CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC’S STEVE LIESMAN SPEAKS WITH ERIC ROSENGREN, FEDERAL RESERVE BANK OF BOSTON PRESIDENT, TODAY
WHEN: TODAY, TUESDAY, AUGUST 7TH
WHERE: CNBC’S BUSINESS DAY PROGRAMMING
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Eric Rosengren, Federal Reserve Bank of Boston President today. Excerpts of the interview will run throughout CNBC’s Business Day programming.
Following are links to the video of the interview on CNBC.com:
All references must be sourced to CNBC.
STEVE LIESMAN: Yes, Andrew thanks very much. I do have-- something of a newsmaker here this morning, Eric Rosengren, the Boston Federal Reserve Bank making some news. Eric-- thanks for joining us this morning.
ERIC ROSENGREN: Nice to have you here in Boston.
STEVE LIESMAN: Lovely to be here. Let's talk about-- before we get to some of the other issues about policy I want to just lay the groundwork for your economic outlook. We're at… about 1.5% in the second quarter. Not a lot…of the third quarter. Where do you think we're going this year?
ERIC ROSENGREN: Well, as you highlight we've only been treading water and since the beginning of the year-- we started the year with 8.3% unemployment. We now have 8.3% unemployment as well. We started the here with an employment population ratio and a participation rate in the labor market of roughly the same as what we're seeing now.
So we've only been treading water in the labor markets and, as you just highlighted, the GDP reports have been disappointing. First quarter was 2%. Second quarter was 1.5%. My expectation is the second half of the year won't be much better. So given that we're only treading water, that's the reason why I would advocate for a more accommodative monetary policy.
STEVE LIESMAN: Where do you think we end the year on unemployment and inflation?
ERIC ROSENGREN: My own forecast is a little bit-- lower than the consensus for GDP and a little bit higher than the consensus for the unemployment rate. My own expectation is in the absence of any kind of policy that we'd have an 8.4% unemployment rate at the end of the year and I'd expect the second half of the year not to be much better than the first half.
So we did 1 3/4% for the first half of the year. Roughly that-- maybe even a little worse. And the reason is we've gone-- from the first quarter to the second quarter the economy slowed down. Both consumption and investment got weaker. And I think that's a reflection of concerns about what's going on in Europe. Concerns about how our own fiscal deficit will play out.
STEVE LIESMAN: Let's talk about what you think the appropriate Fed policy is given that economic outlook?
ERIC ROSENGREN: So if you're treading water, even if you're a good swimmer, at some point you need to get to land. I think that we've been-- trying to wait until we saw a pickup in the economy. We were expecting a pickup in the economy. If you looked at our January meeting when we produced the forecast, people were expecting 2% on to 3% for a real GDP. We're going to be substantially below that, it looks like, over the course of this year.
So it calls for a much more accommodative monetary policy. I think it needs to be substantial enough that it offsets some of the shock that we're getting from abroad and some of the concerns that people have with how-- weak the world economy's been. So we're in a global slowdown. So that would argue for a quantitative easing program and one of sufficient magnitude that it has an impact.
STEVE LIESMAN: What would be that magnitude?
ERIC ROSENGREN: Exact magnitude, roughly the magnitude that we saw for the first two quantitative easing programs I think would be appropriate.
STEVE LIESMAN: Combined or in a single--
ERIC ROSENGREN: No.
STEVE LIESMAN: --one…
ERIC ROSENGREN: But what I would argue for, actually, is to have it open ended. That we focus on economic outcomes. So I've argued for-- the guidance should be tied to economic outcomes. President Evans has suggested the same thing. I would argue that if we do a quantitative easing program, again, we should be using economic outcomes as what we're trying to get. We want a stronger economy, we want faster growth in the income and we want a labor market that has an unemployment rate--
STEVE LIESMAN: And-- do you--
ERIC ROSENGREN: --that's clearly declining.
STEVE LIESMAN: --tell me what an open ended QE would look like? How would it functionally work? Or operationally?
