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QUEST MEANS BUSINESS

U.S. Fed Cuts Interest Rates For Second Time Since July; Saudi Official Says There's No Question Iran Sponsored The Attack On Its Oil Facilities; New York Fed Steps In To Rescue Overnight Lending Market; Twenty-Six Children, Two Teachers Die In Liberian School Fire. Aired 3-4p ET

Aired September 18, 2019 - 15:00   ET

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


[15:00:13]

PAULA NEWTON, CNN INTERNATIONAL HOST: So, the Fed Chair says he is still data dependent and the market says, eh, really? It is the final hour of

trade on Wall Street. U.S. stocks are firmly lower. As you see on the day, we saw a bit of a dip down in that last hour as the investors were

watching the Fed. And this is what investors are watching now.

As we said, the U.S. cuts interest rates. Investors want to know how many more cuts are left. The New York Fed steps into rescue with the overnight

lending market. It is the first time that's happened since 2008. And Saudi Arabia says there's no question Iran sponsored the attack on its oil

facilities. Live from the world's financial capital, New York City. It's Wednesday, September 18th, I'm Paula Newton in for Richard Quest, and this

is QUEST MEANS BUSINESS.

All right, I think many people would still consider it an open question, are we -- is the Fed in a rate cutting cycle? We are still listening to

the press conference there, but after indicating July's move might only be a one-off adjustment, Jay Powell and the Federal Reserve had just lowered

U.S. interest rates for the second time in two months.

The Federal funds rate was lowered by a quarter point and will now hover somewhere between 1.75 and two percent. Now, that's still well above what

of course President Trump has demanded. He wants rates at zero or negative and says anything else is in his words, unfair to the economy. He tweeted,

"Jay Powell and the Federal Reserve fail again. No guts. No sense. No vision."

Chairman Powell meantime says the Fed will continue to respond to slowing global growth, and of course, that fluctuating uncertainty over trade.

(BEGIN VIDEO CLIP)

JEROME POWELL, U.S. FEDERAL RESERVE CHAIRMAN: If you look at the things we're monitoring, particularly global growth and trade developments, global

growth has continued to weaken. I think it's weakened since our last meeting. Trade developments have been up and down and then up, I guess, or

back up perhaps over the course of this intermediate period.

In any case, they've been quite volatile, so we do see those risks is actually more heightened now. We're going to be watching that carefully.

We're also going to be watching the U.S. data quite carefully, and we'll have to make an assessment as we go.

(END VIDEO CLIP)

NEWTON: Data there it is, again. Our Clare Sebastian is here. I mean, the market reaction has been you know, rather tepid, I would say, it went

down. But what did we get from a Chairman who has always vowed to be transparent here.

CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: Yes, Paula, I mean, he is turning a really fine balancing act, and this is amazing. As you know

where The Federal funds rate itself was really a bit of a sideshow. People were really looking for what he was going to say in the press conference.

And what the policymakers are saying about the future part of interest rates. So here we have some of the projections, and you see what's really

interesting, we're now in the range 1.75 to two for the Federal funds rate. They really see that that is going to stay through 2020.

So that is quite significant. The policymakers don't really see much in the way of adjustments going forward in order to keep the economy on an

even keel. I think that's worth pointing out.

But also, there was a really interesting part of this and that was dissent. We saw dissent on the FOMC committee in both directions, one participant,

James Bullard wanted a bigger cut. He is the one vote over here and two of them wanted no change at all. So that is certainly significant.

And if you look at the dot plot, which is something that Fed watchers really do focus on, that shows that seven members wanted another cut.

Seven out of 17, so it's not overwhelming. Five wanted to stay where we are now and five actually foresee a rise by the end of 2019. So that

complicates the matter for Jerome Powell. He is not only facing a market, which is really boxing him in, in terms of these decisions, but he is also

facing splits on the committee.

And he said that is a function of where we are now. This is a complex scenario for the Fed to manage, and that is why you're seeing such diverse

opinion on the committee.

NEWTON: Clare, in terms of that dissent, how seriously should we take that because it obviously -- he said it very clearly, I'm going to continue to

look at the data and everyone on the phone is going to continue to look at the data?

SEBASTIAN: You know, I think the dissent, it's certainly unusual. He has been seen, Jay Powell, so far as Mr. Consensus. It was only really in June

that he got his first ever dissent as Fed chair.

So it is something that has to manage. That is part of the Fed Chair's role in this job. It is not just his decisions. He has to build consensus

on the committee, but he said, look, this is a function of divergence of opinion. That is healthy. We continue to listen to these diverse views.

But I do think going forward, it is something to watch because the Fed is also facing pressure from the President, as you pointed out, pressure from

inside, pressure from the markets. It really just adds to these kind of -- this confluence of forces on him.

NEWTON: Clare, good analysis there. Really appreciate it. It gets us set up for the next conversation quite well. We'll talk you through the market

reaction here.

