CNBC News Releases


Steffanie Marchese


WHERE: CNBC's Business Day Programming

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Jeffrey Lacker, Richmond Federal Reserve President, today on CNBC. Excerpts of the interview will run throughout CNBC's Business Day programming today, Tuesday, April 6th.

All references must be sourced to CNBC.


STEVE LIESMAN: Jeff, thanks for joining us.

JEFFREY LACKER: My pleasure. Good to have you down here.

STEVE LIESMAN: Yeah. Great. Let's talk about the news of the day today,which is that- the Fed was going to raise the discount rate. Let me ask you this question. Is the- the discount rate, in your opinion, is spread over Fed funds right now, which is. Does that need to be raised?

JEFFREY LACKER: We raised it in February. I think it'll some time to figure out what the right spread is. We're obviously in a new environment with such a huge amount of reserve power. And we're not really gonna know what a normal spread looks like or ought to be until we get back down to having reserves in- sort of a normal operating range at just a few billion, say.

STEVE LIESMAN: That's a long way to go, right? Down—


STEVE LIESMAN: to $2 billion? You were

JEFFREY LACKER: Quite a bit.

STEVE LIESMAN: $1 trillion.

JEFFREY LACKER: Right. Couple orders of magnitude there.

STEVE LIESMAN: Some people think that 100 basis points is discounted rates over is normal. That- is that?

JEFFREY LACKER: Well, that's what we did when we- sort of configured the - the way to do back in 2002. And went to this- regime of- a normal spread above the target rate. But there's been some sentiment that it- it maybe ought to be 50- just to make it a more available, less costly- safety balance- for the banking system- in routine times. And I think the jury's out.

STEVE LIESMAN: The Feds have a new statement raise discount that would give it some time. Clearly there hasn't been a whole lot of.

JEFFREY LACKER: Hasn't been a whole lot of the time.

STEVE LIESMAN: Is the fact that the market has such jitters about the Fed raising the discount rate symptomatic of the times that we're in right now, in terms of-- 'cause now the Fed- maybe the Fed either needs to move or should be moving soon.

JEFFREY LACKER: That's a good question. So we have rates low right now. Reserve balances are very, very high. Obviously the economy's picking up. And at some point- over the next- whatever the is, we're gonna have some normalized policy bring it back to normal. And yeah, you know, people are curious about the timing. I'm curious about the timing, too.

STEVE LIESMAN: Yeah. I mean, you kind of use that very vague phrase of "whatever the horizon is," which is a placeholder for-


STEVE LIESMAN: some period of time that

JEFFREY LACKER: That's right.

STEVE LIESMAN: -you think that the Fed may eventually move. Let me- let me ask you this question. The economic recovery, you think it's sustainable at this point?

JEFFREY LACKER: I think so. It's pretty rare for- an economy to show what we've seen over the last three quarters and then take another dip. And I think- the labor market report from last Friday is really good evidence that the- finally the labor market is showings signs of- of bottoming out and having bottomed out.

So I'm- I'm pretty comfortable that- that we're not gonna see another dip. But I'm waiting for a point in time at which growth is strong enough on a sustained basis and well enough established- that it's gonna be trying to withdraw monetary policies.

STEVE LIESMAN: Do you have in your heard a series of actions the Feds will take, the sequence of actions the Federal Reserve will take, when it comes time to stimulus?

JEFFREY LACKER: Well, we've been talkin' a lot about that and thinkin' a lot about that. So I haven't settled on my favorite choice yet. But I think the draining reserves has gotta come into the picture at some point. And I think that raising rates is gonna come into the picture at some point as well.

As you know, we pay interest on reserves. That gives us the ability to raise rates even if we haven't brought reserves down to the level that excess reserve used to be before this crisis- when we ran monetary policy the old fashioned way, without interest on reserves. So that gives us the ability to choose the timing separately. To my mind, I think reducing reserves before we raise rates makes a lot of sense. I think there's a lot of good arguments for that. But we're still hashing out the pros and cons of various approaches.

