African - economy down 21.5 percent.

The Russian ruble with President Putin, with Crimea, with Syria and with oil down 14 percent.

And the Turkish lira itself with its own problems off the Syrian border down more than 20 percent.

The Colombian finance minister Mauricio Cardenas joins me now on the line from Bogota in Colombia.

Minister, you and I have spoken several times about this. You have been waiting for this rate rise, you knew it was coming, I expect you're glad

it's happened but now how do you manage your currency as a result?

MAURICIO CARDENAS, COLOMBIAN FINANCE MINISTER: Well I think it's good to see this happening. It's the new normal, and we were waiting for this for

two long.

So markets have somewhat anticipated at least the change today, but there's still a lot to be seen.

We need to know more and only in the next few days we will know what's going to happen with the dollar and more importantly, capital flows for an

emerging/Asian (ph) economy.

We believe capital close to it being strong. I think it will be a matter of the strength of the macroeconomic framework for the different countries,

your compliance with fiscal management to continue -

QUEST: Right.

CARDENAS: -- receiving capital flow.

QUEST: But for somebody like yourself and your economy, I mean, there's not a lot you can do but first of all obviously as you say you've got to

manage any capital flows.

But at the same time, outward capital flows will put pressure down on your currency and that happens at the time when the dollars is going to be

strong anyway.

I know you pride yourself on a free float in an open market, but will it be too difficult to manage?

CARDENAS: I think the exchange rate has already adjusted. The markets anticipated this move, the currencies have depreciated - that certainly has

been the case for Colombia.

Our currency has depreciated about 50 percent in the last year. A lot of that had to do with oil prices. So I don't expect further weakening of the

currency.

I expect that there'll be for some countries - not for Colombia - a reduction in capital flows -

QUEST: Right.

CARDENAS: -- but it could now (ph) be a matter of your grading of your macroeconomic framework. I was very shocked to see today the second

downgrade in Brazil (inaudible) grade. That's going to be difficult.

But for us, we just renewed our prepopulating (ph) yesterday and with an outlook that is stable -

[14:45:04] QUEST: OK, so -

CARDENAS: -- which is good news, it's good news for us.

QUEST: So, Minister, when you see the Fed saying today, and I'm going to read it from the statement because it is the important part of the

statement that, "-- there'll be gradual increases in the Fed Fund Rate." I assume you hope that gradual means fewer in 2016.

CARDENAS: We are expecting a full 1 percentage point - 100 basis points of the increases next year. That's what we incorporated in our own budget in

terms of the cost of our external borrowing.

So I think we're going to see - we're going to see rates in a year from now closer to 1 and a quarter, 1.5.

QUEST: Right. Minister, thank you for joining us, and as 2016 - well first of all we wish you a good holiday season -

CARDENAS: Thank you.

QUEST: -- but as 2016 moves forward, we look forward to you coming on the program and talking through how it's affecting your economy. Thank you,

sir.

Now, the Dow Jones Industrials, you can see the numbers on the screen. A look at what the hike means for banks, businesses, the dollar and

inflation. We need to pull the strands together.

We've given you a lot of information in the hour so far, and after the break we'll help you make sense of what it might mean for you.

(COMMERCIAL BREAK)

(BEGIN VIDEOCLIP)

YELLEN: -- more confidence that inflation would move back to 2 percent over the medium term. We felt that these conditions had been satisfied. We

have been concerned as you know about the risks from the global economy and those risks persists, but the U.S. economy has shown considerable strength.

Domestic spending that accounts for 85 percent of aggregate spending in the U.S. economy has continued to hold up. It's grown at a solid pace and

while there is a drag from net exports from relatively weak growth abroad, any appreciation of the dollar overall we've decided today that the risks

to the outlook for the labor market and the economy are balanced.

And we recognize that monetary policy operates with (layouts). We would like to be able to move in a prudent, and as we have emphasized, gradual

manner.

It's been a long time since the Federal Reserve has raised interest rates and I think it's prudent to be able to watch what the impact is on

financial conditions and spending in the economy, and moving in a timely fashion enables us to do this.

[14:50:08] Again, I think 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.

In terms of our actual and forecast or projected conditions relative to our employment and inflation goals and will adjust policy over time as seems

appropriate to achieve those goals.

Our expectation as I've indicated is that policy adjustments will be gradual over time but of course they will be informed by the outlook which

in turn will evolve within coming data.

(END VIDEOCLIP)

QUEST: In that once sentence answering that question, Janet Yellen has just given the reasons why they raised rates now and the outlook for rate

rises in the future, the prudence of seeing the effect before deciding what to do next.

Paul La Monica is here. She encapsulated the whole thing.

