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CNBC Exclusive: CNBC Transcript: CNBC’s Steve Liesman Sits Down with New York Fed President Bill Dudley Today on CNBC’s “Squawk Alley”

WHEN: TODAY, FRIDAY, OCTOBER 9TH

WHERE: CNBC'S "SQUAWK ALLEY"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with New York Fed President Bill Dudley today, Friday, October 9 on CNBC's "Squawk Alley." Following is a link to the video of the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000430858.

All references must be sourced to CNBC.

DAVID FABER: INVESTORS TODAY ARE DIGESTING MINUTES FROM THE FED'S SEPTEMBER MEETING. LET'S GET TO STEVE LIESMAN WHO IS IN NEW YORK WITH AN IMPORTANT EXCLUSIVE INTERVIEW INVOLVING THAT FED. STEVE, TAKE IT AWAY.

STEVE LIESMAN: DAVID THANKS VERY MUCH. I AM HERE AT THE NEW YORK FEDERAL RESERVE BANK WITH NEW YORK FED PRESIDENT BILL DUDLEY. BILL, THANKS FOR JOINING US TODAY.

BILL DUDLEY: GREAT TO BE HERE STEVE.

LIESMAN: LET'S GET RIGHT TO THE NEWS FROM YESTERDAY. A LOT OF PEOPLE LISTENED TO THAT AND READ THOSE MINUTES YESTERDAY AND THEY THOUGHT, YOU KNOW WHAT, SEPTEMBER WAS REALLY NOT THAT CLOSE OF A CALL. IN YOUR VIEW WHEN YOU WENT INTO THAT MEETING, WAS IT A CLOSE CALL, AND WHERE ARE WE NOW?

DUDLEY: I THINK GOING INTO THE MEETING IT'S NOT FOR ME TO JUDGE AT THAT TIME WHETHER IT'S A CLOSE CALL OR NOT. MY OWN VIEW WAS I WANTED TO SEE MORE INFORMATION. YOU KNOW INTERNATIONAL DEVELOPMENTS IN AUGUST, FINANCIAL MARKETS DEVELOPMENTS IN AUGUST, I THINK RAISE SOME QUESTIONS ABOUT THE STRENGTH OF THE GLOBAL OUTLOOK. I THINK THERE WERE QUESTIONS ABOUT HOW THAT GLOBAL OUTLOOK WOULD AFFECT THE U.S. THE ECONOMY IN THE U.S. I THOUGHT WAS LIKELY TO SLOW IN THE SECOND HALF OF THE YEAR WE'RE SEEING SOME EVIDENCE OF THAT SLOWING. WE HAD A LOT OF INVENTORY ACCUMULATION IN THE FIRST HALF OF THE YEAR AND NOW WE ARE GOING TO SEE SOME INVENTORY DRAG IN THE SECOND HALF AND SO THE ECONOMY IS DOWN SHIFTING A LITTLE BIT. AND INFLATION IS BELOW OUR OBJECTIVE SO MY VIEW IN SEPTEMBER IT MADE SENSE TO WAIT FOR SOME MORE INFORMATION.

LIESMAN: ONE THING THAT STOOD OUT TO ME FROM THE MINUTES YESTERDAY WAS THIS SENSE OF ERODING CONFIDENCE THAT WE'RE GOING TO GET BACK TO 2%. ARE YOU LESS CONFIDENT NOW THAN YOU WERE THAT THAT 2% INFLATION TARGET IS GOING TO BE ACHIEVED?

DUDLEY: I THINK. I MEAN I CERTAINLY HOPE WE'RE GOING TO BACK TO 2%. WE'RE GOING TO CONDUCT A SET OF MONETARY POLICIES THAT GENERATE THAT OUTCOME OVER TIME. NOW I THINK THE KEY QUESTION IS ARE WE GOING TO GET SUFFICIENT GROWTH IN THE ECONOMY TO PUT DOWNWARD PRESSURE ON THE UNEMPLOYMENT RATE, TO GET ACCELERATION IN WAGES? WE GET THAT, THEN I'LL BE REASONABLY CONFIDENT ABOUT INFLATION RETURNING TO 2%. THE LABOR MARKET DEVELOPMENTS IN THE LABOR MARKET DEVELOPMENTS ON THE GROWTH RATE OF THE ECONOMY, HOW THAT AFFECTS THE LABOR MARKET THAT WILL BE IMPORTANT IN TERMS OF HOW CONFIDENT YOU ARE ABOUT GETTING BACK TO 2%.

LIESMAN: IT DOESN'T TAKE A GENIUS TO SAY THAT IF YOU ARE LOOKING TO THE LABOR MARKET FOR CONFIDENCE, YOU'RE NOT GETTING A WHOLE LOT OF IT. THAT LAST LABOR REPORT WAS PRETTY LOUSY WOULDN'T YOU SAY.

