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CNBC Exclusive: CNBC Transcript: Dallas Fed President Robert Kaplan Speaks with CNBC’s Steve Liesman on “Squawk Box”

WHEN: Today, Tuesday, February 28th

WHERE: CNBC's "Squawk Box"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Dallas Fed President Robert Kaplan and CNBC's Steve Liesman live from the Federal Reserve Bank of Dallas today, Tuesday, February 28 on CNBC's "Squawk Box" (M-F, 6AM-9AM ET). Following are link to the video on CNBC.com: http://video.cnbc.com/gallery/?video=3000596955 and http://video.cnbc.com/gallery/?video=3000596957.

All references must be sourced to CNBC.

STEVE LIESMAN: HEY, JOE. GOOD MORNING. I'M HERE WITH ROBERT KAPLAN, THE DALLAS FEDERAL RESERVE PRESIDENT. THE NOT SO NEW DALLAS FEDERAL RESERVE PRESIDENT. YOU'VE BEEN AROUND FOR OVER A YEAR NOW.

ROBERT KAPLAN: YEAH, I'M A VETERAN NOW.

LIESMAN: SO, I'M NOT GOING TO BE SO CRUDE AS TO ASK YOU, ARE YOU GOING TO HIKE IN MARCH. I'M GOING A LITTLE BIT MORE ROUND ABOUT. GIVE ME AN IDEA OF HOW YOU ARE THINKING ABOUT RATES FOR THE MARCH MEETING.

KAPLAN: OK. WHAT I'M THINKING IS THAT WE'RE MAKING GOOD PROGRESS ON OUR EMPLOYMENT OBJECTIVE. WE'RE MAKING GOOD PROGRESS ON INFLATION. MY OWN FORECAST FOR 2017 IS GROWTH IN EXCESS OF 2%. EVEN BEFORE POTENTIAL POLICIES THAT COULD PROVIDE SOME UPSIDE. SO IN THAT CONTEXT, I THINK WE'RE GETTING CLOSER TO REACHING OUR DUAL MANDATE OBJECTIVES AND WE SHOULD BEGIN THE PROCESS OF REMOVING ACCOMMODATION. I THINK EVEN AFTER WE DO THAT, WE'LL STILL BE ACCOMMODATIVE, BUT I THINK WE SHOULD BE TAKING STEPS TO REMOVE SOME AMOUNT OF ACCOMMODATION SOONER RATHER THAN LATER.

LIESMAN: SOME PEOPLE HAVE CRITICIZED THE FEDERAL RESERVE FOR MISSING OPPORTUNITIES TO HIKE. THERE WERE TIMES YOU COULD HAVE DONE IT AND YOU HELD BACK BECAUSE YOU WERE AFRAID THAT THERE WOULD BE BAD ECONOMIC OUTCOMES THAT DIDN'T COME TO PASS. DOES THIS LOOK LIKE ONE OF THOSE OPPORTUNITIES FOR YOU, MARCH, AN OPPORTUNITY YOU SHOULDN'T MISS?

KAPLAN: WELL, AND I CAN SPEAK OBJECTIVELY ABOUT THE PAST BECAUSE I WAS JUST AN OBSERVER TO THE FOMC.

LIESMAN: RIGHT.

KAPLAN: I ACTUALLY THINK WE'RE NOW MUCH CLOSER TO MEETING OUR EMPLOYMENT AND INFLATION OBJECTIVES. AND YEAH, I THINK YOU NEED TO TAKE – ONCE YOU'VE DECIDED THAT, I THINK YOU NEED TO TAKE ADVANTAGE OF WINDOWS WHEN THEY PRESENT THEMSELVES BECAUSE YOU COULD HAVE EXOGENOUS FACTOR, YOU COULD HAVE MARKET EVENTS THAT COULD GIVE US SOME PAUSE. SO I THINK IF WE THINK WE'RE MOVING CLOSE TO OUR DUAL MANDATE OBJECTIVES, WE SHOULD TAKE OPPORTUNITIES TO REMOVE SOME AMOUNT OF ACCOMMODATION IN THE CONTEXT OF A PATIENT, GRADUAL PATH OF RATES.

LIESMAN: SO THIS IS A LITTLE MORE DIRECT HERE, MR. KAPLAN. THE FED FUNDS FUTURES PROBABALITY IS ABOUT 34% FOR THAT MARCH HIKE. HOW DO YOU GAUGE THAT? IS THAT ABOUT RIGHT?