[09:05:10]

NEWTON: Markets dropped, of course after the news of that rate cut. They had been only slightly lower for most of the day. As you can see there,

all markets taking off about a half a percent. As you see down almost 150 points on the Dow. That was down about 60. That was just before the

decision. The S&P 500 and NASDAQ also fell.

U.S. Treasury yields though something we should really look at more closely curbed some of their losses after the Fed projected no more rate cuts next

year.

Investors expect the Fed to do nothing at its next meeting in October. According to stats from the CME Group, the market is saying the chance of a

quarter point cut is around 27 percent and it puts the chance of a no change at 50 percent.

Anthony Chan is the former Chief Economist at JPMorgan Chase and he joins me now. A lot to get through here, and yet what was your overall sense in

terms of the Fed Chair trying to do what he has continually done, right, in saying, look, I'll look at the data. If I think I need a rate cut, there

will be a rate cut.

ANTHONY CHAN, FORMER CHIEF ECONOMIST AT JPMORGAN CHASE: Well, I think the Fed Chairman is looking at a lot of things. He is looking at trade

uncertainty. He is looking at the data. He is looking at as many things as he can. And the data right now suggests that there's not an urgency for

a rate cut.

The trade uncertainty suggests more rate cuts are necessary, and then of course, he has to deal with that committee. Now, the good news is that the

voting members of the committee seem to be on his side. Yes, there are some members that are not excited about a rate cut, but those are non-

voting members.

So if he wants to execute another rate cut, yes, he will get some dissension but let's not lose sight of the fact that one of the

dissensions, wanted a 50 basis point cut, and that of course, was Bullard so that offsets the other two that didn't want a rate cut.

NEWTON: I guess if we do the math on the three dissenters that'll work out. Anthony, what's your take, though now? I know you're watching the

data clearly as well. Some people would say why didn't he move more aggressively? Others are saying -- especially given the muted inflation

that he talked about again in the press conference?

CHAN: Well, we have energy prices picking up. So that'll pick up prices a little bit more. But basically, the economic data is telling us we have a

two percent or so overall economic economy right now, in terms of growth. That is not something that can justify negative interest rates or zero

interest rates.

The trade uncertainty probably justifies another rate cut between now and the end of the year. But it's very hard to justify a zero interest rate

cut or let alone negative interest rates.

NEWTON: Does it worry you that if he cuts anymore, though, that there isn't going to be a lot of ammunition left if -- if we do get any kind of a

global crisis?

CHAN: I really don't worry about that, because unlike when I was an economist at the Federal Reserve, they have a lot more tools now that

they're anxious and willing and ready to use right away.

NEWTON: You think that much has been learned since your tenure there?

CHAN: It is not question of whether it's been learned or not, these are the tools. Now, they may not be as effective the more you use them, but

there are different tools that when I was at the Federal Reserve in the New York Fed, and of course, the Washington Fed, they did not even think about

using them.

So those things give me a lot of comfort. And by the way, the Federal Reserve almost has no choice because other Central Banks like the European

Central Bank, the Bank of Japan, they're all sort of in an easing mode, and it's not that they have to follow them, but they can't ignore those moves.

NEWTON: I'll bring up the U.S. dollar. Is there any concern there? I mean, it's spiked again, just right after this announcement. Do you have

any concerns that that dollar is just still too strong?

CHAN: I think that right now, it's not helpful. But in fact, it's pretty clear why the dollar spiked up slightly, and that's because Chairman Powell

gave the impression that he will only lower rates if the data justifies it. And he also pulled back and said, at this juncture, it doesn't appear to me

that the data is justifying it.

So what is the dollar going to do? It's going to go up, because less rate cuts mean that on a relative basis to other economies, we can justify a

stronger dollar.

NEWTON: But the U.S. economy can handle that because you know the President says we cannot handle this strong dollar.

CHAN: Well, there are two things that you constantly hear from Washington. One, this is the greatest economy we've ever had. We have the lowest

unemployment rate in 50 years, but we need zero interest rates. Now, one of those two things is not true. You figure out which one it is.

NEWTON: I'm going to throw it back to you, though and talk to you again about the politics. Do you think he is behind that now? I mean, of

course, the President tweeted again, he will continue --

CHAN: Again, I never like to get into the politics. But any President --

NEWTON: But in terms of a Fed chair, in terms of someone working at the Fed, do you think they can see past whatever tweet whatever is said in the

press conference?

CHAN: Oh, there's no question that people at the Federal Reserve, even some that I've actually talked to say that they're seeing beyond the

politics, but in all fairness to the politics, whether you have a Democrat or a Republican in the White House, guess what? They like to get

reelected.

And if you have an economy that's even at risk of going into a recession, it certainly doesn't help the chances of reelection. So I actually am not

surprised that the President is continuing to sort of tout and argue for a lower interest rate because that's what anybody in the White House --

Democrat or Republican would do.

[15:10:07]

CHAN: Maybe the President is a little bit more vocal, but it's something that any President would do -- Democrat or Republican.