STEVE LIESMAN: One of the most controversial areas here is asset. Where do you figure that into your sequence?

JEFFREY LACKER: Well, for me it's the logical first place to start if you wanna drain reserves. It's what's been increasing reserves since around August or September. The extra purchases we've been making of-- mortgage backed securities and agency debt. And the teams like first out that we ought to withdraw that first. I say that becauseit seems like the best way to reduce reserves in my mind, compared to the alternative.

STEVE LIESMAN: Well, some of the alternatives that have been given a lot of publicity by the Federal Reserve is- been usin' these big reverse repos or these huge term deposits. Do you prefer asset sales to either one of those two?

JEFFREY LACKER: You know, I do. That's the way I'm thinkin' about it right now. Those other methods are- are untested. It's not clear that those would have the same effect as a reduction in the- that draining reserves that way would be- have the same effect on monetary commission.

It's not clear that those would be liabilities of the central bank, but it's not clear that those would be truly non-monetary liabilities. And it's hard for me to see why we would issue our own debt just to avoid asset sale.

STEVE LIESMAN: Wouldn't, I mean, isn't there implicit promise from the Federal Reserve that once they use more resources for a while?

JEFFREY LACKER: I don't think so. I mean, some of these securities go out, you know, ten, 20, 30 years. And, I think that after the dust settles, we have to get to a point where we're holding treasuries only. I think the intervention in the market for mortgage backed securities is designed to channel credit to the housing sector, and I think that's something we should only do in exceptional circumstances, if ever.

STEVE LIESMAN: You've said that before, this idea that the Feds shouldn't really be channeling credit to the mortgage sector or the- but why does it make any sense, for example, to channel credit to the Treasury, which is what it's doing?


STEVE LIESMAN: And buys treasuries?

JEFFREY LACKER: when we buy treasuries, we're t-


JEFFREY LACKER: essentially taking treasuries out of the hand of public.


JEFFREY LACKER: And you're monetizing it.


JEFFREY LACKER: So if from the public's point of view, they see a certain amount of treasuries and a certain amount of monetary liability down there. For us to sell treasuries and buy securities, mortgage backed securities with it, it's like we're issuing treasuries. It's like we're issuing government debt and using the proceeds to buy MBS.

STEVE LIESMAN: I wanna get back to the economy. The Federal Reserve has said that we remained exceptionally low for an extended period. Do you support that?

JEFFREY LACKER: Well, I said a couple months ago I was comfortable with it. I'm still comfortable with it, but my comfort is diminishing somewhat over time. And it's somethin' that, you know, we're not gonna, I'm not be comfortable with forever. I think it's important to recognize that extended period is not a time period with a fixed number of months or a fixed number of meetings attached to it. And we're gonna have to choose policy as the data comes in.

STEVE LIESMAN: If the recovery is shown to be sustained, is it something that you feel requires you to drop that language then?

JEFFREY LACKER: Well, I think the language would be inappropriate shortly before we were increasing interest rates. But other ways of withdrawing stimulus, for example asset sales you know, we could still- I think that language still might be not inconsistent with taking some of those measures.

STEVE LIESMAN: In the old days, we didn't ask Fed presidents questions like this because it just wasn't done. But now there are Fed presidents out there saying, "We may not raise rates till next year." And so I have to ask you that same question. Is that- do you not see any tightening of monetary policy this year? Do you think it's more of a next year story?

JEFFREY LACKER: I think it's true we may not raise rates till next year. I think we may raise rates this year. I think either are possible. I don't have a sense of the probabilities and I'm not willing to really go out on a limb and characterize it. I think we strived to, over the years, to become more and more forthcoming about how we think about how policy is determined in an effort to help people understand how we're going to react to incoming data. But that's not- that's not to promise any particular path for policy. It's people understand how our policy is going to respond to economic development.

STEVE LIESMAN: Is the recession over, in your opinion?

JEFFREY LACKER: I think it's quite likely that when the dating committee gets together, as they're gonna get together some point, they will date the end of the recession, the contraction phase in the middle of last year some time.

