WHEN: Today, Friday, September 9th
WHERE: CNBC's "Squawk on the Street"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Governor Daniel Tarullo and CNBC's Steve Liesman live from Washington, D.C. on "Squawk on the Street" (M-F, 9AM-11AM ET) today, Friday, September 9th. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000549893, http://video.cnbc.com/gallery/?video=3000549892, and http://video.cnbc.com/gallery/?video=3000549894.
All references must be sourced to CNBC.
STEVE LIESMAN: GOOD MORNING, CARL. THANKS VERY MUCH. I'M HERE WITH FEDERAL RESERVE GOVERNOR DAN TARULLO. THANKS FOR JOINING US.
DAN TARULLO: GOOD TO BE WITH YOU, STEVE.
LIESMAN: UNFORTUNATELY, WITH YOUR BRIEF, I'M GOING TO DISPLEASE HALF THE AUDIENCE WHEREVER I START BUT I AM GOING TO START WITH WHAT IS THE NEWS OF THE MORNING WHICH THERE IS TWO NEWS STORIES ON THE BANKING FRONT ON THE REGULATORY FRONT, WHICH IS, OBVIOUSLY, THE OTHER HALF OF YOUR BRIEF. SO MANY BILLIONS OF FINES PAID BY BANKS AND, OBVIOUSLY, I'M TALKING ABOUT THE STORY BY WELLS FARGO, ABOUT WELLS FARGO THIS MORNING, OPENING FAKE ACCOUNTS, FAKE CREDIT CARD ACCOUNTS, SO MY QUESTION IS, AFTER ALL OF THESE BILLIONS OF FINES HAVE BEEN PAID, HAS BANK BEHAVIOR CHANGED AT ALL FOR THE BETTER?
TARULLO: WELL, I DON'T THINK IT'S CHANGED ENOUGH, STEVE, AND I THINK WE SEE EVIDENCE OF THAT IN OUR OWN SUPERVISORY WORK. OBVIOUSLY, I CAN'T COMMENT ON THE WELLS FARGO CASE BECAUSE THAT WAS A CFPB ENFORCEMENT ACTION BUT I WOULD SAY TWO THINGS
LIESMAN: CONSUMER FINANCIAL PROTECTION BUREAU FOR THE UNINITIATED.
TARULLO: FIRST, WHAT I HAVE SEEN IS THAT TOO MANY BANKS INSTEAD OF PUTTING IN PLACE A COMPREHENSIVE SYSTEM FOR ASSURING THAT ALL THEIR EMPLOYEES UNDERSTAND WHAT IS LEGAL AND ETHICAL ACROSS THE BOARD, ONLY RESPOND WHEN THERE'S A PARTICULAR PROBLEM. AND FOR BANKS THAT ARE IN THAT SITUATION, THEY REALLY NEED TO CHANGE. THEY REALLY NEED TO BE MUCH MORE PROACTIVE IN STATING THEIR EXPECTATIONS ACROSS A RANGE OF BEHAVIORS TO THEIR EMPLOYEES. IT'S A LITTLE BIT PARALLEL, STEVE, I THINK TO WHAT WE SAW IN RISK MANAGEMENT, WHERE THERE WAS TOO MUCH SILOING OF RISKS IN THE PRE-CRISIS PERIOD AND ONLY GRADUALLY HAVE BANKS LEARNED HOW TO INTEGRATE ALL THOSE RISKS. HERE THEY NEED TO INTEGRATE ALL THEIR COMPLIANCE ISSUES.. SECOND THING I WOULD SAY THERE IS A NEED I THINK FOR FOCUS ON INDIVIDUALS AS WELL AS THE FINES PUT ON THE INSTITUTIONS. IN INAPPROPRIATE CASES, I THINK THAT FINES FOR INDIVIDUALS, PROHIBITION ORDERS, OBVIOUSLY, THIS IS A MUCH HIGHER STANDARD BUT FOR JUSTICE DEPARTMENT PROSECUTIONS, ARE THINGS THAT DO NEED TO BE PURSUED IN ORDER TO MAKE THE POINT THAT THERE IS INDIVIDUAL CULPABILITY AS WELL AS COLLECTIVE.
