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Quest Means Business
U.S. Federal Reserve Cuts Interest Rates for the First Time Since 2008; U.S. Senator Sherrod Brown Calls for Clampdown on Share Buybacks; U.S.-China Trade Talks End with No Deal in Sight. Aired 3-4p ET
Aired July 31, 2019 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, CNN INTERNATIONAL HOST, QUEST MEANS BUSINESS: Sixty minutes left of trading. And as you can see, the markets are not in a good mood
having bounced around most of the session, a very sharp full and that fall comes not after the Fed interest rate decision, but half an hour later,
when the Fed Chairman starts speaking.
The markets are down. They do not like what they have heard and these are the reasons. The Fed has cut rate for the first time in a decade. But
investors all worried about whether there's another and what comes next. That's why the market is down.
It's a hard landing. The CEO of Airbus wants Europe to get ready for a no deal Brexit.
And flying information, the head of Air France KLM tells me how he is getting two airlines to work as one.
We are live in the world's financial capital, New York City on Wednesday. It's July 31st. I'm Richard Quest. I mean business.
CNN Breaking News. Tonight, Jerome Powell tries to let the good times roll as interest rates are cut in the United States. This is despite a healthy
U.S. economy. The Fed has reduced rates for the first time since the depths of the 2008 financial crisis. A quarter point cut, two to two and a
quarter percent. The Fed says it's trying to get ahead of a slowing global economy, better sooner rather than later approach.
The Dow does not like what it has seen. When the interest rate decision came out, if you look at the Dow over the course of the day, when the
interest rate decision came out at two o'clock, there was almost no reaction. It just bounced around again.
But half an hour into it, at around 2:30 towards quarter to three, the market turned turtle. There you see it, now down 350 points. Investors
want to know if this is a start of a one-off or if it heralds more cuts to come. The President has yet to weigh in, though in unprecedented and
repeated attacks, Donald Trump has made it clear, he wanted a deeper cut. A tricky balancing act for Chairman Powell. He will now face criticism
that the Fed has bowed to pressure from the White House or Wall Street, or both, sacrificing the Central Bank's pressures independence.
He insists the FOMC, the interest rate setting committee is strictly responding to the data.
(BEGIN VIDEO CLIP)
JEROME POWELL, CHAIRMAN, U.S. FEDERAL RESERVE: What we've been monitoring since the beginning of the year is effectively downside risks to that
outlook from weakening global growth and we see that everywhere, weak manufacturing, weak global growth now particularly in the European Union
and China.
In addition, we see trade policy developments which at times have been disruptive and then have been less so, and also inflation running below
target. So, we see those as threats to what is clearly a favorable outlook. And we see this action is designed to support them and keep that
outlook favorable.
(END VIDEO CLIP)
QUEST: They'll pass the Fed's statement and Paul La Monica is watching the markets. We must start with you. What happened? Because at two o'clock,
it holds its own, and then at about 2:30 to 2:40, roughly when the press conference starts, the market then falls. What took place?
PAUL LA MONICA, CNN BUSINESS REPORTER: Yes, Richard, I think what really happened was the market was not happy with Jerome Powell's comment about
this is not going to necessarily be the start of a long, deep interest rate cutting cycle from the Fed.
He said that this is just a -- as I quote, "mid cycle adjustment to policy," which I think people read as, "Okay, yes, we probably shouldn't
have raised rates in December, we're taking that rate cut back, we're going to watch the data. But we're not hell bent on lowering rates because of
criticism from the bond market, the inhabitant of the White House and many others," they're going to do what they think is right for the economy based
on the data.
QUEST: So why have they done this? The statement talks about, "In light of implications of global developments for the economic outlook, as well as
muted inflation." What all those global developments that's driven the Fed?
CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: Well, I'd say the biggest one is trade, Richard that really has come out over the course of the press
conference. He said, not only has it proved extremely disruptive at times and less disruptive at other times, he says it's simmering at the moment,
but it's still an entirely new set of circumstances that they have to deal with.
This was also apparent -- this is uncharted territory for them. He said we're having to assess this in a new way. And I think the same applies to
inflation. He said, you know, recently in his testimony before Congress, the relationship between unemployment and inflation is now faint heartbeat.
[15:05:07] SEBASTIAN: He didn't use that phrase again, but we get the sense again, that this is something entirely new that they're having to
deal with.
LA MONICA: Yes, the Fed, as you point out, Clare, definitely grappling with this problem that they're waiting for inflation to pick up the fruits
of a decent job market to finally you know, come into play. But it hasn't.
So until wage growth is more prevalent, there's no need, obviously, to be raising rates, but because the job market overall outside of the wage
question is still healthy. I mean, you've got unemployment at a -- what? Five decade, half century low -- that doesn't mean that it's time to be
slashing rates aggressively either, just to get wages and inflation back up.
QUEST: But Chairman Powell talked about other Central Banks who are cutting rates. This idea that because the ECB is likely to do some more
easing. The Bank of England, certainly, if we get to a no deal Brexit. This is the Fed wanting to be what? Ahead of them?
SEBASTIAN: Well, the thing is -- I mean, he didn't really elaborate on it, Richard. He really just mentioned it a bit, but it was crucially important
that he did. And we actually heard, Richard Clarida a few weeks ago, go even further than that, and say that we don't want to get too far behind
them because of the integration of capital markets.
