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CNBC Exclusive: CNBC Transcript: Federal Reserve Bank of Cleveland President Loretta Mester Speaks with CNBC’s Steve Liesman on “Squawk Box”

WHEN: Today, Friday, October 7th

WHERE: CNBC's "Squawk Box"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Loretta Mester, Federal Reserve Bank of Cleveland President, on CNBC's "Squawk Box" (M-F, 6AM-9AM ET) today, Friday, October 7th. Following is a link to the story on CNBC.com: http://www.cnbc.com/2016/10/07/feds-mester-says-september-jobs-report-was-solid.html. Following are links to the video on CNBC.com: http://video.cnbc.com/gallery/?video=3000557542, http://video.cnbc.com/gallery/?video=3000557545 and http://video.cnbc.com/gallery/?video=3000557546.

All references must be sourced to CNBC.

STEVE LIESMAN: LET'S BRING IN LORETTA MESTER. SHE'S THE PRESIDENT OF THE CLEVELAND FEDERAL RESERVE. THANKS FOR JOINING US, MISS MESTER.

LORETTA MESTER: THANKS FOR HAVING ME.

LIESMAN: SO I'M JUST GOING TO LAY IT OUT THERE. THIS NUMBER – JOE IS CONFUSED. THE MARKET IS CONFUSED. 151. IS THAT A GOOD NUMBER?

MESTER: IT'S A SOLID LABOR MARKET REPORT.

LIESMAN: HOW DO YOU COME TO THAT CONCLUSION THAT IT IS SOLID?

MESTER: OK. SO, REMEMBER 75,000 TO 120,000 PER MONTH IS ABOUT WHAT YOU NEED TO KEEP UNEMPLOYMENT STABLE.

LIESMAN: AND YOU COME TO THAT BECAUSE THAT'S THE GROWTH OF THE WORKING AGE POPULATION MORE OR LESS.

MESTER: YEAH, EXACTLY. IT TAKES INTO ACCOUNT DEMOGRAPHICS AND TREND GROWTHS. SO THAT'S A NUMBER ABOVE THAT. YOU'VE SEEN SOLID LABOR MARKET NUMBERS CONSISTENTLY THIS YEAR. I WOULD SAY, I MEAN, WE'RE 192,000 I THINK YOU SAID –

LIESMAN: THE THREE-MONTH AVERAGE.

MESTER: THE THREE-MONTH AVERAGE, WHICH IS A SOLID NUMBER. THE UNEMPLOYMENT RATE IS ABOUT AT WHAT MY ESTIMATE OF FULL EMPLOYMENT IS. YOU KNOW, NATURAL RATE OF UNEMPLOYMENT. THAT'S A GOOD NUMBER. YOU'VE GOT INCOMES GOING UP. YOU HAVE SOLID HOURS WORKED. AGAIN, I THINK THIS IS VERY CONSISTENT WITH WHAT WE EXPECTED TO SEE. CERTAINLY WITH MY FORECAST.

LIESMAN: BUT WE HAVE THIS NUMBER, WHICH YOU ACKNOWLEDGE IS DOUBLE THE GROWTH OF THE WORKING AGE POPULATION, YET THE UNEMPLOYMENT RATE DOESN'T DECLINE. THIS IS EXACTLY THE VIEWPOINT OF THOSE WHO THINK THE FED SHOULD NOT RAISE RATES BECAUSE IT SHOWS THE ECONOMY HAS ROOM TO RUN. THERE'S MORE LABOR SLACK OUT THERE THAN IT APPEARS.