NEWTON: And you're confident the Fed is going to it as background noise and continue to just --

CHAN: I feel that the President -- the President will continue to put some of the pressure. Then the argument is, would the Federal Reserve sort of

react to it? Maybe a little bit at the margin, but not necessarily push the economy into negative interest rates if it doesn't require it. I'm

very confident the Federal Reserve will see beyond that noise.

NEWTON: Okay, Anthony. So good to see you again, as always, especially today. Appreciate it. And we will have more of course, later this hour,

Nobel Prize winning economist Robert Shiller will join me right here despite the warning signs flashing. You'll want to hear from him because

he doesn't think there will be a recession next year.

Moving on now to Saudi Arabia, and it says it has the goods -- the proof on Iran. Riyadh has been showing images of the alleged Iranian weapons it

says were used in the attack on Saudi Aramco facilities.

Now the launch point of the weekend attack is still unknown they say, but Saudi Arabia says it could not have come in any way shape or form from

Yemen.

In Washington, meantime, President Trump says he has ordered new sanctions on Iran. Tehran says it had nothing to do with Saturday strikes which hit

the world's largest crude oil processing plant.

Aaron David Miller is a former U.S. State Department negotiator. He is also a CNN Global Affairs Analyst. And he joins me now live from

Washington.

Okay, take us to 35,000 feet here. We had the press conference today from the Saudis looking at what they say is evidence and yet really unclear

exactly what that evidence points to in terms of did the strike actually come from Iran, and the United States already arguing it doesn't matter.

Iran's fingerprints are all over it.

AARON DAVID MILLER, CNN GLOBAL AFFAIRS ANALYST: The evidence does matter in trying to justify the prospects of the projection of American military

force. Military action and response requires an evidentiary standard that the administration my judgment is obligated to meet, but I'll give them the

benefit of the doubt. Let's assume the worst. The Houthis claim responsibility for this, but it was actually an attack with cruise missiles

and drones from an Iranian Revolutionary Guard Corps base in Iran. Let's assume that's correct.

The question in the end, once the evidence is presented, the administration makes its case is what are they going to do about it? To do nothing

obviously creates a new norm, a new baseline in which the Iranians and their proxies can direct fire, as you mentioned, a critically important oil

processing facility, oil and gas separator and have Saudi production you know, within several hours and seriously, shake the global oil markets.

On the other hand escalation, in an effort to deter, preempt or punish the Iranians threatens to trip into a conflict that can quickly get out of

control.

You have a risk averse President running for election in 2020. He doesn't want to war. He doesn't want to project American military power and upset

his base. He certainly does want a hike in gas prices or a major increase in oil prices. So I suspect, he is going to be strongly tempted to avoid

military action.

But again, even if we strike, even if it's a proportional strike, it's not going to answer the mail. And therein lies the dilemma for the United

States and for this administration.

NEWTON: This is an incredibly complicated picture, especially when you put it that way in terms of look, whether you do or you don't, you are still

right back at square one with Iran. And yet, how important here do you think the international consensus is?

I mean, look, on this show, we've been tracking just what countries in Europe have been trying to do just to sidestep the U.S. sanctions against

Iran.

MILLER: Right.

NEWTON: Now, the U.S. saying, hey, we're going to add even more sanctions. That is how divided the international community is right now about what to

do about Iran.

MILLER: Well, there's us and then there's the rest of the international community. You remember back in June when the Iranians were sabotaging oil

tankers, and there was talk of an International Maritime Force to basically protect shipping in the Gulf.

Well, I'm sitting here and it's now September, and I don't see any international response. I mean, the reality is there should be. The

Chinese are dependent on Saudi oil far more than we are. The Saudis and the Emiratis are the ones who are going to be on the line.

And the truth is, I take a very -- you know, having worked for Republicans and Democrats and voted for Republicans and Democrats, we have to be

extremely careful before we trip into another military conflict. We've been selling the Saudis billions of dollars in sophisticated military

equipment, largely prestige combat aircraft and the like. They still won't have an integrated air defense system.

[15:15:01]

MILLER: How is it possible that a few drones and some cruise missiles could take out Abqaiq so quickly and so easily? Where were the air

defenses? Where's the protection? We haven't thought this through clearly.

Final point, the President of the United States made a decision for political reasons and reasons of ego that he wanted to withdraw from the

Iran Nuclear Agreement, a highly flawed, but frankly, still functional agreement to constrain and restrain, not perfect Iran's punitive of search

for enough physical material and make a bomb.

Well, he made a judgment a year ago in May that he wanted out and he got out. But what he didn't bake into the cake, is the fact that if we're

going to strangle the Iranians economically, you know, this isn't Syria, you're not going to launch a few cruise missiles at some chemical weapons

sites and the Syrians aren't going to shoot back. This is a serious country that's determined to protect their interests.

And I fear and I think Mr. Trump does to, the possibility of a conflict that starts, gets out of control and ultimately is another unwinnable war.