LIESMAN: YOU KEEP HEARING THAT AS A POTENTIAL NEXT LEVEL BUT WE NEVER GET THERE. THERE ARE BILLIONS OF FINES LEVELED. COMPANIES ARE ALLOWED TO NOT ADMIT GUILT AND YET PAY THE FINE AND WE KEEP HEARING IF IT KEEPS GOING WE'RE GOING TO RATCHET UP BUT IT NEVER HAPPENS. IS IT TIME NOW?
TARULLO: WELL I THINK THERE ARE -- IT TAKES TIME FOR SOME OF THESE THINGS TO WORK THEIR WAY THROUGH. SUPERVISORY REGULATORY AGENCIES NEED TO MAKE PRETTY CAREFUL AND THOROUGH INVESTIGATIONS, BUT I CAN TELL YOU THAT WE HAVE HAD SOME PROHIBITION ORDERS IN THE RECENT PAST AND WE WILL CONTINUE TO LOOK INAPPROPRIATE CASES AND, INDEED, ON AN ONGOING BASIS ARE LOOKING AT INSTANCES IN WHICH EITHER CIVIL MONEY PENALTIES OR PROHIBITION ORDERS MIGHT BE APPROPRIATE.
LIESMAN: ANOTHER NEWS STORY TODAY FROM THE BANKING REGULATORY FUND IS YOU'RE OUT WITH RECOMMENDATIONS FOR BANKS AND PROHIBITIONS AGAINST THEM INVESTING IN NONFINANCIAL COMPANIES. THIS IS ALREADY BEEN CRITICIZED BY BANK LOBBIES ON TWO FRONTS. ONE IS THEY SAY THIS HAS NOT LED TO ANY ADDITIONAL RISK IN THE BANKING SYSTEM AND SECOND, IT'S JUST SEEN AS REGULATORY OVERREACH. MORE DECISIONS FROM CENTRAL PLANNING SO TO SPEAK IN THE BANKING SYSTEM. HOW DO YOU DEFEND THESE RECOMMENDATIONS.
TARULLO: FIRST OFF TO BE CLEAR THESE ARE RECOMMENDATIONS WE'RE MAKING TO CONGRESS FOR CONGRESSIONAL ACTION. THIS IS NOT THE FED SAYING WE THINK THAT THERE SHOULD BE NO MERCHANT BANKING AUTHORITY, THEREFORE THERE ISN'T. THIS IS US SAYING, WE THINK THAT CONGRESS SHOULD CONSIDER REPEALING THE PORTION OF GRAHAM LEACH BLILEY THAT ALLOWED IT. THE BASIC REASONS FOR THAT, STEVE, ARE FIRST, THE TRADITIONAL SEPARATION OF BANKING AND COMMERCE STILL HAS SOME POTENCY, I THINK. THE REASONS FOR IT STILL HAVE POTENCY. SECONDLY, EVEN THOUGH A RISK MAY NOT HAVE MATURED TO THIS POINT, BECAUSE OF THE POTENTIAL FOR, FOR EXAMPLE, TORT LIABILITY THAT SUBSTANTIALLY EXCEEDS THE AMOUNT OF AN INVESTMENT, THAT CAN GO ALONG WITH CERTAIN KINDS OF BUSINESS, FOR EXAMPLE, MINERALS EXTRACTION OR TRANSPORTING OIL.
LIESMAN: HOLDING PHYSICAL COMMODITIES.
