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RESERVE BANK PRESIDENT ERIC ROSENGREN ON CNBC’S CLOSING BELL Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Boston Federal Reserve Bank President Eric Rosengren on CNBC’s “Closing Bell,” Thursday, October 14, 2010. All references must be sourced to CNBC. ************ STEVE LIESMAN: Thanks very much. You have to make a decision in not too many weeks from now-- President Rosengren, thanks for joining us. ERIC ROSENGREN: Thank you for having me here. STEVE LIESMAN: So we're on the eve of this Fed conference that-- you planned a long time ago. And it's about monetary policy in a lowinflation environment. Most of the market expects the Federal Reserve to do additional quantitative easing. Is most of the market right? ERIC ROSENGREN: Well, I think we're gonna have to discuss whether we do quantitative easing or not. And that's one of many options that the Federal Reserve has. Let me talk a little bit about what the impact upon …easing might be so that people can understand why we might or might not do it. There are a number of different channels that quantitative easing works through. The most obvious one is for buying an asset like a Treasury Bond. When we purchase the Treasury Bonds, price goes up, the interest rate goes down. But we're not primarily interested in Treasury Bonds. We're interested in long-term instruments like mortgage-backed securities and corporate bonds. Experience has showed that when we buy those treasury securities, those other assets also have their rates go down as well. That stimulates the economy by helping both housing and-- and
investment. There're a number of other channels that it also works through if you have a minute for me to-STEVE LIESMAN: Sure, go ahead. ERIC ROSENGREN: --just talk about those other channels. Another channel that it works through is that it affects short-term interest rates that people interpret-- that action as affecting when monetary policy might change again. STEVE LIESMAN: But this has been criticized for-- you know, rates are already low. It's weakened the dollar. And it's gonna cause inflation and maybe massive inflation down the road. How do you respond to that predicament? ERIC ROSENGREN: So, the idea is that we wanna stimulate demand. STEVE LIESMAN: Right. ERIC ROSENGREN: So, part of the problem that we're trying to address is that the inflation rate is lower than we'd like. So the inflation rate, the foreign inflation rate's roughly one percent. The FOMC has said they'd like to get it closer to two percent. And so right now, the goal is not to have further disinflation. So if you have a Fed funds rate that's fixed and the inflation rate goes down, that's a tightening. We don't want a tightening with the economy this weak. So we actually wanna prevent further disinflation from occurring. And this is one way to do that. STEVE LIESMAN: What I really wanna ask you is, "How much are you gonna do?" But I understand-- in this environment, that's a sensitive question. So, feel free to answer that. But, if not, how do you figure out how much to do? How do you calibrate the amount of quantitative easing that's A, gonna lower interest rates by X amount, or B, create X amount of GDP growth or lower the unemployment rate? ERIC ROSENGREN: So, whether or what we do depends on what's happening in the economy. And so we have to look at over the intermediate term, what's the likelihood that we get the full employment and get the two percent inflation? And so we scale it by saying, "How far away are we from where we wanna be?" That partly depends on incoming data. There-- also depends on our forecast for the economy overall. It's why we have to meet every six weeks to decide what the appropriate size is, because if the economy grows much more quickly,
we may not have to do anything or we may not have to do as much. If the economy grows much more slowly, then we're gonna move further away from where we wanna be on our two parts of our dual mandate. STEVE LIESMAN: Do-- do you feel as if the economy can grow quickly enough now to get unemployment back to a place where you are comfortable with, additional help? ERIC ROSENGREN: So I think it's going to take a while before we get to-- full employment, whether or not we do anything. What additional quantitative easing would potentially do is bring down the unemployment rate faster than it otherwise would come down. STEVE LIESMAN: Eric, you're also known as the person who's-- deeply involved in the financial system. Right now, there's a big mortgage documentation vest. Is that something the Federal Reserve is watching carefully? Is the Federal Reserve involved in that? What is your role in-in regards to this documentation, as is there concern about systemic risk? ERIC ROSENGREN: So, it's certainly something that we follow very closely and are worried about. The housing sector's a very important sector in the economy. And obviously-- the mortgage market doesn't work efficiently, that is a problem for tryin' to get housing to work more effectively. STEVE LIESMAN: You-- we asked you for some charts that you-- 'cause you're-- you're famous for your charts and-- and-- and slides that you bring in your presentations. And it's a little scary that the first thing you showed us was one from Japan. Explain to us what the chart-shows. ERIC ROSENGREN: So, this partly reflects-- what our conference was about, as our conference originally occurred in October of 1999. STEVE LIESMAN: Right. ERIC ROSENGREN: And one of the main topics at that point was actually what was happening in Japan. And at that time, there was a deflation problem in Japan. But it was just starting. And the analysis of most the participants at the conference was that deflation was going to be under control very quickly. As this chart shows, deflation was not under control at that time. In fact, we didn't have deflation continuing to get much worse. But we did have a persistent deflation problem in Japan.
