Fed Raises Interest Rates for Fourth Time in 2018; Stocks Tumble After Fed Rate Decision; GlaxoSmithKline Splitting into Two Firms After Pfizer Deal Closes
RICHARD QUEST, ANCHOR, QUEST MEANS BUSINESS: We are in the last hour of trade on Wall Street. Those of a nervous disposition should turn away. The market which had been as much as 300 points higher after the Fed interest rate decision came out, rates went up. The market rallied for a split second, and then whoosh, this is the lowest part of the day so far. It's not only the Dow. The S&P, the broader market, the NASDAQ, they are both sharply lower. This last hour of trading is the dangerous time, and these are the reasons why. This is what's moving the markets. The Fed stays the course. Rates are going up, but it cuts growth forecast next year and the likely number of interest rates. Jerome Powell says there are signs the economy is softening. Mohamed El-Erian is here and he is going to help us understand. An IPO dear. The second IPO, the biggest IPO in history is a spectacular flop. We're live in the world's financial capital, New York City. Gray day down markets on Wednesday, it's the 19th of December. I'm Richard Quest. I mean business. Breaking news in the last hour. Fed is on course as policymakers raised rates for a fourth and final time this year. They shrugged off a barrage of criticism from President Trump and increased volatility on the stock markets and a slight softening in economic growth forecast, 2.25% to 2.5% is now the Fed funds range. Whilst the Fed still believes some rate rises are needed, policymakers expect only two in 2019, one less from previously forecast. In a statement, the Fed said it is monitoring the global economy. Its exact words were, "We will continue to monitor global economic and financial developments and assess their implications on the economic outlook." That is a change from the last statement. A moment ago, Jerome Powell warned the Fed sees some signs that growth in the U.S. is slowing.</s>JEROME POWELL, CHAIRMAN, U.S. FEDERAL RESERVE: Despite this robust economic backdrop and our expectation for healthy growth, we have seen developments that may signal some softening relative to what we were expecting a few months ago. Many FOMC participants had expected that economic conditions would likely call for about three more rate increases in 2019. We have brought that down a bit and now, I think it is more likely that the economy will grow in a way that will-call for two interest rate increases over the course of next year.</s>QUEST: Markets gave up the earlier gains as the Fed decision was published. And what's interesting about this it was up as much as 382 points, and then at 2:30, but immediately after the actual - I mean, the market sort of stages a little mini rally-ette and then falls out of bed and went out of the worst so far of the day. The Fed expects economies to scuffle, this has spooked investors, and if you look at commodity prices and copper and gold, they are also down, which is slightly unusual because obviously, an uncertainty, then that is easier for them. Arguably, in times of inflation or higher inflation or slower economies, you might want gold as a hedge, but that doesn't seem to be the play at the moment. I'm guessing there's more behind all of this, which is why we have Mohamed El-Erian here to help us understand. First of all, what the Fed says is it's going to slow down.</s>MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER, ALLIANZ: It says it is going to somewhat slow down, but it came across more hawkish than the markets expected. And what you're getting now is a signal for markets, this is a policy mistake. And I think that's important. If you look at the turn around in stocks, if you look at the lower yields, if you look at the flatter yield curve, all that is flashing, be careful Fed. This may be a policy mistake.</s>QUEST: So that's the hawkishness to stick to the fourth hike this year.</s>EL-ERIAN: Three things. One is they deliver on a hike. That was expected. Two is, they reduced next year's rate hikes not from three to one, but three to two. And three is they still are going to overshoot the equilibrium rate over in 2020. So the market is saying, wait a minute that wasn't a dovish enough hike, we needed a more dovish hike.</s>QUEST: So when you say a dovish hike, would that have been don't raise four, but say you'll do one next year or raise four - raise the fourth, and say one next year and give us some language?</s>QUEST: I guess, what I'm trying to say is, the fourth rate hike, was it inevitable because of the political pressure that if they hadn't, they would have been in trouble?</s>EL-ERIAN: Yes, it was inevitable. So I don't think the market expected them not to hike, but they expected them to signal a more dovish path from here. That is what they missed doing. Look, you have to understand, Central Banks have gone from being the only game in town where they can do no wrong to a being in a lose-lose situation like they are today. And that is the new realities and it is because we have over relied on them and they simply cannot deliver now what they used to deliver.