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CNBC Exclusive: CNBC Transcript: CNBC's Steve Liesman Sits Down with Federal Reserve Governor Daniel Tarullo on CNBC's "Power Lunch" Today


WHEN: Today, Tuesday, October13th

WHERE: CNBC's "Power Lunch"

Following is the unofficial transcript of a CNBC exclusive interview with Federal Reserve Governor Daniel Tarullo and CNBC's Steve Liesman on CNBC's "Power Lunch" (M-F, 1PM-3PM ET)today. Following is a link to the interview on

All references must be sourced to CNBC.

Brian Sullivan: Welcome back to "Power Lunch," everybody. Let us get right now to Steve Liesman and his exclusive interview with Fed Governor Daniel Tarullo. Steve?

Steve Liesman: Brian, thanks a lot. I'm live from the Federal Reserve building in Washington with Fed Governor Dan Tarullo, who is a member of the federal market committee, a permanent voter as well as the top federal reserve official when it comes to bank supervision. Right now, Dan, I want to ask you, I was reading BenBernanke's recent book, he talks about an exchange he had with Jamie Dimon fromJPMorgan. And Jamie asked, has anyone bothered to truly count the cumulative effect of all of these regulations on the economy? It was more than four yearsago today. My question to you is, do we know yet what the economic impact is,the cumulative effect of these regulations? Are they holding back economicgrowth?

Dan Tarullo: Well Steve, one thing I think we know for sure is that we have a safer financial system now than we did seven or eight or nine years ago. The second thing I think we knowis that it is difficult to disentangle the impact of regulation from on the onehand to overall performance of the economy, the adequacy of adequate demand and– of aggregate demand. And secondly, to be sure about what baseline we'reusing. If people use 2005 as a baseline, that's really not the right way tolook at things. Having said that, I think that we do have a pretty good sensethat financial institutions are able to operate in a sensible and profitablefashion. But we are surely looking at the effects of regulation, particularlyon smaller institutions, to see if there are changes that can be made that willallow for more efficient, but still safe intermediate issues.

Steve Liesman: But I have to come back to the question. We do this with taxes and we do this with otherregulations. do we need to step back and say here's the total cost of bankinganalyst mike mayor recently said that lending right now loan growth is one-third the normal economic expansion rate right now. is that not part of the cost from regulation?

Dan Tarullo: Again, as I said a moment ago, if one has to try to disentangle whatever impact from regulation there is with from the overall performance of the economy, which as you know has been growing barely above trend for some time now. I will say that in anumber of sectors lending does seem to be healthy. it seems to be in autos andin credit cards and in a lot of C&I lending. it seems to be about where onewould expect given the growth of the economy.

Steve Liesman: The number of new acronyms in the banking business would fill a new dictionary. there are leverage ratios, supplementary level ratios and there is high quality lending, HQLAs or something like that. did i get that right?

Dan Tarullo: Yes.

Steve Liesman: I just have one question about all of this stuff Is it the policy of the federal reserve to force large banks to be smaller?

Dan Tarullo: It's not the policy to force them to be smaller. but I think it is the policy of our bank regulatory system as embodied in congressional legislation to make sure that large institutions of systemic importance do internalize the potential risks to the broader economy from their size and interconnectedness. so in essence, a firm has a choice which is that it can either maintain substantially higher capital levels or it can make a judgement that some forms of business or certain size of that business may not be worth the higher capital charge that takes account of those negative externalities. It really isup to the institution to make that evaluation but what we've tried to do it ina context that forces them to internalize costs.

Steve Liesman: Let me pivot now from that realm of bank supervision into monetary policy. We've had peoplefrom both sides of the spectrum speaking. we had the governor Lael Brainard saying it makes sense to wait and see just yesterday. and then this morning Jim Bullard from St. Louis says things are good enough we're at a normal place with the fed. should be hiking rates right now. where do you put yourself on that spectrum?

Dan Tarullo: The best thing I can probably do Steve is to explain how i am looking at the economy. and to do that, let me check off a few factors. one, where have we been? basically beenin a moderate, elongated recovery in which growth has never gotten too farabove trend which tells us that we don't have an enormous amount of momentumeven though it made a fair amount of progress. Secondly with respect to ourdual mandate, there's no question we made a lot of progress in the labor market. But i don't think anybody knows how much more progress could bemade in a noninflationary fashion. unemployment is already down at or belowwhere just a few years ago many people thought the natural rate was. andthere's a good case to be made from the proposition that at least temporarilythe natural rate may be somewhat lower. on inflation, for most of the timesince the crisis and the recession, we have been running below the FOMC stated 2% target. and we're currently in a globally disinflationary environment with the impact of the stronger dollar also and lower energy crisis playing their part. third factor i think, Steve, is that there is a good bit of uncertainty right now, as you know, there's the debate between know,whether we've got an extended cyclical effect or whether there is some secular things going on in the economy that are changing growth potential and changing optimal policy. i don't think the FOMC is going to be able to disentangle that when -- before we have to make decisions. i do think under these circumstances it's probably wise not to be counting so much on past correlations, things like the Philips curve which haven't been operating effectively for ten years now. and instead to really look for some tangible evidence of, for example, hiccups in wages or inflation that allow us to make informed decisions based on the evidence.

Steve Liesman: Given what's been happening with lower commodity prices and lower oil prices, the stronger dollar, it could be many months before you see that tangible evidence.

Dan Tarullo: Sure. and there is a case to be made for the proposition that one should look through things like the dollar and energy prices. i just point out though, and that may well prove right. i would point out that as i said a moment ago, it's been some years now since inflation has approached the FOMC's target. there have been a series of factors which for some period of time have kept inflation down. Andthat's why my own perspective that one should watch to see some tangibleevidence that allows one to develop that reasonable confidence that inflationwill return to target.

Steve Liesman: Would you put yourself in the camp of one expecting a rate hike this year?

Dan Tarullo: I would -- you know, i do want to orient towards how I think about the economy. based on what i just said and based also on what one might call a risk management approach of being concerned that a premature rise might be harder to deal with than waiting a little bit longer, right now my expectation is given where I think the economy would go I wouldn't expect it would be appropriate to raise rates. but i want to has hasten to add that is an outlook that changes based on developments in the economy and our being forward looking about it. i do think there's been too much focus on a particular meeting and a particular date and not enough on the overall conditions of the economy.

Steve Liesman: Dan, that's all the time we have. Thank you for joining us.

Dan Tarullo: Thank you,Steve.

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