It also highlights a couple of things. The Japanese did do a number of things. They increased their fiscal spending. And they also did quantitative easing. But they did it very gradually. And what this highlights is you may not wanna do it nearly as gradually as they did. You might wanna be much more proactive at getting at the problem before it becomes deeply imbedded in the economy. STEVE LIESMAN: But it raises a very important question. And we don't have much time, but how serious is the deflation threat right now? ERIC ROSENGREN: So, we don't even want disinflation at this point. So, disinflation would be a tightening. And we certainly don't want deflation. I think it's a low probability event that we have deflation. But we don't even want disinflation. STEVE LIESMAN: President Rosengren, thank you very much for your time. Maria-- President Rosengren is gonna just stay right here. And we're gonna continue our interview and bring you additional pieces of the interview in Fast Money and Larry but for the moment, back to you from Boston. STEVE LIESMAN: So, let's continue our conversation. ERIC ROSENGREN: Okay. STEVE LIESMAN: The price of gold is going-- higher by the day, by the minute. The dollar is weakening. Commodity prices are surging-- and a lot of this seems to be in response to the-- the quantitative easing that's coming from the Federal Reserve. Do you worry about those effects when you-- consider additional-- quantitative easing? ERIC ROSENGREN: Well, we look at all the prices that you talk about. And so that is something that we have to factor into the decision. And so whether we do something or how much we do partly depends on how the markets are likely to react. So that is something that we do take into account. Let me address the exchange rate once. So the main focus-- of quantitative easing is to affect long-term interest rates. And by affecting rates, if our rates are going to be low relative to other countries, investment flows will go to other countries. So one of the channels that quantitative easing does work through is through the exchange rate effect. Now, that isn't the focus of the policy. But it is an out of when we lower interest rates. STEVE LIESMAN: Is it something that bothers you that may actually limit the amount that one would do?
ERIC ROSENGREN: It's certainly something that we have to take into account as we think about what would appropriate amount of-quantitative easing be. But our primary focus is stimulating domestic demand in the U.S. economy. And so we need to figure out what the right interest rate is to get the economy on the right path, here. I think one of the side effects is that it affects the exchange rate. And in some respects, it's helpful if we do more exports and less imports. But that's not the main focus. The main focus is to get our unemployment rate down and get the inflation rate closer to the longer target. STEVE LIESMAN: You talked about, earlier, about affecting interest rates. Right now, what we-- what the market believes is that it-- the Fed wouldn't necessarily buy treasuries. Is it a possibility? Would you support the Federal Reserve buy more-- additional mortgage-backed security? ERIC ROSENGREN: Oh, I-- it's situational. We should look at each of the markets, decide what's gonna have to take a step back on the economy. Last time, we chose mortgage-backed securities. If we do something in the future, it could be either of those two assets. It-- I think it is situational. STEVE LIESMAN: One of the things that you've said is that this recovery feels a lot like a normal recession. And you provided us with a chart that kinda illustrates your point. Walk us through your chart, here, about the number of industries, now, that have five percent-- have seen a reduction of five percent or more in unemployment. ERIC ROSENGREN: So, in most recessions, we get one or at most two industries that have a reduction of employment of five percent or more as that chart shows. You can see that in the first period-- when we initially went into the recession, there was only one industry that had a decline of five percent or more, and that was the construction industry. Once we had the financial crisis-- the financial crisis resulted in households and businesses cutting back quite dramatically. And there were six industries that ended up having declines of five percent or more. If you look the most recent period, which is the recovery period, one reason that the recovery doesn't feel all that good is it feels a little bit like a very mild recession. And that's what shows up in the chart. One industry, the construction industry, is still losing jobs that in fact the-- the period that the NBER has declared as a recovery, we've lost five percent more in construction jobs. STEVE LIESMAN: Today the senior credit officer showed me, from the Federal Reserve, showed some improvement-- Shadow Bank