MESTER: SO, I MEAN, THERE'S A VIEW OUT THERE THAT YOU SHOULD TRY TO SORT OF TEST THAT. AND KEEP INTEREST RATES VERY, VERY LOW FOR A LONG TIME BECAUSE YOU CAN TEST THAT. BUT WE'VE LEARNED FROM HISTORY, RIGHT, THAT YOU HAVE TO BE FORWARD LOOKING WHEN YOU ARE SETTING MONETARY POLICY. SO I DON'T THINK WE'RE BEHIND THE CURVE YET. SO I DON'T SEE THAT WE HAVE TO BRING RATES UP VERY STRONGLY. I WOULD LIKE US TO BE ON THIS GRADUAL PATH THAT WE HAVE BEEN COMMUNICATING AS WHAT WE SEE IS APPROPRIATE. WHEN I SEE THE LABOR MARKET REPORT TODAY IN THE CONTEXT OF ALL THE OTHER LABOR INDICATORS WE'VE BEEN GETTING, I THINK WE'RE VERY CLOSE TO FULL – I THINK WE'RE AT FULL EMPLOYMENT. BUT, YOU KNOW, I UNDERSTAND THERE'S SOME ESTIMATES AROUND THAT. SO I'LL GIVE YOU THAT. I SEE THAT THE INFLATION MEASURES ARE MOVING UP. WE HAVE TO BE FORWARD LOOKING. SO IN TERMS OF OUR TWO GOALS, MONETARY POLICY GOALS, I THINK WE'RE – IT MAKES SENSE TO MOVE UP THE RATE ANOTHER 25 BASIS POINTS.

LIESMAN: WOULD YOU RAISE RATES AS SOON AS NOVEMBER GIVEN THAT THE ELECTION IS SIX DAYS LATER?

MESTER: I THINK ALL MEETINGS ARE ON THE TABLE. AND WE'RE AN APOLITICAL INSTITUTION. WE ARE TECHNOCRATS AND I GO IN THINKING ABOUT WHAT'S BEST FOR THE ECONOMY IN MY VIEW. AND THAT'S WHAT I BASE MY DECISIONS ON.

MICHELLE CARUSO-CABRERA: BUT WE HEARD JANET YELLEN TALK ABOUT THE POSSIBILITY OF BREXIT BEING SOMETHING THAT PLAYED INTO THEIR THINKING. SO IT'S NOT ILLOGICAL TO THINK THAT THE U.S. ELECTION COULD PLAY INTO THAT, RIGHT?

MESTER: BUT AGAIN, IT WAS ABOUT THE OUTLOOK. RIGHT? WHAT DOES IT MEAN FOR THE ECONOMY, RIGHT? SO WHEN YOU SEE – ONE OF THE THINGS THAT I'VE BEEN STRUCK BY IS THE ECONOMY HAS BEEN VERY RESILIENT, RIGHT? THROUGH A NUMBER OF THE RISKS THAT WE WERE – THE COMMITTEE HAS BEEN WORRIED ABOUT. EARLY IN THE YEAR REMEMBER THE VOLATILITY IN THE FINANCIAL MARKETS, RIGHT.

CARUSO-CABRERA: FROM CHINA.

MESTER: RIGHT, RIGHT. THE SLOWDOWN IN CHINA. THE RE-EVALUATION OF THE DOLLAR. RIGHT. SO, AGAIN, THEN WE HAD THE JUNE BREXIT VOTE. AND THEN WE GOT THROUGH THAT. SO AGAIN, THE ECONOMY HAS PROVEN TO BE QUITE RESILIENT. AND AGAIN, I THINK THAT'S SORT OF CONSISTENT WITH OUR OUTLOOK THAT THINGS ARE IMPROVING.

LIESMAN: MANY PEOPLE WHO HAVE WANTED THE FED TO RAISE RATES EARLIER HAVE WORRIED ABOUT INFLATION. IT ULTIMATELY HAS NEVER COME TO PASS. THERE WERE ARGUMENTS EARLY ON. 2008, 2009. IF YOU EXPAND THE BALANCE SHEET THIS WAY. IF YOU GET DOWN TO ZERO. WE'RE GOING TO HAVE THIS RUN AWAY INFLATION. SORT OF USING AUTOMATICALLY, MILTON FRIEDMAN'S IDEAS THAT INFLATION IS A MONETARY POLICY PHENOMENON. BUT IT HASN'T COME TO PASS. WHY HAVEN'T YOU CHANGED YOUR MODEL WHEN INFLATION HAS NOT REALLY RESPONDED THE WAY YOU THOUGHT?