STEVE LIESMAN: Let me go back. I don't mean to keep goin' backwards in the economy policy.


STEVE LIESMAN: And that's why they're so intertwined. It strikes me the Federal Reserve is trying to not repeat too exact opposite history. 1937, where- ostensibly stimulus was taken, and 2004 when it was taken away too late. What's the danger, in your opinion?

JEFFREY LACKER: That's a good question. So there's danger in terms of the probability of something going wrong, and then there's danger in terms of the cost of something going wrong. So waiting, you know, waiting too long has this sort of ratchet effect risk that inflation expectations could slide up and we could get stuck in, you know, a situation where inflation's higher than we want to and we have to struggle to bring it down.

And that's- it's a really costly process. I think history has been pretty clear about that. It happened a lot in the '70s, for example. The other risk, obviously, is that you stall out a recovery by moving too soon. And to my mind I think the risk going forward in this expansion is gonna be a little more tilted towards waiting too long. And I'm gonna be pretty.

STEVE LIESMAN: One of the other lessons, I guess a controversial lesson 'cause not everybody agrees, is the idea that the Fed was too transparent about the trajectory of policy. Do you think the Fed needs to inject some, what's the right word? Vagueness into the trajectory so that the market don't get too comfortable with what the Fed is gonna do next?

JEFFREY LACKER: Well, I don't think vagueness is the answer. And I don't think just adding random noise or a trembling hand is the answer, either. I think the thing for us to do is to communicate clearly that it depends and it's gonna depend on how economic data come in, how the economy behaves, and how things look at each meeting.

STEVE LIESMAN: Kathy used the phrase "constructive ambiguity." Is something you that you think is a good policy?

JEFFREY LACKER: I think history has been unkind to constructive ambiguity. With all due respect to- dear friend Kathy used to sit next to me at.


JEFFREY LACKER: It's kind of like having your cake and eating it too. You're getting to pretend you're not gonna do something, but keeping people guessing that you're maybe gonna do it.

STEVE LIESMAN: Back to the economy one more time. Do you expect this to be a jobless recovery?

JEFFREY LACKER: So how the labor market performs is gonna be interesting. And it's hard to tell at this point. You know, jobless is sort of relative. I expect employment to expand this year. Probably not very rapidly and probably not enough to bring the unemployment rate down by a tremendous amount over the next 12 to.

But the unemployment rate should come down a bit. I tend to focus on employment and employment growth when I look at the labor market. 'Cause as you can see the last few months, we've had tremendous growth in the labor force. As the labor market's turned, it's drawn more people into the labor market, even as jobs are picking up. And so unemployment has sort of treaded water. It's been treading water even as job growth is treading.

STEVE LIESMAN: Is this gonna be a jobless recovery?

JEFFREY LACKER: It's hard to say at this point. I think we'll get job-- positive job growth for sure. Whether it's robust or just tepid or not, I think it's too soon to say.

STEVE LIESMAN: The productivity numbers have been off the charts. How do you process that data that we've seen that shows six, seven, eight, even nine percent growth?

JEFFREY LACKER: It's been really stunning. I think it's a one time level effect. I think it's a one time search by a lot of business people, small and large for economies, a way to do more with less. I think a lot of managers; I think a lot of small business heads are themselves out, getting a kind of productivity out of their work force. I think we'll see some payback this year.

STEVE LIESMAN: Payback means hiring, right? I mean, such a-


STEVE LIESMAN: in productivity level of GDP-


STEVE LIESMAN: you need more workers


STEVE LIESMAN: to keep that going.

JEFFREY LACKER: And I think that's I mean, that's the positive. That's the outlook for positive employment growth.

STEVE LIESMAN: Does that suggest to you that you think employment will accelerate as the year goes down?

JEFFREY LACKER: I think so. I mean, it's you know, if you take out the census workers, it was, you know, pretty wild employment growth last month. So I think it'll gradually pick up over the course of the year.

STEVE LIESMAN: I guess we have to do more piece of the economy.


STEVE LIESMAN: It would be really silly if we didn't just talk about inflation.


