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WHEN: Today, Friday, October 14th
WHERE: CNBC's "Squawk Box"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Bank of Boston President Eric Rosengren, on "Squawk Box" (M-F, 6AM-9AM ET) today, Friday, October 14th. Following are links to the video on CNBC.com: http://video.cnbc.com/gallery/?video=3000559487, http://video.cnbc.com/gallery/?video=3000559489 and http://video.cnbc.com/gallery/?video=3000559488.
All references must be sourced to CNBC.
STEVE LIESMAN: GOOD MORNING. I'M HERE WITH ERIC ROSENGREN, THE PRESIDENT OF THE BOSTON FEDERAL RESERVE BANK AND ONE OF THREE DISSENTERS AT THE LAST FEDERAL RESERVE MEETING. THANKS FOR JOINING US, ERIC.
ERIC ROSENGREN: STEVE, GREAT TO HAVE YOU HERE IN BOSTON.
LIESMAN: I THINK THIS IS A GREAT OPPORTUNITY FOR YOU TO WALK US THROUGH WHY YOU DISSENTED. YOU WENT AWAY FROM THE MAJORITY OF THE COMMITTEE. WHAT WERE YOU THINKING?
ROSENGREN: MY VIEWS HAVEN'T CHANGED. WHAT'S CHANGED IS THE ECONOMIC CONDITIONS. SO WHEN WE HAVE AN UNEMPLOYMENT RATE THAT IS AROUND 10%, WE SHOULD BE VERY AGGRESSIVE IN OUR MONETARY STIMULUS. WHEN WE HAVE CONDITIONS LIKE WE HAVE RIGHT NOW, WHICH IS WE'RE VERY CLOSE TO FULL EMPLOYMENT, UNEMPLOYMENT RATE CURRENTLY IS AT 5%, AND CORE INFLATION IS 1.7%. IT'S RELATIVELY CLOSE TO 2%. STILL BELOW OUR 2% TARGET. THOSE CONDITIONS ARE VERY DIFFERENT. AT THIS POINT, I'M AS CONCERNED ABOUT OVERSHOOTING ON WHAT IS A SUSTAINABLE UNEMPLOYMENT RATE. AND AT THAT POINT, I HAVE TO BE CONCERNED ABOUT WHETHER IF WE DID OVERSHOOT SIGNIFICANTLY ON THE UNEMPLOYMENT RATE, WHETHER WE WOULD END UP TIGHTENING MUCH FASTER AND POSSIBLY SHORTENING THE RECOVERY.
LIESMAN: WHEN YOU CAME IN AND YOU GOT THE VOTE IN JANUARY, THE UNEMPLOYMENT RATE WAS 4.9%. WHAT'S DIFFERENT ABOUT THE CURRENT 4.9% THAT MAKES YOU MORE NERVOUS ABOUT A TIGHTER JOB MARKET THAN THE 4.9% UNEMPLOYMENT RATE IN JANUARY?
ROSENGREN: IT'S PARTLY TIED TO OUR FORECAST. SO IF YOU LOOK AT PRIVATE SECTOR FORECASTS AND IF YOU LOOK AT THE BOSTON FED'S FORECAST, WE'RE FORECASTING AN UNEMPLOYMENT RATE THAT'S GOING TO GO BELOW WHAT WE THINK IS A SUSTAINABLE UNEMPLOYMENT RATE. SO OUR PERSONAL – THE BOSTON FED FORECAST IS FOR 4.7%. THAT'S A LITTLE BIT ON THE LOW SIDE FOR THE FOMC MORE GENERALLY, BUT OUR OWN FORECAST IS THAT BY THE END OF NEXT YEAR, WE'LL BE AROUND 4.5%. BY THE END OF 2017, WHICH IS ONLY AROUND 15 MONTHS FROM NOW, WE'RE LIKELY TO BE BELOW WHAT WE THINK IS FULL EMPLOYMENT. THAT PARTLY REFLECTS THAT GDP GROWTH LOOKS LIKE IT'S GOING TO BE STRONG ENOUGH IN THE SECOND HALF OF THE YEAR TO CONTINUE TO PROVIDE THE UNEMPLOYMENT RATE TO BE DRIFTING DOWN. AND IT'S VERY CONSISTENT, ACTUALLY, WITH WHAT MOST PRIVATE SECTOR FORECASTS HAVE.