MESTER: SO AGAIN, WE'RE USING THE BEST MODELS AVAILABLE IN TERMS OF OUR PREDICTION OF INFLATION. BUT, JUST LOOK AT WHAT'S HAPPENED WITH INFLATION. YOU DON'T THAVE TO – DON'T WORRY ABOUT THE FORECAST. LOOK AT INFLATION NUMBERS, RIGHT? AS THE VALUE OF THE DOLLAR, THE APPRECIATION OF THE DOLLAR, AND THE OIL PRICES HAVE WORKED THROUGH, RIGHT? YOU HAVE SEEN THE INFLATION NUMBERS COME UP. SO THE PCE YEAR OVER YEAR RATE IS NOW 1.7. THAT'S APPROACHING THE GOAL OF 2%. SO AGAIN, YOU HAVE TO BE FORWARD LOOKING WHEN YOU ARE DOING THIS POLICY. IT TAKES QUITE A WHILE FOR POLICY TO AFFECT THE ECONOMY. AND AGAIN, I DON'T THINK WE'RE BEHIND THE CURVE. RIGHT? IT'S REALLY WHETHER WE WANT TO BE CONSISTENT WITH OUR VIEW THAT A GRADUAL UPWARD TILT TO THE POLICY PATH IS RIGHT AND, YOU KNOW, IS IT APPROPRIATE GIVEN THE ECONOMY AND GIVEN OUR OUTLOOK AND GIVEN THE RISKS, DO WE TAKE ANOTHER STEP ON THAT GRADUAL PATH?

JOE KERNEN: LARRY SUMMERS WAS ON AGAIN EARLIER THIS WEEK WITH THE SECULAR STAGNATION, YOU KNOW, THAT THERE'S A SUPPLY GLUT, THERE'S NO DEMAND. ALL THESE, LIKE, REALLY MACRO, LIKE SECULAR, NOT CYCLICAL ISSUES THAT KEEP THE WORLD GROWING SLOWLY AND KEEP INTEREST RATES LOW FOR A LONG PERIOD OF TIME. WHAT I GLEANED FROM IT WAS THAT, YOU KNOW, MONETARY POLICY CAN STAY AT ZERO. PROBABLY WON'T HELP ANYTHING. SO IT'S NO LONGER REALLY GOING TO NECESSARILY HELP BECAUSE OF THESE BIGGER PROBLEMS THAT WE HAVE THAT ARE THE REASON WE'RE WHERE WE ARE. BUT THEN IF IT'S NOT GOING TO HELP, I STILL THINK YOU'D HAVE TO THINK ABOUT ARE WE SURE WE'RE NOT HURTING IN TERMS OF SAVERS, AND IN TERMS OF PEOPLE MOVING OUT THE RISK CURVE WHERE THEY SHOULDN'T BE, AND IN TERMS OF CORPORATIONS GAMING THE SYSTEM WITH LOW INTEREST RATES AND NOT INVESTING FOR THE LONG-TERM AND BUYING BACK STOCK AND DOING THIS AND DOING THAT. SO IF THAT'S NOT THE CURE, IF YOU'RE USING, LIKE, AN ANTIBIOTIC ON A VIRUS – IF YOU'RE USING AN ANTIBIOTIC ON A VIRUS BUT YOU MAY END UP MAKING ANTIBIOTICS RESISTANT TO EVERYTHING ELSE IN THE PROCESS OR DOING SOME HARM, I DON'T KNOW. I THINK YOU'RE IN DANGEROUS TERRITORY. NO?

MESTER: I DON'T THINK WE'RE DOING HARM.