JEFFREY LACKER: How much of a concern is inflation right now? You, it seems like the numbers are going down on a year by year basis. But you also have things outlined, for example, commodity prices in oils and also, there seems to be.

JEFFREY LACKER: Yeah. So, 2008 was a very- in terms of the time translation, 2009 has- it's been kind of choppy. But it's been centered around one and a half percent and that seems to be-. You know, there are these little wiggles. We seem to have had some slow months recently. But it's not too much to me to really signal a strong downward trend in inflation.

STEVE LIESMAN: What do you say to the- I don't know what you call 'em. The die hard monitors out there that say, "You know what? You triple the money supply, you create inflation." You guys have tripled the money supply. Where's the inflation that you would have expected to come along?

JEFFREY LACKER: Well, die hard monitors would all know that if the demand for money increases and you increase the supply, you might not get inflation. And that's what we thought in the end of 2008, the big growth in bank reserves that we accommodated in 2008 was because banks, especially the large ones, needed to build up a huge liquidity buffer given what was going on in financial markets.

It made perfect sense for them. We have essentially accommodated that by various since then. It was only at the end of last summer, though, that our asset purchases displaced a lot of the borrowing that was going on to satisfy that demand for reserves and it started pushing the supply of reserves sort of beyond where demand, you know, otherwise would have had it. And that's helped pushed down some short term interest rates like three month T-bills, RP rates and the like since then.

STEVE LIESMAN: One more monetary policy. Which is


STEVE LIESMAN: the purchases of mortgages seems to have been a very successful tool for attacking the long end of the curve. If I'm not mistaken, you try to control short term rates in order to control long term rates. But now you've found yourself with this fabulous tool in order to actually control long term rates. Do you plan to give that up?

JEFFREY LACKER: So, the mechanism there. You have to be real careful about thinking through. So if we bought the same amount of treasuries only, rather than bought than bought so many mortgage backed securities, frankly we would have had more or less the same effect on the long end of the treasury curve.

You know, I think what those purchases is put so much reserves out there that it puts pressure on the very short end of the curve. You know, just a couple of months out. I think that's the predominant effect. I think the price of the longer curve is driven by expectations about real interest rates of inflation going forward.

STEVE LIESMAN: This term they talk about, issues of banking regulations Federal Reserve.


STEVE LIESMAN: Overall, your thoughts on the which I saw on your desk earlier.

JEFFREY LACKER: (LAUGHS) Yeah. I've got three different- I've got two different don bills over there on the table. So the issue of our time has to do with the government's safety net for financial firms. And it's grown tremendously. And containing that, establishing clear boundaries number one priority. And as I read the don bill and the mechanism it sets up for the resolution authorities, it doesn't strike me that it's likely to help us there. And in fact, it seems to me like a major danger is that there's gonna be more instability markets rather than less.

STEVE LIESMAN: Where is the don bill?


STEVE LIESMAN: On the issue of resolution?

JEFFREY LACKER: so the mechanism that's given rise to the huge increase in the safety net is just the ambiguity of commitment. So we had some economists- about ten years ago trying to measure the size of the financial safety net.

What fraction of financial firms' liabilities are guaranteed by the U.S. government? So back in 1999, when we first did this exercise, 28 percent were explicitly guaranteed. So that was bank deposits and PBGC, pension benefit guaranteed corporation covered liabilities, and another 17 percent were the implicit guarantees behind Fannie and Freddie. Forty-five percent of the financial sector benefited from the safety net.

Those numbers for the end of 2008 add up to 59 percent, nearly 60 percent. The fraction that represents explicit guarantees has fallen from 28 to 22 percent. The rest is guarantee of 37 percent financial sector liability. Implicit guarantees. How does that happen? Well, people talk about interconnectedness between different firms in the financial sector. And what they have in mind are credit exposures, that one firm's exposed to the other.

There's another major connectedness, though, that I think is really important in a crisis. It's what firms believe about how one firm is gonna get treated by the government depends on how other firms are treated by the government. So for example, when we did what we did with Bear Sterns in March of '08, that had implications for what investors expected we would do with Lehman and Merrill and Morgan Stanley.