LIESMAN: SOME OF YOUR COLLEAGUES, INCLUDING THE FED CHAIR JANET YELLEN, ALONG WITH LAEL BRAINARD, FED GOVERNOR, HAVE USED THIS CONCEPT OF ROOM TO RUN. AND ONE OF THE THINGS THEY POINT OUT IS OVER THE COURSE OF THE PAST YEAR, THE UNEMPLOYMENT RATE HAS BEEN STAGNANT. 4.95% UP AND DOWN IN THAT RANGE. AND WE'VE BEEN GROWING JOBS 100,000, 200,000 A MONTH. AND 3 MILLION PEOPLE IN THE LAST YEAR HAVE COME INTO THE WORKFORCE. AND THAT HAS SURPRISED THEM. WHY AREN'T YOU ON BOARD WITH THIS CONCEPT OF GIVING THE LABOR MARKET ROOM TO RUN TO SEE IF WE CAN BRING SOME OF THE MILLIONS OF PEOPLE WHO HAVE DROPPED OUT OF THE WORKFORCE BACK INTO THE WORKFORCE?
ROSENGREN: SO IT'S OBVIOUSLY GOOD NEWS THAT WE'RE BRINGING PEOPLE INTO THE WORKFORCE. THE QUESTION IS HOW MUCH LONGER THAT'S LIKELY TO HAPPEN. ACTUALLY, ONE OF THE PAPERS AT OUR CONFERENCE IS BY ALAN KRUEGER. AND IT'S ACTUALLY TALKING ABOUT HOW PEOPLE ARE COMING INTO THE LABOR FORCE. AND IT HIGHLIGHTS THAT FOR PEOPLE OUT OF THE LABOR FORCE, ACTUALLY, WE HAVEN'T HAD OVER THE COURSE OF THE RECOVERY AS MANY PEOPLE – THE TRANSITION INTO BEING IN THE LABOR FORCE HAS NOT BEEN THAT GREAT. AND HE IS ARGUING THAT IT'S QUITE LIKELY THAT IT'S NOT GOING TO BE SUSTAINABLE. AND SO THAT IF WE CONTINUE TO GET GROWTH ABOVE POTENTIAL, IT'S GOING TO SHOW UP IN AN UNEMPLOYMENT RATE THAT GOES DOWN. AND THERE ARE CLEARLY BENEFITS TO HAVING A LOW UNEMPLOYMENT RATE. BUT IF WE GET TO THE POINT WHERE IT BECOMES UNSUSTAINABLE, THEN YOU DO WORRY ABOUT HAIVNG TO RAISE RATES MUCH MORE QUICKLY THAN I'M HOPING THAT WE NEED TO DO.
LIESMAN: YOU'RE ALSO CONCERNED ABOUT SOME FINANCIAL ASSET PRICES OUT THERE. YOU MENTIONED COMMERCIAL REAL ESTATE. IS THAT ONE OF THE AREAS THAT YOU'RE STILL CONCERNED ABOUT?
ROSENGREN: IN MY REMARKS TODAY, I'M GOING TO TALK A LITTLE BIT ABOUT SOME OF THE FINANCIAL IMPLICATIONS OF SOME OF THE ANOMALIES WE'VE SEEN IN THIS CURRENT RECOVERY. AS YOU KNOW, OUR CONFERENCE IS ABOUT THE RECOVERY, NOT JUST ABOUT THE RECESSION. I THINK THERE HAVE BEEN A NUMBER OF ANOMALIES THAT IT'S IMPORTANT TO TAKE A LOOK AT. I'M GOING TO BE LOOKING A LITTLE BIT ON THE FINANCIAL SIDE, COMMERCIAL REAL ESTATE IS ONE AREA THAT I'M CONCERNED ABOUT. A 10-YEAR RATE THAT'S ROUGHLY AT WHERE WE THINK INFLATION IS RIGHT NOW IS QUITE A LOW RATE FOR THE 10-YEAR TREASURY RATE. SO THE FACT THAT LONG RATES ARE SO LOW AND THAT THERE ARE SOME SECTORS OF THE ECONOMY THAT WE'RE STARTING TO SEE VERY RAPID ASSET GROWTH, LIKE COMMERCIAL REAL ESTATE, IS A SOURCE OF CONCERN AS PEOPLE START MOVING TO TRY TO GET HIGHER RETURNS. BECAUSE WE'VE HAD LOW RATES FOR A LONG PERIOD OF TIME.