TARULLO: CERTAINLY IF YOU'RE IN THE BUSINESS OF TRANSPORTING THEM OR EXTRACTING THEM, ABSOLUTELY. AND THIRD, THIS IS NOT AN EASY SORT OF THING FOR FINANCIAL SUPERVISORS TO OVERSEE. MAKING A JUDGMENT AS TO THE SAFETY AND SOUNDNESS OF NONFINANCIAL BUSINESSES THAT MAY BE HELD IN BOTH GEOGRAPHIC AND CORPORATE DISTANCE FROM THE MAIN OPERATIONS OF THE FIRM. SO OUR SENSE IS THAT THE BENEFITS OF THIS TO THE ECONOMY HAVE BEEN OUTWEIGHED BY THE POTENTIAL RISKS. AND WHILE IT IS TRUE THAT TO DATE WE HAVEN'T SEEN ONE OF THESE RISKS MATURE INTO AN ACTUAL SUBSTANTIAL LOSS, I THINK IF THERE'S A LESSON FROM THE CRISIS IT'S THAT WE SHOULD BE TRYING TO GET AHEAD OF POTENTIAL RISKS AND NOT WAITING FOR DISASTER TO BEFALL US.
LIESMAN: OKAY. WELL I HAVE A LOT OF QUESTIONS ABOUT THAT BUT I NEED TO MOVE ON. ONE MORE REGULATORY QUESTION AND THEN I WANT TO GET TO THE MONETARY POLICY STORY. YOU'RE ON YOUR WAY TO BASEL TOMORROW FOR MUCH ANTICIPATED MEETINGS BY THE BANKING INDUSTRY. THEY HAVE LABELED THE CURRENT EFFORT A BASEL 4 AND SAY WHAT YOU'RE DOING, WHAT THE BASEL COMMITTEE IS PROPOSING IS AN END RUN ON RAISING CAPITAL STANDARDS THROUGH A VERY COMPLICATED WAY. CAN YOU TELL US IS THAT ACCURATE? ARE YOU MOVING TO INCREASE CAPITAL STANDARDS BY CHANGING AROUND THE RULES AROUND RISK RATING?
TARULLO: SO, LET ME FIRST SAY, I CAN UNDERSTAND WHY SOME PEOPLE IN THE INDUSTRY HAVE THOUGHT THAT THIS MAY HAVE BEEN A BASEL 4 LIKE EFFORT. BUT I ALSO WANT TO SAY THAT IS NEITHER THE WAY IT WAS INTENDED NOR DO I THINK IT'S THE WAY THAT IT WILL EVOLVE IN THE END. WHAT THIS EXERCISE IS, IS AN EFFORT TO WRAP UP, AS IT WERE, BASEL 3 BY DEALING WITH SOME OF THE RISK WEIGHTING ISSUES, INCREASING THE SENSITIVITY OF THE RISK WEIGHTS, DEALING WITH OPERATIONAL RISK MEASURES, WHICH HAVEN'T BEEN PARTICULARLY SATISFACTORY TO DATE. THE BASEL COMMITTEE AS A GROUP, AGREED THAT THE OUTCOME OF THIS EXERCISE SHOULD NOT BE A SIGNIFICANT INCREASE IN CAPITAL REQUIREMENTS ACROSS THE BOARD, AND I THINK WHAT THE BASEL COMMITTEE HAS LEARNED IS THAT SOME OF THE PROPOSALS MAY HAVE MOVED IN THAT DIRECTION AND SO I BELIEVE THERE IS AN EFFORT TO HUE TO THE ORIGINAL PURPOSE OF READJUSTING RISK WEIGHTS WHILE NOT OVERALL INCREASING CAPITAL REQUIREMENTS.
LIESMAN: YOU'RE NOT GOING TO END UP IN A PLACE WITH THESE NEW RULES THAT'S GOING TO RESULT IN BANKS HAVING TO RAISE SUBSTANTIAL AMOUNTS OF CAPITAL?
TARULLO: WELL, THERE ARE TWO DIFFERENT ISSUES HERE. ARE REQUIREMENTS GOING UP SIGNIFICANTLY AND WHAT ARE THE POSITIONS OF INDIVIDUAL BANKS? WE AGREE WITH THE PREMISE OF THE BASEL COMMITTEE THAT THIS EXERCISE WAS ABOUT NOT RAISING CAPITAL REQUIREMENTS. BUT IF THERE ARE BANKS, INTERNATIONALLY ACTIVE BANKS, WHICH ARE NOT MEETING THE CURRENT CAPITAL REQUIREMENTS, THIS EXERCISE SHOULD NOT BE A VALIDATION OF THAT. INSTEAD, IT SHOULD BE THE OCCASION FOR MAKING SURE THAT THEY BRING THEIR CAPITAL UP.