ERIC ROSENGREN: It would be a promise-- so I would focus on the mortgage-backed securities. And it would be a monthly rate that you could alter if you wanted to, but an expectation that you would have it of a substantial magnitude. So rather than setting a calendar date, rather than setting a magnitude, you'd say, "We're going to do this monthly growth rate until we see-- an improvement in the economy-"
STEVE LIESMAN: I'm sorry.
ERIC ROSENGREN: --"that we're hoping to get."
STEVE LIESMAN: Monthly growth rate of QE?
ERIC ROSENGREN: Of purchases. Yes.
STEVE LIESMAN: So you would grow the balance sheet by X% per month?
ERIC ROSENGREN: Or an X dollar amount from…until we got the economic outcomes that we were hoping to get.
STEVE LIESMAN: And you would do that. And you think you would raise that or lower that based on-- incoming economic data?
ERIC ROSENGREN: Exactly.
STEVE LIESMAN: What targets would-- well, first of all, why don't you set a rate? Why don't you just peg the 30 year to a 3%? Have you thought about that?
ERIC ROSENGREN: I have thought about that. I think there are some that have argued that we should be pegging a rate. I think it's very difficult to peg a rate in an environment where-- a lot of things are occurring in the world that we don't have much control over.
So you could be in a situation where you're flooded with securities that you're purchasing or that nobody-- that you're not purchasing any securities. So the one issue with pegging a rate is that you may not have complete control over your balance sheet at that point. If you want to have more control over how rapidly your balance sheet's-- increasing, then you'd set a rate and--
STEVE LIESMAN: But so-- hold on. You'd just--
ERIC ROSENGREN: --try to push the rate down.
STEVE LIESMAN: You just said you-- what-- you're advocating open ended QE, which means you don't really care about how big the balance sheet gets.
ERIC ROSENGREN: It's open ended in terms of not setting a time, a calendar date.
STEVE LIESMAN: Right.
ERIC ROSENGREN: And not setting a magnitude. But it's not saying that we would purchase everything in a short period of time or not purchase anything for a short period of time, depending on where market rates were relative to your peg. It would be setting a quantity today you're going to continue to buy until you get the kind of economic--
STEVE LIESMAN: Do you--
ERIC ROSENGREN: --outcomes you want.
STEVE LIESMAN: Do you feel like there's any practical limit to the…in the Fed's balance sheet?
ERIC ROSENGREN: Well, there's clearly a limit to how large the balance sheet can be, because we're limited in what we can purchase, so we can only purchase Treasury securities and mortgage-backed securities. So the stock of those two is certainly the maximum amount that we could hold. My hope would be that the policy would be substantial enough that we actually wouldn't have to carry it on for that long and that we'd start real improvements in the economy. That we'd see stronger growth in the economy.
STEVE LIESMAN: I want to talk about some of the critics of this quantitative easing, but maybe in the first order, could you explain why this would do any good? You're already talking about-- I looked this morning. A 3.6% 30 year mortgage. 1.5%, call it 1.6% if you must on the 10 year yield. Interest rates are already low. Real rates are actually already negative. Why would an even lower rate have any practical impact on things that matter to people? Your level of growth and mortgage rates, interest rates?
ERIC ROSENGREN: Well, there are a number of areas that quantitative easing can help in. One, it does push up asset prices. Around times when we were announcing quantitative easing programs stock prices and equity prices do tend to go up. That increases consumption as people's wealth improves.
The second area is the housing market. Before we went on we were commenting on the housing market has been improving in Boston. If you look at what people are renting for apartments in Boston and look at what a condo is and then factoring in what the current mortgage rates are, the lower the rates are, and given that prices are quite low relative to historical standards, there's an opportunity for more people to make a decision that instead of renting they're going to start purchasing either a condo or a house.
STEVE LIESMAN: But aren't we at a point--
ERIC ROSENGREN: And the housing markets have been improving. And I think that's partly a reflection of what we've done to date.