And similarly, when Lehman filed for bankruptcy that had an opposite effect on what people expected the government would do for Merrill, Morgan Stanley, and their creditors. In a crisis, policy makers always looking at the effect of this decision on other firms. And the fear that drives intervention, I think, is predominantly the fear that not supporting the creditors of this firm is gonna lead investors to pull away from other firms and cause volatility

JEFFREY LACKER: now, but that's just a byproduct--

JEFFREY LACKER: No. That's a byproduct of ambiguity. That's not an argument against a regime in which they never believed we would intervene with those firms to begin with.

STEVE LIESMAN: fast rule that government cannot come in.


STEVE LIESMAN: Under any circumstances?

JEFFREY LACKER: I don't see why, I don't see the rationale for us adding uncertainty, adding ambiguity to the situation. And the problem becomes the reaction of the markets to this ambiguous guarantee. With that ambiguity in place people that are- firms that are outside the safety net have an incentive to make themselves have the characteristics that would get them support in a crisis.

STEVE LIESMAN: The don bill allows for a pre-bankruptcy judge penalty solvency. It allows go to. It would allow management to be replaced and shareholders to. How much clearer could the government be in the bill that there will be real losses to investors?

JEFFREY LACKER: It allows those things. But it does not require them. Moreover, it provides tremendous discretion to the Treasury and the FDIC to use that fund to buy assets from the failed firm, to guarantee liabilities to the failed firm, to buy liabilities of the failed firm. They can support creditors in the failed firm. They have tremendous amount of discretion. And if they had the discretion, they're likely to be forced to use it in a crisis.

STEVE LIESMAN: You don't think that ultimately what happened in the financial crisis was about a market failure? Do you think that there was actually some rational market here when it came to relying upon the government to come in and bail out?

JEFFREY LACKER: A lot's been written about the magnitude of losses of the subprime mortgages. And so you think of those losses as coming from the real economy back into the financial system. How would you expect the financial system to handle it?

What we saw in 2007, early 2008, seems pretty reasonable to me. There's a lot of uncertainty about counter parties. Counter party risk spreads rose. There was a demand for safety, demand for liquidity, demand for very safe investments.

I think it responded pretty well. What happened in 2008 was a tremendous amount of uncertainty at the end in the fall about how government policy was gonna treat the stress situation. 'Cause you have to realize, after AIG, there had been five or six, seven different institutions handled five or six different ways.

STEVE LIESMAN: But before that, all of the concentrations of holding, of the super senior on the part of many of the investment banks the leverage in the system, does that feel like it was a rational market at work there?

JEFFREY LACKER: I think the market was significantly distorted by too big to fail, essentially. Is the notion that some institutions were going to benefit from government support. First and foremost, you place on that list Fannie and Freddie. Moreover, some of the large financial institutions were declared in early, mid-2000, mid-1980s. I mean, declared the largest bank holding companies likely to be too big to fail.

STEVE LIESMAN: But Lehman got wiped out. AIG got, the shareholders got wiped out. Bear Stearn's share was almost entirely wiped out. They were relying on too big to fail, but they didn't get it. They were wrong to relax, weren't they?

JEFFREY LACKER: I think there's too much focus in this discussion on shareholders. The critical actors are creditors. Bear Stearn's creditors essentially received support. AIG creditors received support. And so on.

STEVE LIESMAN: So you believe the government right now? Believe the government both in terms of the Federal Reserve and the Treasury administration is gonna unambiguous unsecured creditors that they could lose everything if the bank they're lending through is just?

JEFFREY LACKER: I agree. I mean, to achieve the clarity about how far the safety net extends and more importantly where it does not extend, we need to be clear about where those boundaries are and we need to follow through in a way that's consistent with that. That's gonna be the tough spot: letting an institution go down that's outside the safety net, even if it involves some pain and suffering.

STEVE LIESMAN: include by talkin' about the sort of third which is the bank regulator. A couple things. How bad right now can the banks that you supervise is the commercial real estate problem?

