Transcript for Dow Jones drops 800 points, sharpest drop of the year
To try to understand exactly. What's happened in the markets were Jordan right now they David Wetzel he's a director. At the Brookings institute and David thanks so much for taking a time this afternoon to speak to us I wanna be dean with a topic I was gonna ask you about any way. But fortunately for us the commander in chief just tweeted about it and this is the yield curve so here's a the president just tweeted. And let's start there he writes we are winning big time against China. Companies and jobs are fleeing prices to us have not gone up. And in some cases have come down China it is not our problem though Hong Kong is not helping our problem is with the Fed raising too much into fast. Now she's slowed it cod. Spread is way too much as other countries say thank you in all caps to clueless Jed Powell and the Federal Reserve Germany and many others are playing big deemed crazy inverted yield curve. We should easily be reaping big rewards in gains but the Fed is holding us back. We will win again are right David this is where we turn to you. Explain to us this yield curve explain why the president is pushing right now Jerome Powell to actually do something on us. I let it trying to explain what's going on the markets and the economy but I'll take a pass and explaining what exactly Donald Trump. Means when he lets loose like this OK so what is the yield curve the yield curve is the relationship between short term interest rates. And long term interest rates usually long term interest likes like that ten year. For the twenty year are higher than short term interest rates because people demand some reward for taking lending money for a long period of time. When the yield curve is inverted. That is one long term interest rates. Are lower than short term interest rates that's usually seen as a bad sign it seemed that the markets expect. The Fed is gonna have to cut interest rates are a lot it and why would defend do that because the markets think the economy's in bad shape. And so the reason everybody's all exercised about this the markets which are sometimes right. Sometimes get carried away are suggesting that the economy is headed for trouble. The Fed is going to have to do what Donald Trump has been demanding cut interest rates can cut them a lot. So the irony here is that the reason the markets think the economy's in bad shape. Is not because they think the Fed is during out they think that Donald Trump. Is ruining the world economy with his trade policy. And shaking up business people so much that there are reluctant to invest in soon will be reluctant to hire. One out I just gonna mention because yesterday you saw how well the markets reacted. The announcement that the United States who is going to delay those 10%. Tariff on Chinese goods where as we head into the holiday season the president announcing that. I'm before he went on his trip yesterday but. Where exactly is the Fed at the moment because I just read your report up on Brookings with your colleagues you write it to the Fed governors are on board what with working now on the YCC and the former. Two former -- of the Federal Reserve Ben Bernanke and Janet Yellen have also supported this do we know mayor Jerome Powell stands at this moment in time. Writes I think there are two different things here we have to separate them. The current inversion of the yield curve is the question is is the market telling the fans the economy's really in bad shape. Or is the market saying we expect the Fed to cut interest rates and we're just getting there before the Fed actually announces so as to short term question. Yield curve control which does use the words he'll quote it's something a little different it's what happens. When the economy gets really bad. The Fed cut short term interest rates to zero as they didn't 2008. And then what do they do. And what they might do is say we've cut short term interest rates to zero. And revenue due as the Japanese have done we're not gonna last long term interest rates rise above some levels at 1% but that's not really a relevant issue right now. The relevant issue now is. Does Jay Powell look at the markets and look at the economy and say wow. This is getting worse fast. She Germany's had a lousy quarter there are GDP shrinking. The trade thing is really shaking up business and that we've got to get ahead in this thing can cut interest rates a lot maybe half a percentage planner next meeting. Or in a chain Powell say the markets are carried away here. I feel like I'm looking at a hall of mirrors. I don't want the markets to tell me what my best judgment is about where the economy's going after all unemployment is still very low. Inflation the latest reading is as suggesting it's picking up a bit. And the latest survey I saw an economist from Bloomberg and Wall Street Journal and others say they put the odds of recession in the next twelve months at one and three. The tires than it was before. But the economists who usually don't see these things coming to be sure. Are not yet saying that we're on the cusp of recession so it's a hard call for him to make and the president makes it harder by all the shouting and tweet. And temple as neighboring this over to you because we know the president is going to campaign on the economy heard that David said just there. 13 is now where we're looking in the next twelve months. In the next twelve months from the president's going to be very focused on his reelection effort and that is going to torpedo attack that campaign pledge term if the economy does go down the tunes. Actually it is not only are you an icing up but a lot of people close to him have predicted that. You know the outcome might be not what he wants if the economy tanks and we know that he doesn't have a great relationship. With Powell he has called him clueless son is on sweater and even you see former fed chair is uniting. Behind policies attacks are appropriate but John not gonna go away and great president and his advisors are very. Aware. That the economy needs to be in good shape for him though when the auctioning it. And David lastly you just because I know people are obviously watching their Ferraro and -- there watching the stock market today. When is the next meeting of the Federal Reserve that something could happen. Of the next meeting is in September but I just make a point here. But lady the president has been trying to say if the economy falls apart its defense fault. But I think what's happened to him on I'm unfortunately for him is all this tariffs have been trained staff. Is stepping on that story so people are gonna say the economy was doing okay. And the Fed did a little bit to try and open and then you screwed it up of all this. Tara sable railings I think the reason he's getting so little bit agitated it is his idea that he can tell voters its defense fault not mine is now under question. Is now going Capote because of burying the anomaly tariffs he that. Penny slot a sense David west's all over the Brookings institute thank you very much sir we appreciate it.
This transcript has been automatically generated and may not be 100% accurate.