When you have, you know, monetary policy, much more accommodative in the E.U. or Japan, capital flows into the U.S., the dollar gets stronger, and
of course, that can impact exports.
QUEST: Paul, investors broadly expect another rate cut. If you look at this, according to stats from CME Group, the market is saying, "The chance
of a quarter cut is around 73 percent for September."
Bearing in mind what Jay Powell has said -- I mean, I was at the Stock Market today, Matt Cheslock and all of them down there expect a second one.
Bearing in mind what the Chair said today, and we see the market reaction that this is -- they have cold water poured on them from a great height.
LA MONICA: Yes. And it's obviously in some respects, though, going to be possibly a self-fulfilling prophecy if the market continues to have days
like this, and if there is no resolution or if things get worse between the U.S. and China with trade, if President Trump continues to tweet nasty
things about Jerome Powell, even though Powell is not going to respond directly to the President, he said that he is here to stay, by the way --
you'd have to think that a rate cut in September is more likely because it's the unofficial mandate of the Fed to keep the global financial markets
happy and that bull, you know, just steadily marching along.
SEBASTIAN: You see the topics, Richard, he kind of avoided the market pressure and the President and he did just respond just before we came on
air to a question about that, about the pressure from the President to not only cut rates, but to stop quantitative tightening, which they've also
done. He said, "We don't conduct monetary policy to prove our independence."
QUEST: They say that. This is the problem. They say that, do we believe them? I suppose we do in the sense of, they're not so obvious as to do
that. But you don't ever -- you never stop -- I remember Stan Fischer saying to me, you never really know, just what little inkling at the back
of the mind of an FOMC member wants or maybe we should just get the President just to shut him up.
SEBASTIAN: Yes, I was going to say, Stanley Fischer said it recently, didn't he? That this could cost the Fed its independence, cutting the
positive impact on the economy from cutting rates might be wiped out if there's a hit to the Fed's independence. This is an extremely difficult
balancing.
LA MONICA: I think the good thing if you want to call it that, about this situation, this strange situation we find ourselves in right now, Richard
and Clare, the Fed is obviously reacting to the market.
The market and the President are on the same page. So, Powell can basically dance around this question.
QUEST: Well, you say --
LA MONICA: He can dance around the Trump question by saying, "Well, if you look at what's happening globally, you look at bond yields," he can justify
that the Fed's next move not because the President is yelling at him on Twitter, but because the market is yelling to buy some stocks.
QUEST: But what do you mean?
LA MONICA: President Trump by the same token can say, "Hey, look, I got him to do what I wanted." But it's not necessarily because he is a lone
wolf crying for rate cuts. The whole market wants more rate cuts so Trump is agreeing with them, so it's not as if he is forcing the Fed's hand. The
market is, Trump is just along for the ride. That's my political observation.
QUEST: Right, but when you --
LA MONICA: But one that will most probably work.
QUEST: Right. But when you say the market is forcing the issue. I mean, the Fed looks at interest rate expectations, it looks for example, at the
yield curves.
LA MONICA: Yes.
QUEST: Does it really look at the equity markets?
SEBASTIAN: It definitely does, Richard, and this was addressed in the press conference today. He said, "Look, don't look at this rate cut as an
action on its own. We have been essentially loosening policy throughout this year by adding the word 'patient' into the statement," and that he
said has contributed to an improvement in financial conditions he called it.
But what essentially he is talking about is the rise in the S&P 500 this year, which I think is up about 20 percent. He took some credit for that.
[15:10:05] LA MONICA: Yes, the Fed doesn't want to be killing the bull market prematurely. But you know, also obviously rates are still much
lower and negative in many cases around the world.
So even with this rate cut, you could argue that Fed Monetary Policy is too tight, and to your point, I don't think the Fed is going to get ahead of
that. They're behind the curve in that regard, and they're never going to catch up unless you cut rates to zero and then go below that, I mean, but
what good does that do? You don't want to be in a contest with the ECB how low you can go? That doesn't do anyone any good.
QUEST: The best in the business, Paul La Monica, Guru La Monica on the market, and our own Fed watcher, Clare Sebastian putting it beautifully and
succinctly. Thank you, both. Thank you. We'll have more on the Fed later in this hour.
In Europe, slowing growth is raising expectations of an economic stimulus package from the ECB. One of the things we've just been talking about.
And you -- look you'll see the reason why. E.U. numbers, the Eurozone grew just two tenths of a percent in Q2. It suggests faster growth in the first
few months was a blip.
A slow economy is holding down inflation as well. Manufacturers in particular feeling the pressure from -- those trade tensions are back
again.
Meanwhile, the British Prime Minister Boris Johnson, I still find it difficult to say that after all these years, let's try that again. The
British Prime Minister Boris Johnson is spending the week touring the U.K. trying to reassure voters about his Brexit plans, which increasingly point
towards a no deal.
Today, he met representatives of the main political parties in Northern Ireland as businesses continue to warn about the dangers of a no deal
Brexit. Airbus's Chief Exec says it's obvious and no deal is lightly. And he urged the E.U. governments should step up preparations.