LIESMAN: NOW I HAVE TO PIVOT TO THE MONETARY POLICY ECONOMIC OUTLOOK, PART OF YOUR BRIEF. WE'VE HAD A BUNCH OF DATA OF LATE THAT HAS RAISED QUESTIONS ABOUT THE ECONOMIC RECOVERY, SPECIFICALLY THE RECENT ISM REPORTS FOR MANUFACTURING AND SERVICES CAME IN BELOW EXPECTATIONS. THE JOBS REPORT I GUESS KIND OF LUKE WARM. GIVE US YOUR OVERALL SENSE OF THE ECONOMY AND ECONOMIC MOMENTUM RIGHT NOW?
TARULLO: WELL, LET ME SAY TWO THINGS ABOUT THAT, STEVE. FIRST OFF AS I THINK YOU KNOW, I'VE BEEN CHARACTERIZED AS BEING IN THE SHOW ME CAMP WHICH IS TO SAY I WOULD LIKE TO SEE SOME MORE TANGIBLE EVIDENCE OF INFLATION GIVEN THE BACKGROUND CONTEXT OF EMPLOYMENT CONTINUING TO INCREASE WITHOUT THE UNEMPLOYMENT RATE GOING DOWN. THE FACT THAT WE'RE NOT RUNNING A HOT ECONOMY. THE FACT THAT WE DON'T HAVE AS MANY TOOLS TO RESPOND TO A POTENTIAL RECESSION AS WE WOULD IF GROWTH WERE TO PICK UP. BUT HAVING SAID ALL THAT, I THINK EVEN IF YOU DIDN'T HAVE MY POSITION ON LOOKING FOR MORE TANGIBLE EVIDENCE OF INFLATION, I THINK YOU WOULD WANT TO BE LOOKING AS YOU SAY, AT THE OVERALL MOMENTUM OF THE ECONOMY AND EVEN IF YOU'RE LOOKING FOR AN OPPORTUNITY TO GRADUALLY REMOVE ACCOMMODATION, YOU DON'T WANT TO BE BACKWARD LOOKING. YOU WANT TO SAY, WHAT'S GOING TO BE HAPPENING OVER THE NEXT COUPLE OF QUARTERS? AND THERE, AS YOU SUGGEST, I THINK THERE IS ROOM FOR A ROBUST DISCUSSION BECAUSE WHILE CONSUMER SPENDING, FOR EXAMPLE, HAS HELD UP PRETTY WELL AND THERE ARE SOME INDICATIONS THAT MAYBE BUSINESS INVESTMENT WILL FINALLY PICK UP AT LEAST A LITTLE BIT, ON THE OTHER HAND, THE LABOR MARKET HAS BASICALLY BEEN FLAT FOR A WHILE. WE'VE HAD UNEMPLOYMENT NOT GOING DOWN FOR A YEAR. SOME OF THE INDICATORS OF UNDER EMPLOYMENT HAVE FLATTENED OUT RATHER THAN CONTINUING TO IMPROVE AND AS YOU SAID THE ISM SURVEYS, WHICH ARE BY THEIR NATURE FORWARD LOOKING, SUGGESTS SOME GROUNDS FOR QUESTIONING. SO I THINK THAT'S THE DISCUSSION THAT NEEDS TO BE HAD. BUT I WANT TO EMPHASIZE THAT PEOPLE -- NO ONE SHOULD FOCUS ON PARTICULAR PIECES OF DATA AND CERTAINLY NOT IN A BACKWARD LOOKING WAY. WE NEED TO BE FOCUSED ON THE OVERALL PICTURE WHICH HELPS US TO UNDERSTAND THE MOMENTUM OF THE ECONOMY GOING FORWARD.