</s>QUEST: What justifies what we're seeing now, where a market has gone from up 300 to down 490 points with every prospect since we're in the last hour of this getting even worse?</s>EL-ERIAN: Yes, it's what I call the concern about a policy mistake. That the Fed is going to hit the brakes too hard by hiking too much next year.</s>QUEST: But if we accept that there is an element of uncertainty about the strength of growth next year, how does a Fed - you're in touch with these people - how do they make that sort of mistake?</s>EL-ERIAN: They make a mistake because they have to deliver too much. They simply cannot deliver what the market wants them to deliver. I think you have to think about this as a no-win situation. And it comes against a background that we're coming from a year, 2017, where investors had it all. They had high returns, they had low volatility and the correlations were all in their favor. So this is just in my view a resetting to normal, but is a pretty painful one if you're along this market.</s>QUEST: It is almost inconceivable that we've gone from growth of 3.5% to 4% to where people are -- reputable people are talking of a recession next year and it's not easy or obvious to see what's led to this.</s>EL-ERIAN: So what's led to this is weaker Europe, weaker China and concern about still banks. That's what led - I don't buy the recession next year. Don't buy it.</s>QUEST: But it makes no difference whether you're up half of one or down half of one, it'll still going to feel very slow, very sluggish and you may start to see unemployment going up.</s>EL-ERIAN: I am willing to take a bet that we'll see unemployment going down next year. That the issue is less the economic outlook and what we, in the marketplace call "technicals." That is people being overextended. The paradigm changing in China and Europe and suddenly everybody wants to get back on-site at the same time.</s>QUEST: Now, stay with me. Bear with me, all of this comes amid a backdrop of trade war with China. Alan Greenspan says there are no winners at the end of a trade war. He spoke to Julia Chatterly.</s>ALAN GREENSPAN, FORMER FEDERAL RESERVE CHAIRMAN: If you want the most efficient world economy, you have zero tariffs. Trade wars say between parties A and B, out of a necessity hurt both. The winner of a trade war is one who is hurt the least.</s>JULIA CHATTERLEY, ANCHOR, CNN: Could Trump force then to lower tariffs?</s>GREENSPAN: Could he do it?</s>CHATTERLEY: Yes.</s>GREENSPAN: I would say he doesn't understand that well enough to know. You have a situation now which I don't know where it's going.</s>QUEST: If Alan Greenspan doesn't know where it's going, then it begs the question does anybody? Julia is with me. Mohamed is still with me, we seem to have entered a new - a new era now, a new stage in whatever economics was going on.</s>CHATTERLEY: Yes, I mean, we've been there all year. We've been in a stage where Central Banks globally have been chucking money into the system and supporting the economy and now, they're somehow trying to take it back. We're in uncharted waters and I think this was illustrated really clearly today for Jay Powell. Trade is just one of the risks here.</s>QUEST: They've been taking it back for some time. I mean, first of all by stopping buying and then the tapering and we had the taper tantrum and they should have managed this better.</s>EL-ERIAN: Oh, I think they've managed it well. The problem is that now, it's not just the Fed that's taking it back. The ECB is doing it in a much more serious manner. So the real question mark is how does the system adapt? As Julia said, to two systemically important Central Banks sucking liquidity out.</s>CHATTERLEY: I do argue though that Jay Powell was never going to win today because if he would have come out and have been as dovish as the market was clearly hoping, and really said, "Look, okay, perhaps, we're even going to pour it here," then the markets would have gone ...</s>CHATTERLEY: ... wow, he's really scared now and he's really seeing something dramatic going to happen next year and as you've kind of pointed out, things are slowing, but we're not talking - we shouldn't be talking about a recession in 2019.</s>QUEST: Well, all right, so do you see recession at all or are we talking - because some people are suggesting - I mean, this is the difficulty. I can put five of you in a room and I'll end up with eight opinions on whether or not there's going to be a recession or not. And it's towards an ex post facto decision anyway.</s>EL-ERIAN: So let me give you a strong opinion.</s>QUEST: Go on.</s>EL-ERIAN: The U.S. will not go into recession. Europe may well, the U.S. will not.</s>QUEST: Okay, so taking that the U.S. will - I will take that to the bank.</s>EL-ERIAN: Do so.</s>QUEST: We will take that to the bank, but Julia, you're hearing as I am from those traders on the floor who are basically saying there is more to wash out here than before it's over.