NEWTON: Yes, sobering comments there, especially given the fact that Iran continues to use a word, bait, the United States at every turn. Aaron

David Miller, thanks so much for analysis.

MILLER: Thanks, Paula. Thanks.

NEWTON: Now, the Fed of course has had a very busy few days. Not only is it adjusting interest rates that we were just talking about, it is swooping

in with billions of dollars performing a rescue, not seen since the 2008 financial crisis.

And coming up, economic uncertainty is a big problem for one of the world's largest employers. A top official at Airbus tells us why he believes

London and Washington need to get a grip.

(COMMERCIAL BREAK)

NEWTON: OK, listen up because a crack has emerged in a murky corner of the global financial system and the New York Fed is scrambling to try and come

to the rescue.

Now, it has to do with rising costs on the overnight lending market. Let's go through this. This is where banks go to quickly and cheaply of course

borrow the money that they need literally, liquidity. Costs here are usually aligned with the Federal Reserve's interest rates, but this week,

they spiked to 10 percent, more than four times the Fed's target.

Now, the hope is that by injecting cash into the system, $120 billion so far, that they can lower costs and grease the wheels for lending. And this

kind of Fed intervention is unprecedented since guess when? 2008.

[15:20:10]

NEWTON: During that crisis when banks were worried other banks might collapse, so they wouldn't lend each other money, which is a normal

transaction in those overnight markets. Experts say the situation is less dire this time around and overall banks, they are of course, still pretty

healthy.

But is it still a sign that something is wrong. Speaking to me at the New York Stock Exchange, Matt Diczok from Bank of America said things are still

well within the Feds control.

(BEGIN VIDEO CLIP)

MATT DICZOK, FIXED INCOME STRATEGIST, BANK OF AMERICA: It was slightly elevated this week, but the Fed should be able to get it under control

without too much difficulty. But then it sets them up to whether they have to either set up a longer standing repo facility or potentially start

buying Treasury securities again to get more excess reserves in the system.

(END VIDEO CLIP)

NEWTON: Our Matt Egan is here. You know, that basically kind of echoed what Jay Powell just said when he was asked about it at the press

conference, what's the risk here? And why did the New York Fed had to move to intervene?

MATT EGAN, CNN BUSINESS LEAD WRITER: The risk is that the Federal Reserve loses control of short-term interest rates, right? That's how they conduct

monetary policy, and that -- if they actually lost control for a sustained amount of period that would deal a real blow to confidence.

And so that's why we've seen the Federal Reserve try to reassert some control, right? They had this $52 billion emergency style repo activity

yesterday. That was the first we've seen since the crisis. They came in today with another $75 billion. Jay Powell was talking about this during

the press conference just moments ago.

He said the Fed will not hesitate to do more. He also opened the door to doing kind of an increase of the Federal Reserve balance sheet as a way to

also relieve some stress that we're seeing in the market.

So listen, the Fed is on top of it, and they are certainly trying to reassert control.

NEWTON: Yes, and listening closely to that when he said that in terms of what he called organic growth on the books. You could almost hear the

market applauding.

The issue, though is most people are saying this is completely different from the 2008 crash, is it?

EGAN: In 2008, we saw these markets really break down, and that was because people were very concerned about the health of banks. They didn't

want to lend to each other, right? They didn't know who was going to collapse.

This is different. I mean, banks are making record profits. Balance sheets are really sturdy right now. This is really being described as more

of a plumbing problem. There just wasn't enough cash in the system.

The Federal Reserve had been shrinking -- it had actually been shrinking its balance sheet, so that was one of those issues that had been going on

in the background. It had kept the balance sheet steady for a little while now.

But then there were these sort of one-off events, right? We had corporate taxes. U.S. companies had a lot of money that they had to pay that was due

on Monday. So they took money out of the bank. The bank took money out of the Federal Reserve. And so that may have caused some of this liquidity

issue. Also, there's a lot of Treasuries out there, right? It takes a lot of bonds to pay for the trillion dollar deficits. And so that is also

another issue that may have been contributing to this.

NEWTON: Something that we will talk about with Robert Shiller coming up because apparently everyone seems to have forgotten all those massive

deficits we have.

Before I let you go, I mean, obviously, the New York Fed is going to continue to do this if they need to be doing this.

EGAN: Yes, that's what Powell said. He said that, for now, this is what they're going to be doing to try to calm the market down to inject

liquidity. They're going to probably be pumping in more money if we see those short term rates go above the Fed's target range.

But bigger picture, we may see the Fed at the next meeting announce an increase in the size of the balance sheet. This will be somewhat

controversial because it'll sort of be a return of QE, when they were expanding the balance sheet. This will be a little bit different. They're

going to be targeting short term rates now, but it is controversial because, you know, some skeptics say it is sort of like the Central Bank is

financing the Treasury Department's deficits.