The U.K. car industry is hitting the brakes. Investment is down 70 percent in the H1 of the year. The auto productions dropped by a fifth. And the
pound, well, have recovered, but having dropped very much for a two-year low, and that's hurting British tourists when they go abroad. U.K.
companies import goods and materials -- the usual issues -- relating to that.
Edwin Morgan is Interim Director General at the Institute of Directors, which is urging the government to help smaller firms. So, when the Prime
Minister says he is going to turbo charge for a no deal Brexit. Look, I'm tempted to say to your members, you've had three years with the knowledge
and possibility of a no deal Brexit, what have you all been doing?
EDWIN MORGAN, INTERIM DIRECTOR GENERAL, INSTITUTE OF DIRECTORS: So our members span the range of businesses, larger businesses have prepared more.
For smaller businesses, really the message you get back from them is what are they preparing for?
And for one thing, no deal has been the opposite of the government's policy for the last three years and it is actually still not the government's
policy. Although I think they are sort of waking up to the reality that no deal looks very likely, if not the most likely outcome.
But if you're a small business, you know, the message I get talking to my members is, what am I preparing for? How do I prepare? The government
information is too technical. It doesn't really speak my language. I haven't got the money to do it, you know, I've got to look at the business
as usual.
So, that's why we said, you know, if the government is serious about this, they need to provide some financial backing for small firms.
QUEST: Okay, but that's where you come in, isn't it? Because you do have the expertise, you do have the knowledge to say to a small manufacturing
company in the Midlands or an exporting company in Newcastle, well, this is what you need to be doing. This is what you need to be thinking about.
These are the preparations that you put in place, so that you will be able to continue to export the necessary paperwork and documentation and the
like.
MORGAN: Yes, absolutely. And we've been providing members with guidance throughout the process, and certainly the feedback we get is that actually
businesses, if it's written in their language, if it's more understandable, coming from a business group, it is probably more useful than government
guidance.
But you know, we can only do so much and frankly, actually, we need to know, over the next few weeks, we need to know a lot more about what the
government's no deals plans are because we don't know all of them yet. And we just need those details.
QUEST: But hang on, hang on a second. Edwin, hang on. Hang on. Hang on. You're on notice now from the Prime Minister that unless the E.U. drops the
backstop and changes the withdrawal agreement, it will be a no deal Brexit.
Now, this is the equivalent of a man walking in front of you know, like in the old days of the horseless carriage, standing with a trumpet and waving
a flag, you now know, there's a very real possibility of that come October 31st.
MORGAN: Absolutely. And I mean, that's actually what we've been saying to our members for months is that the risk or the possibility of no deal was
kind of being underrated, I think by lots of people in in the U.K., lots of businesses.
So we've been telling them, you know, you really should be starting to prepare. But you know, the message didn't get through for a long time. I
think people just thought, you know, either there will be a deal or what on Earth does no deal mean? And I think that's the important thing right now.
No deal is not certainty. It's just a -- no one has ever done it before. It just more uncertainty. It's a blank page almost.
[15:15:19] MORGAN: But you know, we've been urging people to, but I think, they need a lot more info.
QUEST: Is it too late to prepare? Is it too late to prepare now?
MORGAN: It's never too late to prepare, and certainly, any preparations done now will help businesses in the event of no deal, but it's certainly
pretty late in the day. Yes.
QUEST: Edwin, thank you. We'll talk more. Please come back and help us understand the machinations as we get ever closer. Thank you very much.
Now, there's one thing I do need to just clarify. A few seconds ago, when I said the British Prime Minister Boris Johnson -- it's difficult to say
that -- of course, I wasn't making a political comment, what I was referring to, of course, was the extraordinary nature of the events.
Boris Johnson has wanted to be Prime Minister for many years, ever since he was a child at Eton, and the fact that he actually got it after such
difficult circumstances, well, that's the extraordinary part that I think most people would agree in Britain.
When we return, the beginning of the end for the world's biggest passenger jet. The CEO of Air France KLM tell me why he is retiring his Airbus A380s
and the iPhone is no longer the driving force behind Apple's success, instead, it's all through its services, as we continue.
(COMMERCIAL BREAK)
QUEST: It is less than a year into his tenure as Air France KLM's group, and CEO Ben Smith's turnaround plan seems to be bearing fruit. The shares
are up eight percent higher in Paris today after the airline's Q2 earnings rose more than expected. Falling costs were mainly the reason.
Air France also revealed it is revamping its fleet. It is retiring it's 10 Airbus A380 Super Jumbos. I spoke to Ben Smith, and he told me that
decision was simply a matter of economics.
(BEGIN VIDEOTAPE)
BEN SMITH, CEO, AIR FRANCE KLM: The amount of money that we were looking at in terms of investment over the near term to ensure that these
airplanes, you know, we're competitive in the markets where we fly. We require a 30 to 40 million euro cabin investment to bring the products up
to, you know, industry standard and then the maintenance investment around engines and the airframe, it could be another 50 million euros per
aircraft.
And then when you take into account the operational challenges we have with a small fleet, the fact that Airbus has decided to discontinue making the
A380, we made the decision that it was best for the group to retire the airplane and not make these very expensive investments and to replace the
airplanes with more efficient current technology.
[15:20:33] QUEST: When you arrived at Air France KLM, you arrived to a group and a series of carriers that are in some trouble. They have great
legacies, they have great roots, they are great -- everything. But the group was and arguably still is in trouble. How are you turning it around?