LIESMAN: SO ALL OF THAT SAID, IF YOU TAKE ALL OF THIS DATA TOGETHER AND YOU COME UP WITH A SENSE OF THE MOMENTUM OF THE ECONOMY, WHERE DOES THAT LEAVE YOU ON THE NEED TO RAISE RATES, KEEP RATES THE SAME? WHAT'S YOUR OUTLOOK FOR WHERE RATES OUGHT TO BE RIGHT NOW? IS THE CURRENT LEVEL APPROPRIATE?
TARULLO: WELL, I'M NOT GOING TO COMMENT ON PARTICULAR MOMENTS FOR RATE INCREASES, STEVE. WHAT I WOULD SAY IS THAT, AGAIN, FROM MY PERSONAL PERSPECTIVE, I THINK WE HAVE AN OPPORTUNITY TO CONTINUE TO GET EMPLOYMENT GAINS IN THIS COUNTRY. REMEMBER OUR MANDATE IS MAXIMUM EMPLOYMENT, NOT SOME CONSTRUCTED VIEW OF FULL EMPLOYMENT. AND WHAT WE'VE SEEN OVER THE LAST YEAR IS THAT THE UNEMPLOYMENT RATE HAS REMAINED JUST ABOUT STABLE, WHILE WE'VE HAD ABOUT A MILLION JOBS ABOVE THE REPLACEMENT NEEDS IN THE LABOR MARKET CREATED. WELL THAT'S A MILLION JOBS THAT HAVE PRESUMABLY BEEN CREATED BY TRYING ON EXISTING SLACK IN THE ECONOMY. AND SO I DON'T THINK ANYBODY REALLY KNOWS WHERE FULL EMPLOYMENT IS AND I THINK WE HAVE AN OPPORTUNITY TO CONTINUE TO BENEFIT FROM SOME OF THOSE GAINS WHILE AS I SAY, NOT RUNNING A HOT ECONOMY, AND, OF COURSE, AS INFLATION IN MY VIEW SHOWS THAT IT'S PICKING UP IN A SUSTAINABLE WAY TO BE AT TARGET RATHER THAN BEING BELOW WHERE IT'S BEEN FOR MOST OF THE LAST FIVE OR SIX YEARS, THEN WOULD RAISE RATES.
LIESMAN: BUT A BUNCH OF INFLATION INDICATORS HAVE TICKED UP. NOT NECESSARILY THE FED'S PREFERRED INDICATOR, THE PCE PRICE INDEX. HOWEVER, WHEN YOU LOOK AT CPI, WHEN YOU LOOK AT EVEN THE CLEVELAND – CAME OUT THIS MORNING. IT'S ABOVE 2% A SERIES OF INDICATORS. BUT DON'T THEY CAUSE YOU CONCERN?
TARULLO: WELL, THERE ARE THINGS TO LOOK AT, OF COURSE. BUT I THINK HE USED THE RIGHT VERB WHICH IS TICKED. WHEN YOU LOOK AT THE CHARTS, IF YOU SEE THINGS GOING UP AND DOWN, BUT THEN YOU'RE LOOKING OVER A LONGER PERIOD OF TIME AND WHAT HAVE WE SEEN? WE'VE SEEN FIVE OR SIX YEARS WHERE THE INFLATION RATE, AND WE DO USE PCE, WHERE THAT HAS NOT BEEN AT OR REALLY NEAR 2%. AND SO REGARDLESS OF WHAT MEASURE YOU USE, AND REMEMBER THEY SORT OF CORRELATE SOMEWHAT DIFFERENTLY, BUT REGARDLESS OF WHAT MEASURE YOU USE, FROM MY POINT OF VIEW WHAT IS OPTIMAL RIGHT NOW IS TO LOOK TO SEE ACTUAL EVIDENCE THAT THE RATES, INFLATION RATE, WOULD CONTINUE TO GO UP AND WOULD BE SUSTAINED AT AROUND THE TARGET, BECAUSE WE'VE HAD SO MANY FALSE UP AND DOWNS IN THE PAST.