DUDLEY: IT WAS DEFINITELY WEAKER. AT THE SAME TIME YOU GET 120,000 JOB A MONTH, 150,000 A MONTH. THAT'S PROBABLY SUFFICIENT TO CONTINUE TO PUSH THE UNEMPLOYMENT RATE DOWN OVER TIME. THE OTHER THING IS IT'S VERY IMPORTANT NOT TO OVERWEIGHT ONE PAYROLL EMPLOYMENT REPORT. PAYROLL NUMBERS HAVE A LOT OF VOLATILITY IN THEM MONTH TO MONTH. LET'S SEE HOW THE DATA UNFOLDS AND BY DATA I MEAN EVERYTHING. ECONOMIC RELEASE DATA, WHAT'S HAPPENING ABROAD AND HOW THAT'S LIKELY TO AFFECT THE UNITED STATES. WHAT'S HAPPENING TO FINANCIAL CONDITIONS AND HOW THAT WEIGHS IN THE OUTLOOK. IT'S ALL ABOUT ALL THE THINGS THAT AFFECT THE OUTLOOK. IF WE ARE CONFIDENT ABOUT THE OUTLOOK, IF WE ARE CONFIDENT THE UNEMPLOYMENT RATE IS GOING TO CONTINUE TO DECLINE THEN I THINK WE WILL PROBABLY BECOME MORE CONFIDENT ABOUT WHAT'S GOING TO HAPPEN TO INFLATION AND THAT WILL THEN LEAD TO LIFT OFF.

LIESMAN: WE ARE GOING TO GET TO THIS QUESTION OF HOW CONFIDENT YOU ARE IN A RATE HIKE THIS YEAR WHICH EVERYBODY IS GOING TO WANT ME TO ASK AND WANTS TO KNOW THE ANSWER BUT I WANT LAY THE GROUND WORK A LITTLE FIRST. HOW CONCERNED ARE YOU ABOUT OVERSEAS DEVELOPMENT IN CHINA. WE HAVEN'T HEARD YET ANY PERSON FROM THE FED SAYING HOW MUCH CAN CHINESE WEAKNESS AFFECT OR BRING DOWN U.S ECONOMIC GROWTH AND REDUCE U.S. INFLATION?

DUDLEY: I THINK THE DIRECT LINKAGE FROM CHINA BACK TO THE U.S. IS VERY SMALL. WE DONT HAVE A TREMENDOUS AMOUNT OF DIRECT TRADE WITH CHINA IN TERMS OF US SELLING GOODS TO THEM. IF CHINA WERE TO GROW 6% RATHER THAN 7%, THE AFFECTS ON US ARE PRETTY DIMINIMOUS – I THINK THE BIGGER QUESTION IS REALLY HOW DOES CHINESE GROWTH FEED INTO COMMODITY PRICE WEAKNESS WHICH PUTS PRESSURE ON A NUMBER OF EMERGING MARKET ECONOMIES AND IF A NUMBER OF EMERGING MARKET ECONOMIES ARE UNDER STRESS. HOW DOES THAT SLOWDOWN AFFECT US? ONE CAN IMAGINE IF THE EMERGING MARKET ECONOMISTS AS A GROUP ARE GROWING VERY SLOWLY AND THEIR CURRENCIES ARE DEAPPRECIATING AGAINST THE U.S., THAT'S NEGATIVE FOR U.S. GROWTH AND NEGATIVE FOR U.S. INFLATION. WE HAVE TO SORT OF FEAR FACTOR THAT INTO OUR CONSIDERATIONS.

LIESMAN: THE CONDUITS FOR THAT HAVE BEEN WEAKER MANUFACTURING AND WEAKER EXPORTS. HOW MUCH CONCERN DO YOU HAVE FOR THOSE SECTORS OF THE ECONOMY, AND HOW MUCH DO THEY PLAY INTO THE WEAKNESS YOU ARE TALKING ABOUT IN THE SECOND HALF?

DUDLEY: I THINK IF YOU LOOK AT THE U.S. ECONOMY RIGHT NOW, YOU SEE A PRETTY STRONG DOMESTIC ECONOMY. YOU ACTUALLY SEE STRONG DOMESTIC DEMAND AND CONSUMPTION IS ACTUALLY GROWING PRETTY QUICKLY. YOU SEE SIGNIFICANT DRAG FROM INVENTORIES, BUT THAT'S GOING TO BE TEMPORARY. THAT WILL ONLY LAST A QUARTER OR TWO. YOU SEE PERSISTENT WEAKNESS FROM THE TRADE SECTOR. I WOULD EXPECT THE WEAKNESS FROM THE TRADE SECTOR TO PERSIST THROUGH 2016 BECAUSE THE DOLLAR HAS CONTINUED TO APPRECIATE OVER THE LAST YEAR. IT'S A MIXED PICTURE. DOMESTIC SIDE OF THE ECONOMY LOOKS REALLY GOOD. SOME TEMPORARY DRAG FROM INVENTORIES AND MORE PERSISTENT DRAG FOR THE TRADE SECTOR.