LIESMAN: SO IT SEEMS LIKE THERE'S TWO DIFFERENT THINGS GOING ON. ONE IS THAT COMMERCIAL REAL ESTATE PRICES OF EXISTING REAL ESTATE. BUT THERE'S NOT A LOT OF CONSTRUCTION OF COMMERCIAL REAL ESTATE GOING ON. I KNOW YOU'VE TALKED ABOUT THE CRANES IN BOSTON. BUT NATIONALLY WHEN I LOOK AT THE INVESTMENT IN STRUCTURES, IT'S NOT BEEN VERY STRONG. MAYBE IT'S NOT A POLICY – MAYBE IT'S AN ISSUE OF INVESTMENT.
ROSENGREN: SO PART OF IT IS LOOKING AT THE COMPOSITION OF THE INVESTMENT. WE HAVE HAD AN OIL SLOWDOWN AS A RESULT OF THE OIL PRICES GOING DOWN. THEY'VE NOW MORE RECENTLY COME UP. BUT AS A RESULT WE HAD A LOT OF INVESTMENT INTO INFRASTRUCTURE TIED TO THE OIL INDUSTRY. THAT DECLINED WHEN WE STARTED TO SEE OIL PRICES DECLINE. AT THE SAME TIME IF YOU LOOK AT APARTMENT BUILDINGS AND OTHER KINDS OF CONSTRUCTION, IT'S BEEN RELATIVELY ROBUST.
LIESMAN: SO WHAT KIND OF FED FUNDS RATE DO YOU NEED TO SLOW DOWN THE COMMERCIAL REAL ESTATE INDUSTRY?
ROSENGREN: SO MY HOPE IS THAT WE DO IT SLOWLY AND GRADUALLY. BUT THAT THE LONGER WE WAIT, THE MORE LIKELY IT IS WE'RE GOING TO HAVE TO DO IT MORE QUICKLY. OBVIOUSLY YOU DON'T SET MONETARY POLICY TO ONE ASSET CLASS, BUT I THINK IT'S SYMPTOMATIC OF WHAT HAPPENS WHEN THINGS START TO BECOME LESS SUSTAINABLE. WHETHER IT SHOWS UP IN INFLATION OR WHETHER IT SHOWS UP IN ASSET PRICES, IT'S A LITTLE BIT HARD TO DETERMINE. BUT THAT'S WHY I'D LIKE TO HAVE AN ECONOMY THAT IS AT A SUSTAINABLE UNEMPLOYMENT RATE OVER A LONG PERIOD OF TIME SO WE CAN MAKE SURE THAT WE HAVE AS LONG A RECOVERY AS POSSIBLE.
LIESMAN: I WAS JUST LOOKING AT THE DIFFERENCE BETWEEN THE 10-YEAR BUND AND THE U.S. 10-YEAR TREASURY. A HISTORIC GAP. 171 BASIS POINTS. HOW MUCH FURTHER CAN THE U.S. MOVE AWAY FROM WHAT'S HAPPENING IN EUROPE AND IN JAPAN? THEY HAVE NEGATIVE RATES. WE HAVE POSITIVE RATES THAT YOU WANT TO MAKE MORE POSITIVE.
ROSENGREN: WE HAVE TO DO WHAT MAKES SENSE FOR THE U.S. ECONOMY. NOW, ONE OF THE THINGS THAT WILL SLOW DOWN THE U.S. ECONOMY IS IF WE RAISE RATES FASTER THAN OTHER COUNTRIES, WHICH IS WHAT YOU'RE HIGHLIGHTING, THAT THE EXCHANGE RATE IS GOING TO MOVE.
LIESMAN: IT HAS ALREADY MOVED.
ROSENGREN: WHEN THE EXCHANGE RATE MOVES, IT SLOWS DOWN OUR ECONOMY SO WE DON'T GROW QUITE AS FAST. THAT'S INCORPORATED IN THE FORECAST. MOST FORECASTS, INCLUDING MY OWN, ARE EXPECTING GROWTH OF 2% OR FASTER. 2% OR FASTER IS WHAT WE HAVE HAD OVER MOST OF THIS RECOVERY. AND WE'VE HAD THE UNEMPLOYMENT RATE DECLINING OVER MOST OF THIS RECOVERY. SO I THINK THAT POSES ONE OF THE RISKS, WHICH IS IF WE GET GROWTH ABOVE 2%, WE'RE LIKELY TO START GETTING AN UNEMPLOYMENT RATE THAT IS NO LONGER SUSTAINABLE.