LIESMAN: I KNOW YOU DON'T WANT TO PEG THIS RATE HIKE OR RATE CUT OR WHATEVER IN A SPECIFIC MEETING.
TARULLO: YOU'RE RIGHT.
LIESMAN: COULD YOU SEE RATES GOING UP THIS YEAR?
TARULLO: I WOULDN'T TAKE – I WOULDN'T FORECLOSE THAT POSSIBILITY. YOU KNOW, AND I THINK IT'S IMPORTANT FOR ALL OF US IN GOING INTO EACH MEETING, TO REMAIN OPEN TO THE POSSIBILITY THAT MOMENTUM HAS CHANGED, THAT EXPECTATIONS HAVE CHANGED, AND THUS FOR US TO CHANGE OUR OWN VIEWS.
LIESMAN: ONE MORE QUESTION. YOUR COLLEAGUE ON THE FOMC, ERIC ROSENGREN, HE'S A VOTER THIS YEAR, PRESIDENT OF BOSTON, IS VERY CONCERNED ABOUT FINANCIAL STABILITY WHEN IT COMES TO THESE LOW RATES. IS THAT SOMETHING THAT ANIMATES YOUR THINKING ABOUT RATES THAT WE'VE HAD RATES SO LOW FOR SO LONG THAT WE'VE CREATED EXCESSES IN THE FINANCIAL SYSTEM?
TARULLO: THERE'S NO QUESTION, BUT THAT WHEN RATES ARE LOW FOR A LONG TIME, THAT THERE ARE OPPORTUNITIES FOR FROTHINESS AND, PERHAPS, OVERLEVERAGE IN PARTICULAR ASSET MARKETS. AND I DO THINK WE NEED TO BE AWARE OF THAT. BUT BEING AWARE OF IT IS DIFFERENT FROM SAYING, THEREFORE, THE ANSWER IS TO RAISE RATES. NOW, I, AGAIN, MYSELF, DON'T EXCLUDE THE POSSIBILITY THAT IN SOME CIRCUMSTANCES, THE FEDERAL FUNDS RATE INCREASE COULD BE AN APPROPRIATE RESPONSE TO FINANCIAL STABILITY CONCERNS. I THINK THOSE WOULD BE PRETTY UNUSUAL CIRCUMSTANCES AND I DON'T THINK WE'RE IN THEM RIGHT NOW. I THINK WE'VE DEFINITELY SEEN SOME MOVEMENT IN ASSET PRICES UP. WE'VE HAD SOME SUPERVISORY RESPONSE ON COMMERCIAL REAL ESTATE, FOR EXAMPLE, MAKING SURE THAT LENDING STANDARDS ARE AS STRONG AS THEY SHOULD BE. BUT YOU KNOW, STEVE, OVER THE COURSE OF THE LAST FIVE OR SIX YEARS, WE'VE SEEN A NUMBER OF ASSET PRICES GO UP AND START TO RAISE SOME CONCERNS, AND FREQUENTLY THEN THEY GO DOWN. WHEN AS WITH LEVERAGE LENDING, THEY DIDN'T SEEM AS THOUGH THEY WERE GOING TO GO DOWN, WE DID TAKE SUPERVISORY ACTION. AND THE LAST THING I WILL SAY IS I DO THINK THAT IF WE ARE GOING TO BE IN AN ENVIRONMENT IN WHICH OUR STAR, THE NEUTRAL RATE OF INTEREST, IS PRETTY LOW GOING FORWARD FOR QUITE A WHILE, WE'RE GOING TO HAVE TO THINK ABOUT A FRAMEWORK FOR FINANCIAL STABILITY THAT INCLUDES, OBVIOUSLY, SUPERVISION AND REGULATION, BUT THAT ALSO HAS TO THINK ABOUT THE FRAMEWORK FOR MONETARY POLICY AND WHETHER WE NEED TO THINK DIFFERENTLY ABOUT HOW WE CONDUCT IT.
LIESMAN: DAN TARULLO, FED GOVERNOR. THANK YOU FOR JOINING US.
TARULLO: THANK YOU, STEVE.
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