SMITH: When I arrived last September, so about 10 months ago, Air France, the Air France side of the business was in the middle of a major social
crisis. And you know, they had a very big strike last year costing in excess of 300 million euros, and quite a number of outstanding contracts
that have yet to be successfully negotiated.
So there was a big focus on finding stability on the social side of Air France and that, I am happy to say has been achieved.
QUEST: Finally, I also want to talk about the group. You know, at the end of the day, the Air France KLM group does not or has not in the past, seem
to operate as smoothly as say the Lufthansa group with the Austrian and the Swiss or even the AIG group with Iberia as the other major airline.
And the clearest evidence of that then, no matter how much the airline made tonight is the fact that the Dutch government bought a stake. Now that
might be in the past, but I think you might have -- you might agree that you know, more needs to be done to make Air France KLM operate as a single
group.
SMITH: Yes, I think we made some very good steps. You know, I'm the first non-French CEO of the group. You know, I do not have a direct role with
the operations at Air France nor with KLM. So, we are -- this is a new position at the group. We do have a non-executive chair that was in place
before. And we've really clarified the managerial governance of the group to better set up so that we can optimize all the strengths of the different
brands that we have.
So this is an important first step. And then, you know, when you look at the power of some of our assets, you know, in particular, our joint venture
with Delta, across the Atlantic, you look at the power of the sales and revenue management teams that we have. You know, I think we can compete
just as effectively as Star Alliance and One World in the market from which we can be.
QUEST: Right. But that's exactly my point then, that is the issue, isn't it? It's getting both sides of the Air France KLM group to be more
effective, so that gets one plus one equals three or four. And the argument would be that so far, that hasn't happened. And that's what
you've been brought in to do.
SMITH: Correct. So, you know, we have three brands at the group, you know, obviously, Air France KLM are the two biggest brands that we have.
But it's not just leveraging the power of the combination of Air France KLM. It's also fully leveraging the two operations we have with Transavia,
as you know, in Europe, the very competitive low cost part of the business.
So, this is -- Air France KLM has not been as agile and as competitive as some of the other players in Europe, and this is obviously one of the major
objectives that I have.
(END VIDEOTAPE)
QUEST: Ben Smith of Air France KLM. Apple beat expectations with its third quarter results. It's putting out an optimistic forecast. The
company says it is even seeing business recover in China, where the trade war with the U.S. has hit demand.
Look at that up three percent $215.00. Shares are retreating a little from the earlier highs, but it's by and large, it is the overall market downturn
that's pulling them back. But it's still a strong performance. Shelly Palmer is here. What did you like about the Apple results last night?
SHELLY PALMER, CEO, THE PALMER GROUP: What I think is, it just says Apple is running a business. They're not just about iPhones, they can withstand
a little downturn in the iPhone business, which is good because they have a downturn in the iPhone business.
But Apple Pay seems to be holding its own and iPads and Macs of all kinds would be holding their own. They're in business. They're doing a good job
and they're running a very efficient supply chain.
QUEST: Right. But -- so, I looked at the numbers, so the iPhone is roughly 47 percent to 48 percent now of revenue.
PALMER: Something like that.
QUEST: So it's under $26 billion, so it's under 50 percent. But the risk has always been wearables and services cannot really make up that
difference in dollar for dollar or can it?
[15:25:17] PALMER: Well, look the whole -- first of all, they're going to have to come up with some version of a way that that does work because the
whole global smartphone market has taken a turn down. People just don't need more stuff. The phones are not innovative in the way they used to be.
They're iterative. So, they're all having slightly better screens, and they're all having slightly better battery life.
The new iPhones, I'm sure will be awesome. But they're not going to be awesome enough for you to turn in your old phone. And you know, Samsung is
finding that, too. They're making amazing phones. Samsung is making some of the best phones ever in the history of the world. And people are like,
"That's expensive, and I need a phone. When I need a phone, I'll get it." No one is running out to get a phone. So Apple --
QUEST: They haven't worked out the trade. I know Apple is playing around with this. But they haven't worked down the car mentality. You know, you
used to trade in your old car as --
PALMER: I don't know if that's -- I'll push back a little, Richard. They have actually a fairly good get a new phone every year program at Apple.
It does two things. One, it tells you you're going to get a new phone every year, which means they're going to make a new phone. And it also
puts a needle in your arm like an addict because ultimately you're paying $60.00 to $70.00 a month for your iPhone, whatever flavor you bought, and
you're paying in 12 payments.
And the only way out of that vortex, by the way, the only way out of that vortex is to hold the phone for two years, which nobody wants to do.
So Apple does kind of have a trade in policy. Verizon has a policy very close to it that you can get into -- I should say program, not a policy --
a program you can get into where you can get a new phone every year. But everybody doesn't need a new phone every year, not now. Phones are good.
They are. And then like, if you've got a relatively new phone, you probably don't need a new one. And everybody who makes phones is feeling
that right now.
QUEST: Right, so Tim Cook -- he has been the CEO now for over a decade or so. He steadied, he has grown, he has taken the company into new markets.
HE is enormously respected. Apple is very much would you say on the front foot at the moment?