NEWTON: Yes, and that will continue because even during the press conference, right, Jay Powell got a hard time about, well, didn't see this

coming and why did they have to come into the rescue. Matt, it's been a busy few hours. Thanks so much for coming in to digest it with us.

EGAN: Thank you.

NEWTON: Now, Airbus has a warning for both the U.K. and the United States. The airline makers Chief Commercial Officer told our Anna Stewart why he

believes Brexit and other potential trade hurdles don't exactly grease the wheels of successful businesses.

(BEGIN VIDEOTAPE)

CHRISTIAN SCHERER, CHIEF COMMERCIAL OFFICER, AIRBUS: As a large industrial company, we don't like uncertainty and no deal means uncertainty. But

fundamentally, what it means with our -- for our 13,500 employees here in the U.K., or for the six billion of work that we do perform in the U.K., is

the question of what would the consequences of Brexit be on the competitivity of our footprint here in the U.K.?

So, it is a longer term consideration that obviously as an industrial company, we will have to consider.

ANNA STEWART, CNN REPORTER: Would it have any impact in terms of where you make your planes? Will you move any production?

SCHERER: Well, we adapt to the best cost solutions that we can find. So if a particular site proves to be less performing than another one, yes, of

course we will move around, and that is exactly the question mark that we have when we face the uncertainty of a no-deal Brexit.

[15:25:12]

STEWART: How has the dialogue been between your business and the U.K. government? Is it a constant dialogue? Are you speaking all the time

about what's happening next and what you can expect?

SCHERER: We are a big stakeholder here, and we'd like to believe the U.K. government considers us an important industrial player here. We're a

perfectly happy U.K. citizen today. So yes, we have constant dialogue with the U.K. government. And we've expressed I think, our opinion about the

uncertainty of a no-deal Brexit explicitly.

STEWART: Okay, let's move from one headwind to another. Tariffs. So by the end of this month, we expect the WTO to rule that the U.S. can impose

tariffs on European goods as a result of course, there's no running case with Airbus. What will tariffs mean for your business and the industry as

a whole on aerospace parts, on aircraft?

SCHERER: Well, tariffs will be a hurdle for us in the beginning, then it will have ripple effects on the supply chain and I'd like to point out that

40 percent of what we procure comes from the United States.

So if Airbus is facing an impediment to doing business in the U.S., there will be an immediate negative effect on the U.S. aerospace industry, not to

mention the effect of higher aircraft prices on ticket prices affecting the consumer and therefore, the whole economic activity of the sector in the

United States.

The second point would be that if the U.S. on that side of the Atlantic puts up a hurdle to doing business, you would have to expect that the

European side isn't going to sit idle and there will be retaliatory measures.

And now, we have the two sides of the Atlantic fighting each other in a downward spiral. So as I was -- I have to tell you, we do not believe it

is a virtuous circle that's being created. We hope that this posturing will lead the parties to the negotiating table and we can finally bury the

hatchet.

(END VIDEOTAPE)

NEWTON: A symbolic language there. Now there's still no clear winner after Tuesday's Israeli elections. The top two parties are nearly tied

leaving Prime Minister Netanyahu's political future hanging in the balance. Former Prime Minister, Ehud Olmert will join me live.

(COMMERCIAL BREAK)

[15:30:00]

NEWTON: Hello, I'm Paula Newton, and there's more QUEST MEANS BUSINESS in a moment. When the Nobel Prize winning-economist Robert Shiller is here.

Despite the warning signs, he says he does not see a recession looming. And as Benjamin Netanyahu and Benny Gantz try to cobble together coalitions

in Israel, we'll hear from the former Prime Minister Ehud Olmert. But before that, these are the headlines at this hour.

The U.S. Federal Reserve cut interest rates for the second time since July, overgrowing worries of a potential global slowdown. Now, officials also

left the door open for yet another rate-cut this year, reinforcing the message by Fed Chair Jay Powell that policy makers would do whatever it

takes to prevent a recession.

Saudi Arabia is presenting evidence to back up its claim that Iran is behind the attacks on its oil facilities. Now a defense official in Riyadh

presented recovered debris, saying 18 drones and key here, seven cruise missiles were used in the attack, but he could not say exactly where they

were fired from, only that they did not originate in Yemen as Iran had previously claimed. Now, Iran denies involvement in the attack.

Twenty six children have died in a fire in a school in Liberia just outside the capital, Monrovia. Now, the children were sleeping in a boarding

school attached to a mosque when the fire broke out Tuesday evening. Two teachers also died. The president's press secretary told CNN there was no

fire and steel bars blocked the windows.

U.S. President Donald Trump has named a new national security adviser, Robert O'Brien will replace John Bolton who recently who resigned from the

job last week. O'Brien has been serving as the top U.S. hostage negotiator, and recently led the effort to get rapper ASAP Rocky freed from

prison in Sweden.

Israeli Prime Minister Netanyahu claims that he has now united the right- wing and religious parties into one bloc. This after Tuesday's elections have left his political fate uncertain. Now, the latest Israeli TV

projections give his opponent Blue and White Party leader Benny Gantz, a one-seat lead. That's right now, neither man though has a clear path to

form a government.