securitization, is there any sign of life at all in the lending market or the bank market in general as far as you're concerned? ERIC ROSENGREN: So I think there've definitely been some improvements. The improvements aren't as great as we'd like to see. But I think the loan officer survey is one of many indicators that we're seeing some of the financial head winds subside. But we're not where we need to be. STEVE LIESMAN: I don't envy you the choice you have to make coming up-- because on the one hand-- tell me if I have the dilemma right, here, which is that a large commitment is one that would tend to have a big impact. But, at the same time, with the data uncertain, you don't necessarily wanna make a-- a huge commitment to the market here. Talk about this debate that's out there about-- if the Fed were to do Q.E., should it be in a shock and awe kind of way or in an incremental kind of way? What's your opinion of that? ERIC ROSENGREN: So again, that's the bi-- whether we do anything and how big it should be depends on the situation. There're a lotta things that we have to take into account. Some of that's the uncertainty about the economy and the economic outlook. Some of that's uncertainty about how it'll affect other markets. Some of that is how disrupted our market's currently. So we have to factor all those things into account when we decide whether and how much to do. STEVE LIESMAN: The-- the other area that's-- that's very interesting right here I wanna just get to the-- back to the inflation question. Is there a danger that you could get the wrong kind of inflation? 'Nother words, in-- inflation comes through the commodity route. And it ends up pushing up prices, let's say, sort of a supply-side inflation, versus what I think you want is a demand-pull inflation. Is that a concern of yours? ERIC ROSENGREN: So ideally what we want is prices in the overall economy growing roughly at two percent. That's what we would expect to see in the long run. Right now, wages and salaries have been experiencing disinflation as well. Wages and salaries are a major component of business cost. They're roughly 70 percent of cost to most businesses. So we'd expect for inflation to start trending up, we'd have to start seeing it in wages and salaries and compensation. We're still not seeing much evidence of that. So there are some markets that have shown some dramatic price increases in commodities. We've definitely seen some increases in gas prices. But when you look at the overall
basket of goods and services and particularly when you look at core inflation, it's still a very low rate. STEVE LIESMAN: The recent Federal Reserve minutes talked about a couple policy alternatives in addition to quantitative easing, talked about targeting nominal GDP or targeting a price level versus the inflation rate. Can you talk about how you think about those alternatives? ERIC ROSENGREN: So, there're a bunch of alternatives. Why don't I just focus on the last one? STEVE LIESMAN: Sure. ERIC ROSENGREN: Make it a-- a shorter answer to-- so, price level targeting would give us the ability to have an inflation rate that got above two percent for a temporary period of time. So the question is, "Do you wanna just get the two percent? Or would you be willing to sustain a higher rate of inflation for some time and average it out two percent?" I think it's an interesting point for us to be discussing. There are communication challenges with price level targeting. I think an inflation target's much more straightforward way to go. But I think that's something that is well worth discussin'. STEVE LIESMAN: Eric, not just on our air but a lot of the economic commentary, a lot of people say the Fed is just wrong to be so concerned about deflation. What do you say to those people? ERIC ROSENGREN: It's not just deflation. It's also disinflation. So, when you think about a fixed federal funds rate and a core inflation rate that's going down, that is implicitly a tightening. So we even don't want inflation to get lower from where it currently is because that would, in effect, be a tightening. So, we don't want a deflation. I think the Japanese have shown us that if you get into that point, it's very, very difficult to get out of it. So, it's a relatively small risk. But it's a risk that I think we should avoid. But, disinflation, I think, is something that could potentially happen. And that's because we have a lotta slack in the economy right now. And so as long as we have this much slack, it is possible to have further disinflation. Further disinflation would also be unwelcome.
STEVE LIESMAN: Eric, is there something that you would like to talk about that I haven't brought up? …area w-- that you-- that you wanted to go over that we haven't discussed? ERIC ROSENGREN: Well, the one thing I would just highlight is that many people feel that the economy's still in a recession. And so if you look at GDP, we have had positive growth. If you look at final sales, we've seen growth, but it's been much slower. So that's taking out the inventory component. And if you look at the employment picture, the unemployment rate's still very high. And we still losing jobs in many, many industries. So there is a reason why many people feel like the recovery's not fully sustained. We need to see some improvement in the later market. STEVE LIESMAN: Thank you very much for your time, Eric. ERIC ROSENGREN: Thank you.
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