PAUL LA MONICA, CNN MONEY DIGITAL CORRESPONDENT: Oh without question. And again, suggesting that all the rate hikes next year are going to be gradual

- that's the world that everyone wanted to hear.

She's delivered that numerous times - was in the statement and now in the press conference. So no one should expect rates to go sky high unless the

economy suddenly takes off, which no one expects it to do.

QUEST: And just - and what she also said was interesting it's been - here exact words, "It's been some time" since the Fed raised interest rates.

And the economy's very different now than it was not - that the laws of the business cycle may not have changed, but the way they react in a new,

productive economy might be very different.

LA MONICA: I think that's a great point. No one knows exactly how this economy is going to adjust to higher rates because we've been stuck at zero

for seven years.

So even though this is a tiny rate hike and it is accommodative, there are some questions about whether or not there will be some upheaval in certain

parts of the market.

We've already seen that to a certain extent with junk bonds. Is that going to happen in other parts of the market? We have to wait and see but she's

right that this is still very accommodative and they're going to raise rates that high.

QUEST: That is the core point. As a quarter to a half a point that they now - the rates are now - at, I mean, in any other cycle this would be

extraordinarily loose.

LA MONICA: Definitely. And it still is which I think unlike the last interest rate cycle when Ben Bernanke and the Fed - 2004 through 2006 -

they raised rates --

LA MONICA AND QUEST IN SYNC: -- 17 times in a row!

LA MONICA: That's not going to happen this time.

QUEST: So talk us through how these rates or the Fed Fund Rates - tomorrow morning they will see what happens in the commercial paper market, the

repro market, they will look at what happens in Libor in London to see how it's transmitting and is it working.

But how does that eventually feed through to credit cards, mortgages and car loans?

LA MONICA: Yes, you're going to have rates go slightly higher there, big banks are going to raise their prime rate. Wells Fargo took all of 12

minutes after the Fed announcement to put out a press release saying that they were raising the prime rate.

QUEST: Prime is now at what - just for my knowledge?

LA MONICA: 3.5 percent I believe is what Wells Fargo had - was going to be raising it to. So we should see other big banks and many regional banks in

the U.S. adjust their prime rate as well.

QUEST: And of course let us never forget there is a - it's a two-sided coin. Savers get more on deposits and investment and in money market

accounts.

LA MONICA: Yes, interestingly Wells Fargo did not announce -

QUEST: Really?

LA MONICA: -- an increase in the deposit rate. In know, big shocker. But savers will eventually benefit a little bit more. They've been waiting for

a long time.

And a lot of people, you know, even referred to the Fed as having a quote, unquote "war on savers." That war may be finally over.

QUEST: Paul, you and I have been doing this for a year or two - probably more than we'd like to think about. So, allow you 30 seconds just to have

a reflection for you having seen the crisis of 2008, seen rates come down to zero, followed through the turmoil of taper tantrums and now we finally

move into another part of the story.

LA MONICA: Yes. The key word the Fed has used is normalization and I think it is nice that finally we may have emerged from the crisis and we're

getting back to what central banks usually do which aren't all these extraordinary measures that obviously now the ECB is doing with

quantitative easing.

It's just the bread and butter boring raising and lowering of interest rates which is what typically that's all they kind of do.

QUEST: Paul, --

LA MONICA: Thank you.

QUEST: -- thank you very much indeed.

Allow me to remind you of the markets. Let's have a look at the Dow. Now back up 150 points which is not best of the day - that came at the opening

session of the bell rang. But it is the best post-the announcement at 2 o'clock.

[14:55:12] So we are in that last hour, hour and five, before - well you have a lot of books squaring. On the day when the U.S. Federal Reserve

made history and raised rates for the first time in nine years.

We'll have a "Profitable Moment" after the break. "Quest Means Business."

(COMMERCIAL BREAK)

QUEST: Tonight's "Profitable Moment." It was an itsy, bitsy, teeny, weeny little interest rate rise. Just a quarter percentage point. But of course

it presarges an entire new cycle in economic policy from the U.S. Federal Reserve.

Whether gradual means one, two, three rate rises next year, a new scenario has begun. Think about it, nine years ago they raised rates for the last

time.

And then we had a two-year period where rates went down to zero. But as Randall Kroszner said on this program, no one expected rates to stay at

zero for seven years.

Today is historic in terms of the financial world. And now the other world central banks have to decide what they do next.

And that's this special edition of "Quest Means Business." From New York, I'm Richard Quest. Whatever you're up to in the hours ahead, (RINGS BELL)

I hope it's profitable.

And let's make sure we get together tomorrow.

END