JEFFREY LACKER: So ours is one of a handful of districts around the country, Federal Reserve districts, where commercial real estate exposure is pretty significantalong our community banks and some regionals. And it's significant in particular slices of the industry. But it's a manageable problem so far.

You have to realize that community banks vary tremendously in the strategies they'd employ, the regions they were active in what part of the market they were looking in, their ability to execute on those strategies. So you have some institutions whose strategies turned out very poorly, others that turned out pretty well. And what you're seeing now is a shift in market share between institutions. The problem institutions situations are worked out.

STEVE LIESMAN: Do the don- is the loan at a market value, which is still needs the market. They recognize the expected losses here, or are they still living in yesterday's evaluations?

JEFFREY LACKER: Our examiners are out in the field with more and more frequency now given these problems. They make sure that the reserves put aside for these bad loans are appropriate.And- they're doin' a very good job of ensuring that. So I have no information that suggests any—massive evaluation. I think that's very unlikely.

STEVE LIESMAN: How about the residential problem? Do you feel like the residential problem is-

Do you feel as if the banks have essentially worked through their exposures on residential real estate?

JEFFREY LACKER: Some banks are still workin' through 'em. But I think the path ahead is clear for that. And I think more broadly the economy has got a lot to digest on the residential side. But I think we've hit sort of an equilibrium, that we're gonna get, you know, half a million starts at an annual rate.

Prices seem to have stabilized. I think that was the key. And so from now it doesn't look likely housing's ever gonna be a drag on growth, not to any big extent. I don't think we should look to housing for growth, however, right now. I don't think it's gonna be a big contributor to growth.

STEVE LIESMAN: Speaking of your- I know that you said that people in the Fed really, who needs to be involved in regulating smaller.


STEVE LIESMAN: Chair- Senator Dodd has come out with a statement, a response to that. That, you know what? We've had witnesses testify before a committee and say, "You know what? We can't find any evidence of the Fed using its supervisory- supervision on smaller banks in monetary policy." How do you respond to that?

JEFFREY LACKER: Well, so when you go you have to realize you- each of us talks about how we view economic conditions- we don't put footnotes in the transcripts- or the minutes tell people where we got all this information. I can guarantee that all around the system people knowledge from all their contacts, but from banks in particular.

More we have this lender last resort function that's a very important sort of safety valve liquidity source in normal times for small banks around the country. And we have to know when they call us up at quarter to 6:00 in the afternoon and the Fed wire's gonna go down at 6:30, it's gonna close, and they need to know. They've had somebody wire some money out unexpectedly. We have to know, is this a big bank or a bad bank? Is this a healthy bank or should we, you know, cut them off? And we have to be able to monitor banking conditions. We have to know that. And without having a hand in that, it-- we're just gonna be very poor at it.

STEVE LIESMAN: Speaking of the anecdote you get from the bank, there's a lot of talk whether or not the banks are being- their lending standards are too tough right now. Do you foresee another sort of opening of those and loosing up those credit fingers?

JEFFREY LACKER: Oh, I think that'll happen naturally as the recovery takes off. It's just natural the credit standards vary over the business cycle. And if you were designing how credit cycles should vary over the business cycle, you'd say they should vary. Iv good times you know, borrowers have better risk than the same borrower in the middle of the recession. Because the economic environment they operate in is riskier. So you'd expect some pull back on credit standards.

STEVE LIESMAN: Can you just get to one final area here which is the issue of debts. The government has now running multi trillion dollar for probably several years. The deficit is up to ten percent of GDP and most people say percent of GDP. How much of a threat to the economy is the price stability and to percent?

JEFFREY LACKER: I think it's a significant challenge over the next few years throughout this expansion. It's gonna mean more public sector borrowing than otherwise and it's gonna mean less private sector capital formation. And private sector capital formation is what drives increases in productivity and increases in standards of living for all our citizens. So it's gonna mean slower improvements in standards of living, slower to the real wages. Can those expenditures make up for it somehow? I don't know. We'll see. But it's gonna mean slower growth.

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