PALMER: Yes, you've got to give Apple a lot of credit for where they are. And honestly, it's a supply chain company and they are supply chain
masters. They're just doing a great job making stuff and making margin with this stuff.
So, if you're in business, and you say, "Well, okay, there's two ways I can make money. I can charge more or I can make it for less." He is doing
both.
QUEST: Quick question for now, and a quick answer. Samsung, it screwed up on the Note, whatever it was that --
PALMER: Well, back in the day. Yes, well, they have some explaining --
QUEST: And it's the folding --
PALMER; So they didn't up on the folding phone. He gave them to people like me, who said, "Hey, it's not quite working," they took it back. They
fixed it. And now they're going to bring it out again.
QUEST: Down two and a half percent in the market, and revenue is down some 50 percent. Revenue is down 50 percent.
PALMER: Yes. They have some work to do. But they are making some great stuff and they're going to have an unpacked event in a couple of days. I'm
excited to see the new phones and we'll see how it goes.
QUEST: You put me in place today. Good to see you.
PALMER: It could happen.
QUEST: Make the most of it. All right, it's the first time since 2007 that the Fed has started -- begun a lowering cycle. Now, it's a very
different set of reasons. We'll go through those reasons after the break. It is QUEST MEANS BUSINESS, live from New York.
(COMMERCIAL BREAK)
[15:30:00] QUEST: Hello, I'm Richard Quest, there's more QUEST MEANS BUSINESS in just a moment. The Fed cuts rates for the first time in a
decade and insists it's not simply caving into pressure from President Trump.
Also buyback clampdown, a U.S. lawmaker says if firms want to buy back their own shares, it should cost them. As you and I continue this evening,
this is CNN, and on this network, the facts always come first. The U.S. Federal Reserve has cut its interest rate target for the first time in more
than a decade. The widely expected cut announced a short time ago comes after repeated calls from President Trump for lower U.S. interest rates.
Another round of U.S.-China trade talks have wrapped up with no agreement. The White House says the talks were constructive. It is planning to hold
more meetings in September. Earlier, the Chinese Foreign Ministry hit back at Donald Trump's claim that China had reneged on its promises.
(BEGIN VIDEO CLIP)
HUA CHUNYING, FOREIGN MINISTRY, CHINA: It's clear for all of us to see who has been the fickle one, who breaks his own promises in more than a year of
China-U.S. trade negotiations. China's position on the trade negotiations has been consistent.
(END VIDEO CLIP)
QUEST: North Korea's warning the U.S. and South Korea to cancel their upcoming military exercises. Pyongyang also launched two short-range
missiles, the second launch in less than a week. The U.S. is downplaying the launch, so has pledged to maintain its military readiness.
The sixth wife of Dubai's billionaire ruler is seeking an order to prevent the forced marriage of one of their children, and a non-molestation order
for herself. According to the British Press Association, Princess Haya appeared in the high court in London. The Press Association also reported
that the princess asked that their two children be made wards of the court.
(BEGIN VIDEO CLIP)
HALA GORANI, HOST, HALA GORANI TONIGHT: The Fed reversing course once again and cutting the rate. The reason, the same as it was for the last
rate cut, fear of a recession. The concern is the slump in the housing market this time, rising delinquencies on subprime mortgages and the credit
crunch could combine to drag the economy down.
(END VIDEO CLIP)
QUEST: When Hala was saying that, she could have had no knowledge, none of us did of how bad things were going to get, how close to financial
Armageddon we were. But it was 2007, and it was the last time the Fed kicked off a rate-cutting cycle. In the last hour, Jerome Powell and the
FOMC lowered rates by a quarter point.
And so, today's lesson, why the Fed has cut interest rates? Yesterday, we had 101, we were at 102, we're making progress. So, in September 2007, you
go back to there and you see the rate cuts starting. It was a surprise half point cut. Ben Bernanke knew he had to do something. It had to be
dramatic.
Little did he realize that rates would come down virtually to zero, and then so it has been. Look at that length of tenure of no interest rate
moves at all. And the economic picture in 2007 wasn't so different over since it was GDP today, 2.1, then it's 2.2, unemployment, we have a
difference there, 3.7 versus 4.7.
[15:35:00] And the S&P over one year gain, well, tenure was up 15 percent, up 7 percent, but remember, that was probably up more until the recent
volatility. So we have to discount that to some extent. The economic scenario between the two, let's not push it too far.
GDP in 2007 and '8 and '9 would fall by 4 percent, unemployment would hit 10 percent and the market would drop 50 percent. We need to put this into
context. What is the justification for today's rate cut? William Foster is with me, good to see you, good to see you --
WILLIAM FOSTER, VICE PRESIDENT & LEAD U.S. ANALYST, MOODY'S: Sir, thank you --
QUEST: He's vice president and lead U.S. analyst at Moody's. First of all, do you think today's rate cut is justified?
FOSTER: Yes, I think that the Fed's being precautious and in terms of trying to ensure that the economic expansion in the U.S. is going to
continue to be relatively strong, that it's going to achieve its dual mandate, which focuses on maximum employment and price stability.
And you know, there's interesting comparison there and the risk that they're focused on today really have less to do with the domestic concerns
like they did in 2007, and more on some of the external factors that were - - that they mentioned today in the statement.