Ehud Olmert is the former Prime Minister of Israel and he joins me now. And here we are, back to the bargaining in Israel. I think this was, you

know, the prediction ahead of time that most people feared, that the do- over election wouldn't resolve anything. Do you think this next round of bargaining will damage Israel's interests at this point in time?

EHUD OLMERT, FORMER PRIME MINISTER OF ISRAEL: Well actually, Paula, I think that the elections yesterday were very important. I think that they

have determined the direction that Israel would take from now on. I think that Netanyahu is at the end of his service. It doesn't matter if the bloc

has one more or one less member in the Knesset.

Netanyahu will not have the necessary minimal 61 votes that are needed to form a coalition. And therefore, most likely, he's not going to form a

coalition, and he will not be the Prime Minister. Question is, and this is a serious question. Whether Blue and White, that had outstanding

achievement under the leadership of General Gantz will have the necessary 61 votes to form their coalition.

It is a serious question right now because they depend for the 61 votes on two different factions. On the one side, they are faction which has

increased its representation in the Knesset, well, 12 seats now and on the other hand, Mr. Lieberman, who is also increased his representation and is

considered to be one of the winners of these elections.

Now, the problem is that Lieberman will not Gantz if Gantz will depend on the Arabs.

[15:35:00]

The Arabs will not support Gantz if they will depend -- if he will depend on Lieberman. So, in a strange way, neither of the blocs presently, and I

emphasize presently, things change and the dynamics of politics in Israel is always unpredictable, but I think that it's likely that none of these

two will be able to form a separate coalition.

That is either a left wing or a right wing. The question is whether the two major parties, Blue and White and Likud will form a national unity

government. This also is quite questionable because this afternoon, Netanyahu created a bloc with the other right-wing parties which lost votes

in the Knesset in the elections.

But with them, there is a little chance that they can form a coalition with Blue and White. So, don't be surprised, I know that they're not used to it

in America and it sounds quite crazy. But there may be a third round for Israeli elections --

NEWTON: OK --

OLMERT: Sometimes at the beginning of 2020.

NEWTON: Right, we may not be used to it here, but we are used to it in Israel because we know that the coalition building can take a long time.

And yet even by Israeli standards, it looks quite chaotic right now. A lot of commentators said yesterday that look, whatever happens in this

election, it is reflective of public opinion in Israel right now. Do you agree with that? Do you think that they're being well served with what's

playing out right now?

OLMERT: Well, the question is what kind of reflection is this? Actually, I think that the right wing lost in a very serious way in this last election

so that Netanyahu's position has been weakened dramatically. He lost eight seats or seven seats for his own party and the other right-wing parties

also lost seats.

So, all together, I think that the perception that Israelis are leaning right wing is not true. Israel has always been the center of the political

map, I mean, the majority of Israelis and it still is. The question is, whether because of the division in the political system, and the fact that

there're so many different parties.

There will be a real genuine change to form a coalition that is made of at least 61 members. As I said, maybe we need another election. Now, you say

that it is common in Israeli politics -- look at Great Britain, you know, we always thought that Great Britain is the symbol of complete stability.

Now, you look at them and you say --

NEWTON: Not a country anyone --

OLMERT: Hey, David Cameron resigned, yes, Theresa May also left her job, and now you have Boris Johnson and Boris Johnson is losing all the votes --

NEWTON: I know, but you portray --

OLMERT: In the parliament. So, I look at them and I say, well, maybe it's not so bad in Israel.

NEWTON: No, I don't know, you pertain as -- that's politics, but now, I'm sure if you speak to anybody in Israel right now, they'll say, you know,

they want their government to get down to business, whatever that business looks like. Look, I don't have a lot of time left --

OLMERT: That's right --

NEWTON: But I have to ask you, we have been covering of course the attacks on the Saudi oil facilities. Given these strikes and how they appeared to

take Saudi Arabia off guard, even though they have a very sophisticated air defense system.

How confident are you in the Israeli air defense system given the nature of these attacks in Saudi Arabia?

OLMERT: I want to say two things briefly. Number one, we have a lot of confidence in our air defense system. We have the most sophisticated air

defense system there can be. But the other thing is that, I think that the Iranians know that if they will dare ever attack the state of Israel, the

Israeli reaction will be devastating and will be quick and will be very painful.

And I'm sure that when Qasem Soleimani; the head of the Revolutionary Guards hears me or he will hear what I say, he knows what I'm talking

about, believe me.

NEWTON: But you believe that even given that -- because no one would want that kind of escalation. Do you believe that the Israeli air defenses are

sophisticated enough to deal with even these new -- somewhat new, but relatively low-tech weapons?

OLMERT: Look, we have defended -- we have developed the iron dome that is very effective against the rockets shot at Israel from the Gaza district.