LIESMAN: NOW LET'S TALK ABOUT SOME OF THE UPCOMING MEETINGS. IS IT STILL POSSIBLE THE FEDERAL RESERVE -- HOW ABOUT THIS? I DON'T WANT TO GIVE IT THAT OPEN-ENDED. IS IT LIKELY THE FED COULD HIKE RATES IN OCTOBER?

DUDLEY: I MEAN, IT'S POSSIBLE. I THINK, YOU KNOW, THE CHAIR HAS SAID -- I AGREE WITH HER IN THAT EVERYTHING IS ON THE TABLE. AT THE SAME TIME HAVE WE SEEN ENOUGH INFORMATION BETWEEN SEPTEMBER AND OCTOBER TO CONVINCE US TO DO IN OCTOBER WHAT WE DIDN'T DO IN SEPTEMBER? THAT WOULD BE THE QUESTION I WOULD ASK.

LIESMAN: AND HOW WOULD YOU ANSWER THAT?

DUDLEY: I'M NOT GOING TO PREJUDGE WHAT WE'RE GOING TO DO AT THE OCTOBER MEETING. YOU KNOW, I THINK EVERY MEETING SHOULD BE A LIVE MEETING WHERE WE GO INTO THE MEETING AND ASSESS THE EVIDENCE AND ASSESS HOW THAT WEIGHS ON OUR OUTLOOK FOR THE ECONOMY, BOTH WITH RESPECT TO THE LABOR MARKET AND INFLATION, AND THEN USE THAT AS THE BASIS FOR MAKING A DECISION ABOUT WHETHER IT IS TIME TO LIFT OFF.

LIESMAN: DENNIS LOCKHART SAID YESTERDAY HE STILL THINKS A RATE HIKE IS LIKELY THIS YEAR. ARE YOU IN THAT CAMP AS WELL?

DUDLEY: BASED ON MY FORECASTS, YES, I AM. BUT IT'S A FORECAST. AND WE ARE GOING TO GET A LOT OF DATA BETWEEN NOW AND DECEMBER. SO IT'S NOT A COMMITMENT. SO IF I SAY I THINK IT'S LIKELY THIS YEAR, DOESN'T MEAN THAT I'M COMMITTING TO DOING IT THIS YEAR. IT'S JUST BASED ON MY EXPECTATION OF HOW THE ECONOMY IS MOST LIKELY TO EVOLVE. YOU KNOW, THERE'S CERTAINLY A RISK THAT THE ECONOMY EVOLVES IN A DIFFERENT WAY THAN I EXPECT, AND OBVIOUSLY BE TOTALLY INAPPROPRIATE FOR ME TO NOT TAKE THAT INTO CONSIDERATION IN TERMS OF WHAT I THINK IS APPROPRIATE FOR MONETARY POLICY.

LIESMAN: BILL, THERE'S BEEN ENORMOUS VOLATILITY IN EQUITY MARKETS AND EVEN IN FIXED INCOME MARKETS. SOME HAVE BLAMED THE FEDERAL RESERVE FOR THIS. THAT THIS DATA DEPENDENT REGIME THAT YOU ARE UNDER RIGHT NOW IS CREATING MARKET VOLATILITY. DO YOU THINK THERE ARE NEGATIVE OUTCOMES FROM DATA DEPENDENCE RIGHT NOW THAT ARE SHOWING UP IN THE MARKET AND ITS VOLATILITY?

DUDLEY: WELL, I JUST DON'T UNDERSTAND WHY YOU WOULDN'T WANT TO MAKE YOUR DECISION BASED ON HOW THE DATA EFFECTS YOUR OUTLOOK RATHER THAN SORT OF PRECOMMITTING TO SOME LIFTOFF ON CERTAIN TIME. THAT WOULD SEEM TO BE IRRESPONSIBLE IF THE FED IS ACTUALLY GOING TO ACHIEVE ITS OBJECTIVES OF MAXIMUM EMPLOYMENT AND PRICE STABILITY. I THINK IT'S ALSO IMPORTANT NOT TO OVERWEIGHT THE VOLATILITY IN THE MARKET. IF THE MARKET JUST GOES UP AND DOWN DAY TO DAY, THAT DOESN'T HAVE BIG IMPLICATIONS FOR THE ECONOMIC OUTLOOK, SO IT SHOULDN'T REALLY CONCERN US AS FEDERAL RESERVE OFFICIALS. ONE MORE THING ON THAT, STEVE.