QUEST: But it's interesting, isn't it? Because you don't often get the Fed, which is concerned with the $20 trillion domestic economy. In the
light of implications of global developments -- well, like the trade war, isn't it? He's talking about the trade problems.
FOSTER: That's certainly one aspect of it. Global growth has been slowing more generally. You've been seeing manufacturing sector in particular,
slowing. Obviously, there are concerns about Chinese economy has been slowing more generally in the last few years as it shifts to balance the
economy, the EU, obviously, has its own concerns and obviously there's Brexit.
So, there's a whole host of factors externally that one can point to, but certainly, the trade issues between the U.S. and trade policy coming out of
the U.S. have exacerbated these concerns.
QUEST: How much is today's cut an implicit acknowledgment that they made an error raising rates in December?
FOSTER: And that's a point that everyone likes to point to. I think what's really important is to go back in time and to look at what the data
was saying at that time in the second half of the year. And compare that to what you saw in the first half of the year, and ultimately, I think the
Fed was making the right decisions based on the data that was coming in.
QUEST: Do you think it was right to raise in December?
FOSTER: I'm saying based on the data that was available --
QUEST: Right --
FOSTER: At the time, and we have to put ourselves back in that position, and what one could expect for the future. And trade policy is a big
uncertainty that was very difficult to forecast. So, ultimately, you can't -- there's hindsight bias, you can't make a call today based on --
QUEST: Right --
FOSTER: What you know now, but clearly, they're trying to accommodate for the future and that's what's most important.
QUEST: The real problem here is the perception that the Fed, even the scintilla of possibility is responding to political pressure from the
president. Listen to what the chair said today about that.
(BEGIN VIDEO CLIP)
JEROME POWELL, CHAIRMAN, FEDERAL RESERVE, UNITED STATES: We never take into account political considerations, there's no place in our discussions
for that. We also don't conduct monetary policy in order to prove our independence. We conduct monetary policy in order to move as close as
possible to our statutory goals, and that's what we're always going to do.
We're always going to use our tools that way, and then at the end, we'll -- you know, we'll live with the results.
(END VIDEO CLIP)
QUEST: He may believe that to be true, but most people are starting to say they've caved.
FOSTER: Well, I think, ultimately, you know, the Central Bank independence for the Fed is really important, right for credibility in the markets for
them to be effective in their monetary policy. And so recently, we believe that it continues with the case with the Fed.
What's different today is that you have a president that is much more vocal and critical. It's a challenge for the Fed, but you know, ultimately, they
are focused very much on the data and making their decisions based on what they think is best for the economy --
QUEST: Right --
FOSTER: And achieving a dual objective.
QUEST: Do you think that the Fed needs or should or perhaps might exhibit its independence more in the sense of, you know, it is the silent one in
the room. So, the only time you hear about it is when Jay Powell gets asked one question in a two-day testimony where -- would you go if you're
pushed? And he says no. I mean, is there anything -- would the market like this? Or maybe the market is not concerned, you tell me.
FOSTER: Well, I think that -- you know, the central bank independence is very important for the markets. It's very important for the strength of
the U.S. institutions and ultimately, people's belief and faith in the U.S. --
QUEST: Right --
FOSTER: Treasury market, everything.
QUEST: So --
FOSTER: So, I think it's very important.
QUEST: We saw today, I saw -- I think, the ten-year was down 20 basis or something, not a huge amount, but it is heading down by down towards 2
percent again, I think it's 2.2 or 2.02. Is this a one and done rate cut do you think -- or do you think there'll be maybe one or two more to come?
[15:40:00] FOSTER: Well, that was the big question today is, you know, everyone was expecting the 25 basis points, but what's going to happen in
the future? And I think what the Fed made quite clear is they're going to continue to focus on the data --
(CROSSTALK)
QUEST: Yes, but it includes only data they won't cut again --
FOSTER: Well, that's maybe your view. But we're sure it's going to come in --
QUEST: But what's your view?
FOSTER: Our view is really -- it's going to depend. I think fundamentally, the Fed would prefer not to have to cut because they want to
preserve the economist's space to have for -- if the economy starts to go into recession, they want to have the capacity to respond quickly through
their tools.
QUEST: And what about its other quantitative efforts in terms of the run- off of the balance sheet? You could stop doing that, not with a certain amount of liquidity back and again, that would -- the tightening or you
could speed up the run-off of the balance sheet to put more money back, and what would you think there?
FOSTER: Well, I think what they tried to do makes a lot of sense. They have decided to align the policies both from the interest rate front and
from the quantitative easing front to ensure that they're not at odds, and so, you know, that makes a lot of sense. But those are two tools that the
Fed has at its disposal if it needs to respond to, you know, worse kind of conditions moving forward.
QUEST: The Fed now has what? Two to two and a quarter. So, you've got a quarter point, you've got a few rate cuts if you need it. Haven't you?
FOSTER: You do.
QUEST: You've got -- you've got a bit of give there, if you should require it, but not comfortable. Would you agree?
FOSTER: Well, based on history, yes, this is obviously -- it's a much lower amount of space that you have relative to the zero --
QUEST: Yes --
FOSTER: Lower bound, and that's really the concern for the Fed right now, is that this is not the normal position that you'd be at this stage in
expansion and they're trying to work with that.
QUEST: Good to see you, sir, thank you very much indeed.