[15:40:00]

We have the aero system which is considered to be the most sophisticated air defense system in the world with long-range missiles that can shoot

down air attacks from distance of hundreds of kilometers. So, I think that the Iranians know that we have a very good air defense, but we also have a

very effective and powerful air attack system.

And I think that the Iranians will think many times before they decide to cross this line, that may actually turn the Middle East into a big turmoil.

I doubt it very much, I think we don't have to overplay the significance of what they did in Saudi --

NEWTON: Right --

OLMERT: As far as Israel is concerned.

NEWTON: OK --

OLMERT: I think the Saudis do have to think about it --

NEWTON: Right --

OLMERT: And I'm sure that MBS will find the appropriate answer together with President Trump.

NEWTON: We will see. Ehud Olmert, thanks so much, always good to have you on, appreciate it.

OLMERT: Thank you.

NEWTON: Now, Nobel Prize winner Robert Shiller says the narratives people tell each other could lead to a recession. And he doesn't expect one next

year. He will join me next.

(COMMERCIAL BREAK)

NEWTON: OK, tonight, the U.S. Federal Reserve is flexing its rate-cutting muscle, it remembers how to use it, trimming interest rates for the second

time in two months. Now, the Dow was down by triple-digit, it's now back up again though. As you can see there, it will likely and flatter, maybe

even up before the next few minutes are out.

The Fed's latest move shows the U.S. Central Bank has been keeping an eye on a series of economic warning signs. Now, as we've been reporting, the

New York Fed is offering tens of billions of dollars in liquidity to rescue the overnight lending rate and disappointing earnings sent FedEx shares

plunging.

The delivery giant is blaming in part what it calls weakening global economic conditions. Plus, a new survey of America's chief financial

officer shows quite a gloomy outlook. More than half of those polled expect the U.S. to enter a recession before the 2020 presidential election.

Robert Shiller predicted the housing market collapse that led to the financial crisis in 2008 has said that there's less than a 50 percent

chance of a recession in 2020.

He's a Nobel Prize winning-economist professor at Yale and author of the new book "Narrative Economics". And Professor Shiller joins me now, and

thank you for joining us. We'll just get to the day's headlines. So, we'll start --

ROBERT SHILLER, ECONOMIST & PROFESSOR, YALE UNIVERSITY: Yes --

NEWTON: You know, an insurance rate cut, a couple of them, from the Fed, you don't see anything all that crazy on the horizon in terms of slowing

growth?

[15:45:00]

SHILLER: I hope not, yes, I think -- it -- look a little bit like 2005, maybe.

NEWTON: OK --

SHILLER: That is that the housing market is weakening, but it's still going up. We had some good news about construction. And the general

narrative at this time is not a sign of something imminent. And these things take -- 2020 is only next year and these things take a while. If

you look at housing prices -- in the last recession, they were softening for years before there was an actual recession.

So, I don't think when I said it was less than 50 percent, that wasn't meant to be terribly reassuring because it's still 40 --

(LAUGHTER)

NEWTON: We won't take it as such then --

SHILLER: Forty percent maybe.

NEWTON: Yes, don't -- that is pretty funny. You're still saying pay attention to the 49 percent, you're saying because there are some risk

factors out there.

SHILLER: That's right, and the question is will it be a mild recession or a big recession? That's something that economists are not very good at

answering. So, there is uncertainty that the trade dilemma is a major source of uncertainty that could harm confidence even more than it has

already.

NEWTON: I want to talk to you about your book and we talk about narratives, and this is kind of a new -- relatively new and uncomfortable

space for economists, when you start talking about the narrative and how it can move markets. How do you think what you call the data revolution will

influence that going forward? Do you think it will confound us, which is what I'm afraid of or do you think that data will give us more clarity?

SHILLER: Well, I was comparing it with another data revolution that came in roughly in the 1930s with the great depression, and that was GDP

accounting, they divided it up into consumption, investment, government expenditure, net exports, just the way Keynes, John Maynard Keynes

suggested they should be.

And we had unemployment rates coming in for the first time -- we had a generation of economists who is analyzed that data. That data is very

interesting, but it's also limited. But now with digitized data, with the vast database we have, and I'm talking specifically about text human speech

in the form of well, newspapers, magazines, books, and even odd things like sermons or diaries are now searchable.

And so, we can get closer to what people are thinking. I think the economist will have several decades of work to try to really understand the

thought process that underlies economic decisions.

NEWTON: But what improves predictive capacity because that's -- we all want that.

SHILLER: Yes, we do want that. And unfortunately, this is to quote Alfred Marshall over 100 years ago, "economics is not an exact science". And the

reason it can't be an exact science is it's about people and their decisions. And people are -- there's something that is yet -- all of our

neuroscientists still can't explain what it is that goes on in our minds.

NEWTON: But your thought process in the new book is that there is a narrative there and it does matter, and it is identifiable?