LIESMAN: YES, PLEASE. GO AHEAD.

DUDLEY: THE ONLY THING I WOULD SAY IS, I WOULD EXPECT MARKET VOLATILITY TO GO UP IN ANY SITUATION WHEN THE FED IS GETTING CLOSER TO LIFT-OFF. A FEW YEARS AGO WHEN IT WAS VERY CLEAR THAT THE FED WAS FAR AWAY FROM BEGINNING TO NORMALIZE MONETARY POLICY, DATA DIDN'T MATTER VERY MUCH. IF IT WAS A LITTLE STRONGER OR A LITTLE WEAKER, THE FED WAS STILL NOT GOING TO LIFT OFF. BUT NOW AS WE GET CLOSER TO THAT LIFTOFF POINT, NOW THAT WE'RE AT A 5.1% UNEMPLOYMENT RATE, THE DATA REALLY DOES MATTER IN TERMS OF HOW IT AFFECTS THE OUTLOOK, AND SO, OF COURSE, THE MARKET IS GOING TO REACT TO THAT DATA MUCH MORE NOW THAN IT WOULD A FEW YEARS AGO.

LIESMAN: I WAS ASKED THIS MORNING ON THE SHOW, BILL, IF THERE WAS A CHANCE THAT THERE WOULD BE ADDITIONAL QUANTITATIVE EASING. IS THERE SOME PROBABILITY OF THAT IF THE ECONOMY WEAKENS AGAIN?

DUDLEY: I MEAN, YOU NEVER WANT TO SAY NO TO ANYTHING BECAUSE OBVIOUSLY WE HAVE FULL PANOPLY OF TOOLS THAT WE COULD USE IN LIGHT OF CHANGES IN ECONOMIC SERVICES. BUT IT'S NOT SOMETHING THAT I WOULD SPEND ANY TIME THINKING ABOUT AT THIS STAGE.

LIESMAN: WHAT ABOUT USING NEGATIVE INTEREST RATES AS THE NEXT TOOL FOR STIMULATING THE ECONOMY?

DUDLEY: WELL, IT'S OBVIOUSLY AN OPTION. WE DECIDED EVEN DURING THE PERIODS WHERE THE ECONOMY WAS DOING THE POOREST, AND WE WERE PRETTY FAR AWAY FROM OUR OBJECTIVES NOT TO MOVE TO NEGATIVE INTEREST RATES BECAUSE OF SOME CONCERN THAT THE COSTS MIGHT OUTWEIGH THE BENEFITS. THAT SAID, SOME OF THE EXPERIENCES IN EUROPE SUGGEST THAT MAYBE YOU CAN USE NEGATIVE INTEREST RATES AND THE COSTS AREN'T AS GREAT AS YOU WOULD ANTICIPATE. BUT THIS IS NOT A CONVERSATION I THINK IS RELEVANT RIGHT NOW. I THINK WE'RE TALKING ABOUT AN ECONOMY THAT'S GROWING A BIT ABOVE TREND. THE LABOR MARKET IS GRADUALLY TIGHTENING, AND IF WE THINK THAT'S GOING TO CONTINUE, AND THAT'S THE KEY QUESTION. IF WE THINK THAT'S GOING TO CONTINUE, IN LIGHT OF ALL THE INFORMATION WE RECEIVE, THEN WE ARE SETTING THE STAGE FOR LIFTOFF.

LIESMAN: WE REALLY HAVE TO GO, BILL, BUT I CAN'T NOT ASK THIS QUESTION. THE POSSIBILITY OF A SHUTDOWN IN WASHINGTON AND THE IMPACT THERE, IS THAT SOMETHING THAT ANIMATES YOUR POLICYMAKING RIGHT NOW?

DUDLEY: I DON'T THINK SO. I MEAN I THINK FIRST OF ALL, I WOULD EXPECT COOLER HEADS TO PREVAIL. AND I THINK IT'S CRAZY TO EVEN THINK ABOUT NOT PAYING THE DEBTS THAT YOU ARE OBLIGATED TO PAY OVER TIME. OBVIOUSLY, YOU KNOW, WE HAVE TO TAKE THE WORLD AS IT IS, THOUGH, AND IF IT EVOLVES IN SOME CRAZY WAY, WHICH I THINK WOULD BE TOTALLY INAPPROPRIATE, THAT WOULD OBVIOUSLY WOULD FACTOR IN OUR DECISIONS JUST LIKE ANY OTHER DEVELOPMENT WOULD FACTOR INTO OUR DECISION MAKING.

LIESMAN: BILL, THANKS FOR JOINING US TODAY.

DUDLEY: THANK YOU.

LIESMAN: NEW YORK FED PRESIDENT BILL DUDLEY. DAVID, BACK TO YOU GUYS.

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