STEVE LIESMAN: Are we at a point where the marginal person who would qualify for-- a mortgage rate is not qualifying not because of the rate but because their home is deeply underwater. And that's really-- an issue from the fiscal side. Not really a rate issue.
ERIC ROSENGREN: I think it's both a rate and availability issue. As the rates go down, part of it is that you need to be convinced that housing prices are going to go up and that you're getting a rate that's low relative to the cycle. So if we're artificially pushing rates down it does encourage some of those that are waiting to determine when they want to actually purchase a house or purchase a condo that this is a particularly good time to do so. And I think that's actually true and that's why we're starting to see some legs in the housing market. And you certainly see it in Boston, where the housing has picked up.
STEVE LIESMAN: You said it pushes up asset prices. Some people would say some of those assets whose prices are pushed up are things like oil and commodities and overall inflation which tends to undermine spending power. Just-- isn't that a big negative for additional quantitative easing?
ERIC ROSENGREN: You would be concerned about the inflationary effects if you thought that we would have big inflationary effects. We've had two quantitative easing programs. Right now the total inflation rate's 1.5%. So our balance sheet expanded in 2008. Now 2012, many people were concerned about the inflationary impact of expanding our balance sheet in both-- in both of the quantitative easing programs.
Our problem right now is we're below our 2% target, not above our 2% target. That's the despite two quantitative easing programs and the fact that our balance sheet is much larger. So I think the inflationary effect, while that's a real concern and we have to factor that in, to date we haven't seen those inflationary pressures, in part because we haven't got the economic growth that we were hoping to get.
STEVE LIESMAN: Okay, President Rosengren, thank you for joining us this morning.
ERIC ROSENGREN: Enjoyed being here.
STEVE LIESMAN: Joe and Andrew, back to you guys. I'm going to have-- a little bit longer conversation with-- President Rosengren. We'll bring you some of that later on in the day.
STEVE LIESMAN: President Rosengren-- Dallas Fed President Fisher said now is a good time for the Federal Reserve to act-- because of upcoming elections and it would create the misperception that the Fed is being political. What do you think about that?
ERIC ROSENGREN: I'm not going to comment directly on his comments, but I would say that we started out the year expecting that we would have an improvement in the economy. We thought GDP would be gradually increasing but the unemployment rate would be gradually decreasing. Despite that forecast we had a January SDP that actually provided forward guidance at the end of 2014.
We're now seven months past that and what have we found? We found that the economy actually has not…back as we had hoped. So we need to be politically independent. We should be focusing on economic outcomes and what monetary policy can do to change that.
We now have enough evidence, it's my view, that the economy is not going to grow the way we had hoped. And, as a result, I think it is an appropriate time to take stronger actions. A non-partisan Federal Reserve should not be worried about the political cycle. It should be worried about the business cycle. That's what we should be focused on.
STEVE LIESMAN: But in a time when the Fed is very much in the political discussion, the political dialogue-- are you concerned at all about the blowback and what would happen to the Fed's reputation if you act now?
ERIC ROSENGREN: I think if we do the right thing our reputation will be enhanced.
STEVE LIESMAN: Let's talk about-- what kind of-- effect you think a quantitative easing program would have. You have a number in your mind where you'd like to see rates come down to? How much do you have to spend versus how much result you get?
ERIC ROSENGREN: So I don't want to focus just on the interest rate. I really want to focus on are the labor markets improving and this nominal GDP increasing. So if you expect that we want to have a 2% inflation rate and at least a 2.5% growth rate, given how weak the economy is, we should see nominal GDP growth of 4.5%, not as a ceiling but as a floor. You need to get faster growth to get the labor markets to improve. So I would do quantitative easing to get those kind of economic outcomes. Stronger economic growth and a better labor market.
STEVE LIESMAN: …my next question. What will your target be? Is nominal GDP you think the way to target?