SHILLER: Yes, narratives come and go, like diseases, I compare them to infectious diseases or I use the phrase go viral, which is a -- which is a

medical school metaphor. But ideas go viral just as diseases do. And there are perennial narratives that I outlined in the book that are there

hanging in the background and ready to maybe mutate a little bit or in terms of environment change where the contagion rate will go up and then it

will gradually take over and become important.

NEWTON: Maybe controversially, you were quoted as saying that Trump in terms of his economic thinking is at times brilliant and at other times

deranged. Please explain.

SHILLER: Did I say deranged?

NEWTON: You said deranged, at least --

SHILLER: OK --

NEWTON: As you were quoted as such just last week.

SHILLER: Yes, we're all different in our handiwork. And some of us have perspicacity about human emotions and how to move people. And I think

Trump discovered something. It came out in his "Apprentice" TV series. Something that people need and want. And he has built toward that, but you

know just, you must agree with me, that the transcendence of the Trump narrative all over the world is just phenomenal.

[15:50:00]

We talk about him every day, of course, he is president of the United States, but we haven't been this -- attached to our current president, I

don't think ever before. So, it's a sign -- wait, what I call a constellation of narratives, that all center on in this case one celebrity

and the narrative is crafted and designed.

Trump carefully monitors his audiences in these various rallies and tries to amplify it. He's been doing this for 50 years, and it's a slow but

steady process upward.

NEWTON: And as you said, it can be seen as that narrative going forward. Professor Shiller, unfortunately, we're out of time. The control room is

relieved because we didn't get to modern monetary theory. You and I can have that conversation --

SHILLER: Yes, that will be great --

NEWTON: Or read your stuff online about it for everyone else who is not part of the discussion in the commercial break. When we return, President

Trump takes on California, you want to listen to this, pulling its power to set auto emission standards and setting a stage for a court battle that

could affect us all.

(COMMERCIAL BREAK)

NEWTON: California is threatening to take the Trump administration to court after it pulled the state's power to set its own stricter auto

emission standards. Now, Mr. Trump says the move will result in cheaper and safer cars and increased auto production. California's governor says

the president is acting on a political vendetta.

Nick Watt is in Los Angeles and joins us now. Nick, obviously, this has been a contention between California and the Trump administration for

several months at least. What is at issue here in terms of the fact that will California's emissions standards literally materially change?

NICK WATT, CNN CORRESPONDENT: Well, listen, you said there that California is threatening to take the Trump administration to court over this. They

definitely will take the Trump administration to court over this. There are already I think nearly 60 lawsuits that California has filed against

the Trump administration on the environment, on healthcare, on immigration.

So, the issue here is since 1970, California has been allowed to set its own emission standards because their emission standards frankly predated

any federal regulation. The issue is that President Trump as we all know would like to basically dismantle Barack Obama's environmental legacy.

[15:55:00]

And one thing he wants to do is freeze a kind of progressive emission standards timetable that Obama had put into place. The thorn in his side

is that California has this waiver and many other states follow California, and also many automakers follow California.

So, that is why President Trump came out this morning and said that this waiver in California will be over. But this battle is actually about much

more than just emissions. Now, Governor Gavin Newsom here came out in California this morning and said, we -- he quoted the ancient Athenian

Pericles, and said, you know, "we do not imitate, we are a model."

Newsom says that California is a model for the rest of the world in the battle against climate change. But taking it back to the personal, you

know, this is a clash of political egos between the president and Gavin Newsom. This is a clash between the president and California, arguably the

most blue state in America. Take a quick listen to what Governor Newsom had to say to President Trump this morning.

(BEGIN VIDEO CLIP)

GOV. GAVIN NEWSOM (D-CA): We're winning, and that's the frustration he's having. We are winning. He's losing. And we're winning because we have

the law, science and facts on our side, and we are not only the formal authority, we have the moral authority, and that's something missing in

this White House.

(END VIDEO CLIP)

WATT: But this battle is also way more than that. Now, a consortium of American doctors came out after the Trump announcement this morning and

said that this move would quote, "endanger the health of our people and our planet." So, this is about the climate and this is about politics, Paula -

-

NEWTON: And not to be left out, the auto companies left in the middle to try and figure out what kind of car --

WATT: Yes --

NEWTON: They're actually going to manufacture. Nick Watt, thanks so much --

WATT: Exactly --

NEWTON: Really appreciate it. There are just moments left to trade on Wall Street, we'll let you know how that market is reacting to the latest

Fed moves. We'll back with the closing bell in a moment.

(COMMERCIAL BREAK)

NEWTON: OK, there, just moments left to trade there on Wall Street. And as you can see, the Dow has in fact turned positive. It fell more than 150

points following the Fed's announcement that it would cut U.S. interest rates by a quarter point for the second time since July.

Some investors were hoping though for a deeper cut, but from that analysis of the stock market there, it does seem that some people hope there will at

least be one more rate cut before the end of the year.

(BELL RINGING)

I'm Paula Newton in New York, the news continues right here on CNN.

END