LIESMAN: WHAT ABOUT WAGES? HOW MUCH CONCERN DO YOU HAVE THAT WAGES ARE NOW RISING IN A PLACE THAT CREATES INFLATIONARY DANGERS?
ROSENGREN: SO I'M NOT THAT WORRIED ABOUT INFLATIONARY DANGERS IMMEDIATELY. I DO THINK THAT WE ARE SEEING BOTH WAGES AND PRICES GRADUALLY RISING. THAT'S CONSISTENT WITH BEING VERY CLOSE TO FULL EMPLOYMENT RIGHT NOW. SO I THINK IT'S A POSITIVE TREND THAT WE ARE SEEING THE WAGE GROWTH. AND I'M EXPECTING TO SEE MORE WAGE GROWTH. BUT THAT ALSO HIGHLIGHTS THAT WE'RE NOT THAT FAR FROM FULL EMPLOYMENT. BECAUSE WHEN YOU'RE AT FULL EMPLOYMENT, THAT WOULD BE THE TIME THAT YOU'D EXPECT SOME GRADUAL INCREASES IN WAGES AND PRICES.
LIESMAN: COULD YOU GIVE US YOUR TRAJECTORY FOR HOW DO YOU THINK INTEREST RATES WILL GO FROM HERE? IS ONE INTEREST RATE HIKE ENOUGH THIS YEAR FOR THE FEDERAL RESERVE? AND WHAT HAPPENS IN 2017?
ROSENGREN: SO I'M NOT GOING TO BE SPECIFIC ABOUT THE EXACT PATH OF INTEREST RATES. THE SUMMARY OF ECONOMIC PROJECTIONS HIGHLIGHTS THAT BY THE END OF NEXT YEAR, WE'RE EXPECTING TO BE A LITTLE BIT ABOVE 1%. AND THEN THE FOLLOWING YEAR, A LITTLE BIT BELOW 2%. MY OWN VIEW IS THAT IF THE UNEMPLOYMENT RATE FALLS AS MUCH AS I'M EXPECTING, THAT IT IS POSSIBLE THAT WE'LL HAVE TO RAISE RATES FASTER THAN AS PROJECTED BY THE SUMMARY OF ECONOMIC PROJECTIONS. AS YOU KNOW, THAT'S ALSO FASTER THAN WHAT THE MARKET CURRENTLY HAS PRICED INTO FINANCIAL CONTRACTS.
LIESMAN: SO TALKING ABOUT MARKET PRICING, THE PROBABILITY OF A FED RATE HIKE IN NOVEMBER RIGHT NOW IS BELOW 9%. IS THE MARKET MISPRICED THERE?
ROSENGREN: I WON'T TALK ABOUT THE PRICING OF THE MARKET. BUT I WOULD SAY THAT EACH OF OUR MEETINGS OUGHT TO BE LIVE. I DO THINK THAT WE HAVE TO CONSIDER WHERE THE ECONOMY IS RIGHT NOW. WE HAVE TENDED TO MOVE AROUND THE TIMES THAT THE CHAIR HAS A PRESS CONFERENCE. SO THE NEXT PRESS CONFERENCE MEETING IS IN DECEMBER. THERE'S A MUCH HIGHER PROBABILITY IN DECEMBER. I DON'T KNOW WHAT IT IS TODAY, BUT IT WAS BETWEEN 60% AND 70% OVER THE LAST WEEK OR TWO. TO ME THAT SEEMS QUITE APPROPRIATE. AS YOU HIGHLIGHTED AT THE BEGINNING OF THE INTERVIEW, I DISSENTED IN SEPTEMBER. SO I OBVIOUSLY THOUGHT THE CONDITIONS WERE STRONG ENOUGH IN SEPTEMBER TO ACTUALLY MAKE A MOVE AT THAT TIME. THE MARKET SEEMS TO THINK THERE'S A VERY HIGH PROBABILITY IN DECEMBER. WE'LL SEE HOW THE ECONOMIC DATA ACTUALLY COMES IN, BUT I THINK THAT IS PRICED APPROPRIATELY.
LIESMAN: WE BETTER LEAVE IT THERE, ERIC. THANKS FOR JOINING US.
ROSENGREN: THANK YOU FOR BEING HERE.
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