ERIC ROSENGREN: I think nominal GDP is certainly one way to target. Others have-- advocated for example, President Evans has advocated for looking at an employment and an inflation rate target. I think that's a possible way to go. I think it's up to the committee to decide what exactly would be the right target to use. And part of this is a consensus process. I would certainly be comfortable with setting a nominal GDP of at least 4.5%.
STEVE LIESMAN: What about-- you've also spoken about cutting the interest rate on excess reserves. What about the effect on money markets? You have…who say this would really hurt them.
ERIC ROSENGREN: So what I've advocated is to do that gradually. So the interest on reserves right now, we're paying 25 basis points at a time where three month treasuries are creating around eight basis points or nine basis points. And we seem to be paying people too much to hold reserves-- in the Federal Reserve.
So the alternative is to gradually reduce that. Europe has reduced their deposit rate down to zero. I'm not advocating for dropping it to zero right away, but to gradually decrease the interest on excess reserves. There's no reason to be paying the high-- the high rate that we're currently paying.
STEVE LIESMAN: Some people would argue that by acting now the Federal Reserve would be effectively bailing out the fiscal side. And even Fed Chairman Ben Bernanke has said that the Federal Reserve cannot offset the effects of the fiscal cliff. Do you feel like you'd be letting off-- letting Congress off the hook by acting now?
ERIC ROSENGREN: I don't think we're going to be able to completely offset shock from Europe or shock that could occur from fiscal policy, but it doesn't look like we're going to do anything on fiscal policy and it's unlikely that a lot's going to be done in Europe over the next two quarters.
We've been treading water in the economy. I don't want to have another two quarters go by. It's very expensive in the labor market. And two examples. People-- coming out of high school or college, looking for their first jobs are facing diminished job prospects. That affects their long time earnings. It doesn't just affect them temporarily now.
Similarly at the other end of the age distribution, people that are 55 and over that were hoping that these would be the years that they really built up their retirement accounts, they're now finding that they may have a spell of unemployment and using up their savings much earlier. It's very costly to be treading water at a point where we have 8.3% unemployment. We need a stronger labor market than what we've been seeing.
STEVE LIESMAN: Finally, I want to ask you about Europe. Are they doing enough, in your opinion, to-- help their own growth and their own…their own problems?
ERIC ROSENGREN: I think they can do more. They have the financial capacity to do more. It's a difficult political problem. And we have an easier problem than they have and yet we're having trouble getting a solution to our fiscal problems. So I think we have to have some patience with-- the difficulty of getting a political consensus when you have so many countries involved. Nonetheless, the time for patience can only be for so long and then we need to see some positive progress. I think it would help the U.S. economy and the global economy if there was less uncertainty around what was happening in Europe.
STEVE LIESMAN: What's your reaction to the policy guidance that was given out-- the ECB's last meeting? The idea that-- the ECB would come in and purchase-- bonds of a sovereign nation if they asked for help and then rescue them?
ERIC ROSENGREN: It seems like a reasonable start to a program that tries to get the problems that the sovereigns are having under control. I think there're plenty more steps that they have to do and there's not going to be any one solution to the European problems. It's going to have to be a series of actions that they're taking to get towards a more unified fiscal solution.
STEVE LIESMAN: Do just have concern about the American financial system's interconnectedness with the European-- system? Has there been progress made in-- severing some of those financial ties?
ERIC ROSENGREN: I think there has been some progress, but I think financial stability issues should be something that policy makers need to be very attentive to. I've focused on the market money funds as an area where there's still more work to be done to make sure that that is not a financial stability problem, if we were to have a shock.
Not that I'm anticipating that from Europe, but if we were I think that's one area that we still need to do some more work in. I would say there are other areas that are similar to that in that-- we need to be continuing to focus on financial stability, not the-- lull in that we haven't had a recent large shock.
STEVE LIESMAN: Eric Rosengren, thanks for joining us.
ERIC ROSENGREN: Thank you.
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