KERNEN: BUT HOW WOULD YOU KNOW UNTIL YOU'RE ON THE OTHER SIDE OF WHERE –

MESTER: BUT AGAIN, RIGHT? I THINK THE ARGUMENT FOR WHY ANOTHER 25 BASIS POINT INCREASE ON OUR GRADUAL PATH MAKES SENSE IS BASED ON OUR TWO MONETARY POLICY GOALS. THE DUAL MANDATE GOALS. YES, THERE ARE OTHER PEOPLE WHO WORRY THAT IF YOU KEEP INTEREST RATES AT ZERO FOR A LONG TIME, YOU COULD BE – THERE MIGHT BE FINANCIAL IMBALANCES BUILDING UP. MY ARGUMENT IS REALLY BASED ON THE OUTLOOK FOR THE ECONOMY AND REALLY OUR DUAL MANDATE GOALS. BUT MOST ECONOMISTS WOULD AGREE THAT , RIGHT, WITH PRODUCTIVITY AS LOW AS IT IS, WE'RE GOING TO HAVE LOWER INTEREST RATES. AND THAT PATH, IF YOU LOOK AT –

LIESMAN: THAT DOESN'T MEAN ZERO, LORETTA.

MESTER: IT DOESN'T NECESSARILY MEAN ZERO FOREVER.

LIESMAN: OUR CNBC FED SURVEY SHOWS WALL STREET DOESN'T THINK YOU GUYS ARE FOLLOWING A PLAN. THAT THERE'S A FRAMEWORK OUT THERE. WHEN WE ASKED PEOPLE WHAT – DO YOU THINK THE FED FOLLOWS THE LATEST ECONOMIC DATA OR THE MEDIUM TERM FRAMEWORK? IT SEEMS LIKE ACCORDING TO THIS DATA THAT WE'VE GATHERED, YOU'VE GOT A COMMUNICATION PROBLEM.

MESTER: I WILL BE TALKING ABOUT THAT LATER TODAY IN A SPEECH I'M GIVING. AND I WAS ON YOUR SHOW WHEN YOU RELEASED THAT IN AUGUST. AND THAT DID TROUBLE ME, RIGHT? BECAUSE WE ARE FOLLOWING, RIGHT, PRINCIPLES IN TERMS OF HOW WE DO MONETARY POLICY. I CERTAINLY FOCUS ON THE OUTLOOK, I FOCUS ON WHERE WE ARE WITH GOALS –

LIESMAN: RIGHT. THERE'S THE DATA. IS THE FED FOLLOWING THE POLICY FRAMEWORK? 60% SAID NO.

MESTER: BUT I WILL CONCEDE THAT THESE RESULTS TROUBLE ME IN THE SENSE OF WHAT YOU SAID ABOUT OUR COMMUNICATION.

CARUSO-CABRERA: SOME CRITICS THINK YOU ARE DOING HARM, TO JOE'S QUESTION. CAPITAL GOING TO PLACES IT OTHERWISE WOULDN'T. MAYBE HAVING THE OPPOSITE EFFECT WHEN INTEREST RATES ARE SO LOW PEOPLE, SAVE MUCH MORE RATHER THAN SPENDING BECAUSE THEY THINK, WOW, I'VE GOT FAR LESS TO LIVE ON RETIREMENT. THEY THINK THERE ARE NEGATIVE CONSEQUENCES OUT THERE.

MESTER: I THINK THAT WE HAVE TO BALANCE, RIGHT? WE'RE LOOKING AT A BALANCE, WE HAD INTEREST RATES LOW. I THINK WE APPROPRIATELY BROUGHT INTEREST RATES DOWN –THE CRISIS. NOW THE ECONOMY IS MOVING BACK TOWARD, RIGHT, A GROWTH RATE THAT'S PICKING UP IN THE SECOND HALF OF THE YEAR, THE SOLID LABOR MARKET REPORT TODAY COUPLED WITH ALL THE OTHER LABOR INDICATORS SUGGESTS THAT BACK. AND INFLATION IS MOVING BACK UP. THAT'S AN ARGUMENT WE CAN MOVE BACK UP INTEREST RATES ON THIS GRADUAL PATH BACK TOWARDS A MORE NORMAL RATE.

LIESMAN: LORETTA, THANK YOU – DO YOU WANT TO ASK ANOTHER QUESTION?

KERNEN: NO.

LIESMAN: I DON'T WANT TO DEFY THEM IN THE BACK BECAUSE I DON'T WORK HERE LIKE YOU DO. LORETTA, THANK YOU SO MUCH FOR JOINING US TODAY.

MESTER: THANK YOU FOR HAVING ME.

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