KAPLAN: SO, HAVING LIVED MY CAREER IN THE MARKETS, I WOULD SAY MARKETS HAVE A TENDENCY TO MOVE THOSE KIND OF PROBABILITIES AND DO IT VERY, VERY RAPIDLY. I THINK WHAT THE MARKET PROBABILITY PROBABLY SUGGESTS IS BETWEEN NOW AND JUNE AND IN THE MARCH, MAY, OR JUNE MEETINGS YOU'RE GOING TO SEE SOME ACTION. I DON'T THINK THE EXACT TIMING IS THE MOST IMPORTANT THING. I THINK THE PATH OF RATES IS. IN THAT REGARD, I THINK THE MARKET IS PROBABLY IN THE NEIGHBORHOOD OF WHERE WE'RE HEADING.

LIESMAN: SO I'M GOING TO DO THE SAME THING ON THE OTHER BIG ISSUE OUT THERE, WHICH IS FISCAL POLICY. I'M NOT GOING TO ASK YOU IF YOU ARE CHANGING YOUR FORECAST. TELL US HOW YOU PLAN OR ARE CURRENTLY INCORPORATING POTENTIAL CHANGES TO FISCAL POLICY COMING FROM THE TRUMP ADMINISTRATION AND THE NEW CONGRESS INTO YOUR FORECAST AND INTO YOUR THINKING ABOUT MONETARY POLICY.

KAPLAN: I'LL BROADEN IT. FISCAL POLICY AND STRUCTURAL REFORM. STRUCTURAL REFORM FOR ME COULD BE JUST AS IMPORTANT. I'M LOOKING AT TWO THINGS. I LOOK AT POLICIES THAT EITHER GROW THE WORK FORCE OR IMPROVE PRODUCTIVITY. SOME OF THE POLICIES BEING DISCUSSED, REGULATORY REVIEW, IF IT'S DONE IN A THOUGHTFUL WAY, POTENTIALLY INFRASTRUCTURE SPENDING, POTENTIALLY TAX REFORM, DEPENDING ON THE DETAILS COULD HAVE POSITIVE IMPACTS, IN MY VIEW, CERTAINLY ON PRODUCTIVITY AND I'M PARTICULARLY ZEROING IN THEN ON POLICIES AND STRUCTURAL POLICIES THAT COULD GROW THE WORK FORCE. WE NEED WORK FORCE GROWTH IN THIS COUNTRY TO GROW GDP. THIS IS WHY I'M LOOKING FOR IMPROVEMENT IN EDUCATION, VOCATIONAL TRAINING, INCENTIVES FOR PEOPLE TO WORK LONGER, AND YES, IMMIGRATION POLICY, EITHER ON THE POSITIVE OR NEGATIVE SIDE, IS A CENTRAL ELEMENT OF WORK FORCE GROWTH.

LIESMAN: WHEN YOU SAY POSITIVE OR NEGATIVE SIDE, WHAT IS A POTENTIAL NEGATIVE KIND OF IMMIGRATION POLICY?

KAPLAN: POLICIES THAT MIGHT DISCOURAGE GROWTH IN APPROPRIATE – UNDERSTANDING IT'S A SENSITIVE ISSUE – IN TERMS OF APPROPRIATE IMMIGRATION COULD ACTUALLY SLOW WORK FORCE GROWTH. HERE'S MY POINT. OVER THE LAST 20 YEARS, IMMIGRANTS AND THEIR CHILDREN HAVE MADE UP OVER 50% OF WORK FORCE GROWTH IN THE UNITED STATES. OUR VIEW AT THE DALLAS FED, THAT PERCENTAGE WILL INCREASE IN THE YEARS AHEAD. WHY IS THAT? BECAUSE THE WORK FORCE IS AGING. ONE OF THE BIG REASONS PARTICIPATION IS DECLINING IS DEMOGRAPHIC AGING. WE NEED TO LOOK AT SEVERAL WAYS TO GROW THE WORK FORCE IF WE'RE GOING TO GROW GDP.

LIESMAN: I NEED TO GET BACK TO MONETARY POLICY BECAUSE THERE'S ANOTHER BIG ISSUE OUT THERE, WHICH IS THE BALANCE SHEET.

KAPLAN: YEAH.

LIESMAN: DID YOU HAVE AN EXPECTATION FOR WHEN YOU THINK THE FEDERAL RESERVE MIGHT REDUCE THE BALANCE SHEET?