FOSTER: Thank you --
QUEST: Much appreciate it, thank you. It's Biden versus Harris. It's round two. There are eight other candidates. Will they ever get a say?
And we're looking, will they make a break-through in the second presidential debate? We'll be looking at it in tonight's encounter and back
at Tuesday's exchanges when corporate America came under fire. QUEST MEANS BUSINESS.
(COMMERCIAL BREAK)
QUEST: We're hours away from the second night of the CNN Democratic presidential debates, and another ten candidates are going to take the
stage at the Fox Theatre in Detroit. Joe Biden and Kamala Harris will be in the spotlight. Now, the fiery exchanges of course of the last debate
last month. On Tuesday night, it has being set up as a battle between the progressives and the moderates. And that's exactly what we got.
(BEGIN VIDEO CLIP)
[15:45:00] JOHN DELANEY, FORMER CONGRESSMAN & PRESIDENTIAL CANDIDATE: Democrats win when we run on real solutions, not impossible promises.
When we run on things that are workable, not fairytale economics.
SEN. ELIZABETH WARREN (D-MA), PRESIDENTIAL CANDIDATE: I don't understand why anybody goes through all the trouble of running for president of the
United States just to talk about what we really can't do and shouldn't fight for.
(CHEERS)
(APPLAUSE)
(END VIDEO CLIP)
QUEST: Elizabeth Warren and another progressive, Bernie Sanders, both made it clear, life for corporate America must change.
(BEGIN VIDEO CLIP)
SEN. BERNIE SANDERS (D-VT), PRESIDENTIAL CANDIDATE: If anybody here thinks that corporate America gives one damn about the average American worker,
you're mistaken. If they can save 5 cents by going to China, Mexico or Vietnam or any place else that's exactly what they will do.
(END VIDEO CLIP)
QUEST: Jeff Zeleny is in Detroit. Listening to last night, I was struck by the venom in many ways, admittedly, it's to be expected from Elizabeth
Warren who calls herself a capitalist, and Bernie Sanders who's an avowed socialist. But there was real anger by some of them at corporate America.
JEFF ZELENY, CNN SENIOR WASHINGTON CORRESPONDENT: No question about it. I mean, it's not really a surprise. Bernie Sanders is largely been on this
same argument for most of his career, most of his life in Washington, and Elizabeth Warren, of course, has been as well.
She blames Wall Street and believes they really have never been held accountable for the financial collapse at the beginning of the Obama
administration, at the end of the Bush administration. So, look, that was a playing out there as we just saw was a central argument that is going to
certainly -- wasn't resolved last evening.
It's going to be, you know, going on, the soundtrack of this Democratic primary campaign. So, you saw the moderates, you know, on the right,
trying to throw some jabs. What I was most struck by, Richard, was Bernie Sanders, Elizabeth Warren, they are competitors but they locked arms in
this because they both believe by making this same argument, and it essentially amplifies it.
You know, John Delaney and others were essentially a proxy for Joe Biden tonight, we get the real thing here --
QUEST: Right --
ZELENY: When Joe Biden will be on stage. It will not be as much of a similar discussion about corporations as last night. He'll have more of a
back and forth with Kamala Harris and Cory Booker.
QUEST: So, actually, while you were talking about Joe Biden on stage, that's exactly what he's doing. He is doing his walk-through --
ZELENY: Right --
QUEST: At the moment, we're watching. We know he has to perform with more verve and vigor than he did last time. I mean, but Kamala Harris is
obviously going to come back again for a second round. From your speaking to the campaigns, have they been putting a bit of pep into Biden?
ZELENY: No doubt. I mean, he knows that he has to have a stronger debate performance. I was talking to one friend of Biden's who said, look, you
know, the weak debate performance was probably the best thing that could have happened for him because it gets him to focus on this.
That's generally what candidates say after they have a weak debate performance. So, we'll see. He has to bring it tonight. He has to show
that he is up to the task of, you know, really moving along this quickly. His campaign has been telegraphing all these, you know, attacks he's going
to be pointing out.
On Cory Booker for example, the senator from New Jersey, he was the former mayor of the town of Newark in New Jersey, and I'm told that the former
vice president, he's, in fact, been talking about and going to be going after his crime rate there in Newark. He's going to be going after Senator
Harris' -- really, she's tried to have several different positions on healthcare.
But it is sort of the -- you know --
QUEST: All right --
ZELENY: Agility of Joe Biden, that's also going to be tested tonight. He's the leader in this race, he's not necessarily a strong front-runner.
Some Democrats think he's a place-holder leader here. He'll have to prove that he's the front-runner tonight.
It's a low bar from last month in Miami, but he still has a pretty high expectations to me, Richard.
QUEST: Jeff, it will be -- last night was an excellent debate. They really did get to some deep substantive issues for policy wonks and geeks
like me. Good to see you, sir, thank you very much indeed --
ZELENY: OK --
QUEST: Don't miss, it is round two of the Democratic debate, it's live tonight on CNN, coverage begins at 8:00 here in eastern United States, a
9:00, 10:00, 11:00, 12:00, 1:00 in London, 2:00 in Europe, 3:00 as you move towards the Middle East, it -- and will be a repeat of it of course later
in the day.
There's a buy-back boom on Wall Street and some investors say it's getting out of hand. Just how out of hand in a moment.