</s>CHATTERLEY: Yes, I mean, there's a real concern here I think and you've illustrated this as well that you have a Federal Reserve here who has got a lot of uncertainty that they're going to keep hiking rates and they are going to hike rates into a slowdown. So policy uncertainty from the Central Bank is one fear. China, what's going to happen with the trade concerns between the United States and China another factor. Europe, you've already mentioned it. I mean, there's so many different risk points. I mean, Jay Powell talked about it. Cross currents. How does that impact his decisions? We don't know at this stage.</s>QUEST: So, is this a moment where one would prefer to have firm economic hands on the wheel? And as we know, we have Mario Draghi leaving next year. We've got Jerome Powell who, fair dues all around, I agree with your point but he's still an untried and untested quantity and a maximum streams of pressures. Steven Mnuchin, we'll leave that there. And the rest of the economic team.</s>EL-ERIAN: So we're having a lot of transitions. We are having five major transition in the context where some important policymakers are also changing. I think the signal is this is like Julia said, a very uncertain time, markets are going to be very volatile, and you better be able to stomach this volatility because it's not going away.</s>CHATTERLEY: And that's the other thing, I think. We have been going up for a long time. Markets have been going up for a long time. We've forgotten what volatility feels like. We've forgotten all of that.</s>QUEST: Oh, we never had - no, no.</s>CHATTERLEY: Yes.</s>QUEST: No, no. Volatility of this sort of --</s>CHATTERLEY: Yes.</s>QUEST: No, no. We've not had volatility of this sort of magnitude for a very, very long time.</s>CHATTERLEY: That's what I am saying. That's what I am saying - well, fine, the 10 years markets have been effectively going up, so there's going to be an adjustment phase where people are nervous and I think we're in that, too. Q And there we go, we know the nerves are there. Let's go back to that, the 30. You know it is a bad day where the only gainer is Verizon. Because it is the last gasp of rush to quality, or not for quality, but rush to defensive stocks governed by Verizon, the telco. We'll see more from you in just a moment. Julia, great to see you. Thank you. Thank you. Now, second biggest IPO of all time, what a disaster. Softbank officially took its mobile unit public in Tokyo and the shares fell 15%. It makes it one of the largest IPO flops in history. The Chief Executive blames rough market conditions. Softbank has the usual habit of being in the right place at the right time, unfortunately that didn't happen today. One of the earliest investors of Yahoo, which made the company a fortune are back to Verizon. It won exclusive rights to carry the iPhone in Japan, a major win for the chief executive, Masayoshi Son and it was one of the early investors in Alibaba, taking a 32% stake. Will Ripley explains what went wrong.</s>WILL RIPLEY, SENIOR INTERNATIONAL CORRESPONDENT, CNN: Softbank obviously didn't want things to go this way on the first day of their eye-popping IPO. This was the world's second biggest share sales after Alibaba back in 2014. But it comes at a really tough time for stocks. You look at the numbers. Japan's Nikkei Index down 6% this month. Down 13% from its early October high. And then there are some other factors at play as well. Softbank had an embarrassing service outage just two weeks ago. It lasted more than four hours. They announced last week they might be pulling Huawei gear from their network. That potentially could be a very costly move. And then you have this controversy over this $90 billion venture fund with Saudi Arabia focusing on emerging technologies. Softbank is under pressure to cut ties with the Saudis after the murder of Jamal Khashoggi. They're saying they're not going to do that, but it's just yet another obstacle that could be spooking some investors in Japan's third largest wireless network. Not to mention the fact that the Japanese government is trying to encourage wireless providers to lower their prices. I can tell you I've lived in Japan, very expensive to have a cellphone there, but that maybe changing because the government is pressuring mobile carriers there. The Softbank CEO, Masayoshi Son, he has been down this road before. He has overseen a vast tech empire that has overcome difficulties to reach really tremendous success and with this IPO, he's raising about $23.5 billion compare that to Facebook. They raised $16 billion ...