KAPLAN: SO WE'VE SAID SO FAR PUBLICLY THAT WE'LL WAIT UNTIL WE'RE WELL UNDER WAY IN TERMS OF NORMALIZATION BEFORE WE START LETTING THE BALANCE SHEET RUN OFF. I STILL THINK THAT'S THE CASE. BUT I THINK AS THE YEAR GOES ON IN 2017, WE'LL BE ACTIVELY DISCUSSING PLANS FOR ADDRESSING THE BALANCE SHEET. BUT I STILL THINK THAT'S PROBABLY THE APPROPRIATE BASE CASE. WE'LL HAVE TO GET A LITTLE BIT FURTHER ALONG. AND WE SHOULD ALLOW THE BALANCE SHEET TO RUN OFF, AGAIN, IN A PATIENT, GRADUAL WAY FOR ME THAT DOESN'T UNDULY AFFECT THE MARKETS.

LIESMAN: IF I'M GETTING YOU RIGHT, GETTING THE BALANCE SHEET TO GO DOWN IS NOT AN ISSUE FOR THIS YEAR. IT'S A DECISION FOR THIS YEAR AS TO WHEN, BUT NOT AN ACTUAL –

KAPLAN: DEPENDS ON HOW MUCH PROGRESS WE MAKE THIS YEAR IN NORMALIZATION IN MY VIEW. IT'S SOMETHING WE SHOULD BE DISCUSSING. I WOULDN'T PUT A TIME FRAME ON IT YET. BUT I THINK AS WE MAKE PROGRESS, I THINK IT'S IMPORTANT THAT WE START TAKING THE OPPORTUNITY TO ACTUALLY LET THIS BALANCE SHEET RUN OFF.

LIESMAN: I WANT TO GET BACK TO THE ECONOMY AND FISCAL STIMULUS. THERE'S TWO THOUGHTS. ONE IS THAT THERE IS QUITE A BIT OF SLACK OUT THERE, AND WE CAN PUMP UP THE ECONOMY AND WE CAN GET IT GOING, AND THERE'S PLENTY OF RESOURCES OUT THERE. CAPACITY UTILIZATION, JUST 75%. 96 MILLION AMERICANS ARE OUT OF THE WORK FORCE. NOW ONLY MAYBE 5 MILLION OF THEM OR 6 MILLION ACTUALLY SAY THEY WANT JOBS, BUT THERE'S A POOL OF LABOR THERE. THE OTHER IDEA IS THAT WE'RE AT OR NEAR FULL EMPLOYMENT AND THAT KIND OF STIMULUS IS GOING TO POTENTIALLY CREATE INFLATION AND FORCE THE FED TO RAISE RATES MORE. WHERE DO YOU STAND IN THAT DEBATE?

KAPLAN: SO HERE'S WHAT I LOOK AT. I LOOK AT WHAT'S CALLED IN THE LINGO, U-6.

LIESMAN: U-6. THE BROADER –

KAPLAN: WHICH IS THE UNEMPLOYMENT PLUS MARGINALLY ATTACHED WORKERS, DISCOURAGED WORKERS AND THOSE WORKING PART TIME WHO WOULD LIKE TO WORK FULL TIME. THAT NUMBER IS RIGHT NOW, AS WE SIT HERE TODAY, 9.4%. THE PRE-RECESSION LOW WAS A LITTLE ABOVE 8%. SO I THINK THERE'S SOME ROOM THERE. THE PROBLEM IS IN A POTENTIAL WORK FORCE OF 160 MILLION PEOPLE, GETTING DOWN TO 8.1% IS ABOUT 1.75-2 MILLION PEOPLE. IT IS HELPFUL. AND I THINK WE NEED TO DO THINGS TO TRY AND GET THOSE PEOPLE BACK INTO THE WORK FORCE. BUT THAT ALONE ISN'T SUFFICIENT TO SUBSTANTIALLY GROW THE WORK FORCE. THAT TELLS ME WE'RE NOT AT FULL EMPLOYMENT YET. WE STILL HAVE SOME SLACK BUT WE'RE RAPIDLY MOVING TOWARD FULL EMPLOYMENT. I THINK AS WE GROW THIS YEAR, THAT AMOUNT OF SLACK WILL CONTINUE TO DECLINE.

LIESMAN: OKAY. ROBERT KAPLAN, THANKS FOR JOINING US.

KAPLAN: THANK YOU, STEVE.

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