[15:50:00] (COMMERCIAL BREAK)
QUEST: A U.S. Senator is announcing a bill to clamp down on share buy- backs in corporate America. The number of firms repurchasing their own shares is ballooning. Senator Sherrod Brown says it's time for employees
to get their share too.
(BEGIN VIDEO CLIP)
SEN. SHERROD BROWN (D-OH): When companies raise wages, Wall Street punishes them when companies lay off workers, Wall Street rewards them.
Corporate executives focus on short-term performance in the stock market, even when that comes at the expense of a long-term success of the company,
its workers and our economy overall. Their main goal is to increase stock prices quarter to quarter.
(END VIDEO CLIP)
QUEST: And though there as you say, the billions of dollars that corporate America hands back to shareholders are reaching dangerous levels. The S&P
500 companies are on track to buy $940 billion, yes, of its own stock in 2019. Apple and GE are amongst the most generous.
The shares has been good for share prices, it could backfire if the Fed raises rates down the line. Matt Egan is here. And why do buy-back
shares?
MATT EGAN, CNN BUSINESS SENIOR WRITER: We are living through a truly epic period of buy-backs right now. As you mentioned, $940 billion coming this
year, according to Goldman Sachs, that's on top of $800 billion last year. Both are records. We're talking about nearly $2 trillion in two years and
why? Well, listen, they don't know what else to do with the cash.
They are spending some of it on the real economy, which, of course, was the intent of the tax law, at least the stated intent, right? They are
investing some of it in factories and paying workers more, but ultimately, the bulk of their money is going to repurchase stock which is a way to
return extra cash to shareholders.
QUEST: OK, but you could also do it by dividends. You could also pay a -- you can pay a greater dividend or a special dividend, and I know that there
are tax -- that there are different tax treatments of that.
EGAN: The tax treatment is one reason, but here's the other reason. What happened last year? GE had to basically wipe out its dividend, knock it
down to just a token amount and that was seen widely as this negative- negative statement because it was, about the health of the economy and I'm sorry, the health of the company.
And so, with buy-backs, companies can turn it on and off. They'll say, oh, we're going to buy back X amount over three years, we don't actually see
how much they buy back until the end of each quarter. And so, with buy- backs, they could turn it on and off without spooking anyone. With dividends, it's the other way around.
You can't really adjust that dividend once you make that announcement. So, that's why buy-backs are seen as much more attractive for companies, at
least.
QUEST: OK, but what's the downside? If you're -- if you're sitting with 8,000 billion -- 50 billion on your balance sheet, it's not your money, it
is shareholders money. So, what else are you going to do with it? Your Cap X is where it's supposed to be. You're training at R&D is where it's
supposed to be. What else are you going to do with it?
EGAN: That's exactly what the companies are saying. We've seen Lloyd Blankfein and others say, listen, that money doesn't disappear, right? It
is going back into the real economy, but I think that what we're seeing actually on the left and the right because Senator Marco Rubio, Republican,
has also been critical of the buy-back boom.
We mentioned Sherrod Brown as well, people think it's getting a little bit out of hand, but what's interesting is that even Goldman Sachs is
suggesting that perhaps this is getting excessive because they point out that shareholder returns now have actually exceeded free cash flow.
[15:55:00] That is the first time that's happened during the current cycle.
QUEST: It just occurred to me that may be some viewers aren't entirely familiar of exactly how the whole buy-back thing works. So, the company
says it's going to buy back shares. And it goes into the market and buys them, and what? It also invites existing shareholders to offer them up?
EGAN: Right, so what happens is they retired those shares and the benefit for the individual shareholder is that it actually increases their own
holdings, right? Because, now there are fewer shares outstanding. So, it lowers the supply and actually creates this persistent demand as well. So,
for Wall Street, they love the buy-back boom.
QUEST: Love buy-backs, buy-backs. Last few minutes of trade on Wall Street. We are off the lows of the day, but you can see here. I mean,
we're pretty grim down here, it was over 300-something. Only Apple is at the best of the session, up 2.3 percent. That's on its results last night.
We talked about them earlier in the program.
Everybody else is down, but it's down low amid the market. I can't give you any particular reason for one or the other or back or forth or
whatever. They're all down and that is the reason, it is the Fed, and it's fascinating to watch just how that happened when Jerome Powell made his
statement about mid-cycle policy adjustment. Profitable moment is after the break.
(COMMERCIAL BREAK)
QUEST: Tonight's profitable moment. The market is having a child-like tantrum. Stamping its foot because Jerome Powell did not indicate that
there were more interest rate cuts to come. It was rather foolish, he was never going to say that. We always knew there was a possibility of one and
done.
But now, of course, we have to look at the data, and we have to look at -- see what's happening elsewhere with the ECB, with Brexit, with the trade
war, and bearing in mind that there's going to be no further trade talks before September.
Well, I suspect the possibility of a trade of another cut in September is likely. But Jerome Powell is never going to say that today. And that's
why we're seeing a market that are priced in more, now having to reverse. But it is the first cut in the past ten years. And that is QUEST MEANS
BUSINESS for tonight, I am Richard Quest in New York.
Whatever you're up to in the hours ahead, yes, I hope it's profitable. We are just about the low of the day, down 300. The day is done.
(BELL RINGING)
END
END