</s>RIPLEY: ... went they went public back in 2012, and what Masayoshi is doing is he is pumping that cash into companies that are developing really life changing technology. Everything from self-driving vehicles to robots. I remember being in Japan in 2014 and doing a story about pepper, the emotional robot that looked at my face, read my mood supposedly and then tailored its conversation with me based what it thought I was thinking. It's that kind of AI - artificial intelligence that Masayoshi Son says he is devoting 97% of this time and brain to in areas like healthcare and agriculture, transportation, satellites, even e-commerce. He really is a strong believer that someday robots will be smarter than people and he believes that the robot population will eventually rival the human population, a slightly terrifying thought for those of us who grew up watching movies like "Terminator," but in Japan, where robots are widely accepted, they are part of the culture and a lot of people are excited about the future that robots could help provide. And that's where all of that money that was invested in Softbank's IPO will be going towards in the coming years. Will Ripley, CNN, Hong Kong.</s>QUEST: It is "Quest Means Business." British businesses say they've reached the point of no return and activating their plans for a no-deal Brexit. Later in the program, protesters say democracy is slowly being chipped away as the government passes a law to make people work longer hours. A Hungarian Foreign Minister is with us to go into those details after the break. The E.U. and U.K. are currently heading straight for a no Brexit deal. Now, that's the logical conclusion if you look at the way both sides are stepping up their contingency plans. And the European Union has now announced a raft of temporary measures in case things turns our. So for example, it those flights between the U.K. and E.U. would be allowed for 12 months to ensure basic connectivity. Haulers could drive freight into the E.U. for nine months without having to apply for permits and some financial regulations such as those for derivatives trading will remain unchanged for two years to avoid disruption. Bianca Nobilo is in London.</s>QUEST: This sounds - contingency plans, yes, but they're sort of putting together a package that would be acceptable in the event that they can't do a deal.</s>BIANCA NOBILO, CORRESPONDENT, CNN: What we've seen from the E.U. today has been pretty constructive and it does address some of the main concerns like issues about transport, of goods and people, airlines, and what they will be able to do in the event of a no deal and crucially residency rights and that's a really big concern, of course for all the millions of E.U. residents in the U.K. and vice versa. Why they're both doing this and doing it in such a thorough way I think is because both the E.U. and the U.K. are well aware that they need to reassure their own citizens of their preparedness. But in the U.K., they feel people who advocate for a cleaner Brexit and potentially a no deal that the negotiating position of the U.K. is immensely strengthened if they can project that they are fully prepared for this scenario whether or not the British government can convince anyone at this stage remains to be seen.</s>QUEST: Right, but if everybody's putting in place - humor me with this question, Bianca. If everybody is putting in place no deal contingencies such that it will be bad but not dreadful, doesn't an argument develop, well let's just take a clean Brexit, take the lumps and sort out and we know things will manage on?</s>NOBILO: Well, we heard from business leaders today in the U.K., the five biggest business groups like the CBI and the British Chamber of Commerce underscoring how disastrous a no deal would be, saying they're watching in horror what Parliament is doing and how it seems to be hurtling towards this no deal Brexit. So I understand your point, and yes, there are many MPs that I've spoken to that are concerned that the more a no deal scenario is normalized, it may seem a little less scary, they're concerned that it might seem like a more viable option in some people's eyes. But if we look at the small and medium size businesses, you just simply do not have the reserves to spend this money, preparing for a scenario which may or may not happen and to try and get legal advice and prepare customs forms and things like that, it isn't going to be an appealing prospect to people who aren't convinced.</s>QUEST: But, Bianca, she can't get the deal through Parliament. You and I will be sitting outside Parliament on January - the week of January 14th, ready to talk about this in detail. She can't get it through Parliament. Nobody really likes Norway or Canada plus. The prospect of a no deal - what happens?</s>NOBILO: Well, so no deal is the default option. It's enshrined in law. Yet many members of Parliament keep saying Parliament will not allow no deals to happen. But how can that be because they'd actually need to amend legislation and pass it in order to prevent that outcome. So it does seem to be the default option as it stands and Theresa May is trying it seems two strategies. She's trying to use the stress of a no deal and make it realistic as we've seen in the last few days of these preparations and relying just simply on time. The time is running out, the clock is running down and she's hoping that she will be able to get this through the more - the closer that Britain gets to leaving E.U. and the more likely crashing out with a no deal it seems.</s>QUEST: We'll talk more about it. Don't go too far. Thank you. Bianca in London. Mohamed El-Erian is back. Is in your view, is it going to be as disastrous as everybody says if there is a no deal Brexit?</s>EL-ERIAN: Not over the long-term. I think over the long-term, this actually is what makes most sense because you have Europe that was interested in a marriage with the U.K., an ever deeper union. And you have the U.K. that just wanted to date for a long time, give me the access to your markets, but I don't want this ever deeper union. And I think at some point you have to resolve it. The critical thing is the longer this no war no peace, the longer this war of attrition continues, the more problematic it is for both the U.K. and Europe because no one is focusing on what you need to do today to adapt to a changing world. Everybody is totally consumed by Brexit.</s>QUEST: That's on the European side and the British side to some extent. But they're right to be totally consumed by Brexit because if this goes wrong then everybody will be more than consumed by it, they'll be suffering from it.</s>EL-ERIAN: But then the wrong negotiating paradigm. You have the U.K. unable to deliver a unified Conservative Party and therefore unable to deliver a Parliament. You have Europe that doesn't want to give concessions that make the U.K. a big precedent. You cannot continue down this road. It doesn't get to a solution.</s>QUEST: The European Union has problems across it - the range. Italy seems to have finally settled over banks. Shortly we're going to have the Hungarian Foreign Prime Minister on the program who will be talking about their problems. Do you see the Union as being ...</s>QUEST: ... in peril is too strong, but do you see it being in serious trouble with all these various issues?</s>EL-ERIAN: So let me give you a simple number. The European Commission expects Europe to grow by 1.9%. I don't think they'll even get to one. And the reason why - think of a football analogy. You have a team that's not playing as a team. They can't get their act together on regional issues and your top five players are all problematic. The U.K., France, Germany, Spain and Italy. Would you bet on that team? That team is headed towards a relegation zone. That team is not going to win the division.</s>QUEST: Recession in the E.U.?</s>EL-ERIAN: I think high risk of recession in the E.U ...</s>QUEST: And it will certainly feel like that anyway because with slow growth, it will feel just miserable.</s>EL-ERIAN: Correct. Correct.</s>QUEST: Which brings us lastly to this question of trade. Now, if the U.S. plays this anti-China card to its nth degree, you must be very concerned at that point because the trade is really the last thing that's holding everybody together?</s>EL-ERIAN: So the nth degree means two things to me. First, a trade war or the threat of is no longer in the journey, it is the destination, that's problem number one. Second, the nth degree means it's no longer an economic issue. It's a national security issue. So the Chinese will worry about, "Oh, we are being contained," and they are going to start taking steps to counter that and the U.S. will ...</s>QUEST: How far off are we? How far are we from the nth degree by your definition?</s>EL-ERIAN: I don't think we're there yet. I think we're likely to get a short-term compromise and then in a year's time, this issue is reopened.</s>QUEST: It's all a bit of a mess. Are you going to be able to get some time off and have a rest over the holiday break?</s>EL-ERIAN: I love this mess. This is what makes me energetic. I am no different from you. We love this stuff. It's really interesting. It is so good to go back to a time when markets and the economy are so intriguing. And they are really intriguing right now.</s>QUEST: Perhaps, the most intriguing, as we go into a break, perhaps the most intriguing in your thought, the Fed managed to drop the ball today. They should have known better.</s>EL-ERIAN: Yes, I agree with what you're saying and that's what the market does ...</s>QUEST: You said it.</s>EL-ERIAN: I said the market fears a policy mistake, but the Fed has been carrying an enormous burden that it should not carry on its own.</s>QUEST: You're feeling sorry for them.</s>EL-ERIAN: A little bit, yes.</s>QUEST: Let's go to the market. We're down 321. Good to see you, thank you.</s>EL-ERIAN: Thank you.</s>QUEST: Really good to have you. Have a wonderful Christmas.</s>EL-ERIAN: You too. Thank you.</s>QUEST: The cries of Brexit hard didn't go into the European stock markets. Green across the board. The FTSE gained nearly 1%, the best performer of the day was Milan's FTSE. It was lifted by a breakthrough in the controversial budget deal between Italy and the E.U. Mohamed El-Erian, you're always on the show. I think we give you - have a ding at the bell.</s>EL-ERIAN: My dream come true. Not a very good one. Can I get a second try?</s>QUEST: Go on. Which is more than the Fed did. All right, thank you. When we come back, all I want for Christmas is democracy. Hungarians on the streets claiming their rights are being eroded. Their country's Foreign Minister will answer these in just a moment. This is "Quest Means Business." Good evening to you.