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CNBC Exclusive: CNBC Transcript: New York Fed President William Dudley Speaks with CNBC’s Steve Liesman on “Squawk on the Street” Today

WHEN: Monday, December 5th

WHERE: CNBC's "Squawk on the Street"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Bank of New York President William Dudley on "Squawk on the Street" (M-F, 9AM-11AM ET) today. Following are links to video of the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000573500&play=1, http://video.cnbc.com/gallery/?video=3000573499&play=1, http://video.cnbc.com/gallery/?video=3000573496&play=1 and http://video.cnbc.com/gallery/?video=3000573460&play=1.

All references must be sourced to CNBC.

LIESMAN: YES, CARL, THANKS VERY MUCH. I AM HERE WITH NEW YORK FED PRESIDENT BILL DUDLEY FOR AN EXCLUSIVE INTERVIEW. BILL, THANKS FOR JOINING US.

DUDLEY: GREAT TO BE HERE.

LIESMAN: ITS A GOOD TIME FOR YOU TO BE HERE. I'M LOOKING AT THE SCREEN, 19,257, UP 87 POINTS, ANOTHER RECORD HIGH ON THE DOW. AS A REGULATOR, AS A POLICYMAKER, DO YOU LOOK AT THESE KIND OF NUMBERS? DOES IT MAKE YOU NERVOUS?

DUDLEY: I LOOK AT FINANCIAL CONDITIONS AT LARGE, SO DOLLAR, STOCK MARKET, CREDIT SPREADS AND THE BOND MARKET. SO WHAT WE'VE SEEN POST ELECTION IS WE'VE SEEN BOND YIELDS UP, EQUITY MARKET UP, DOLLAR FIRMER. AND MY JUDGMENT IS THAT IT SEEMS TO BE THAT WHAT PEOPLE ARE FACTORING IN IS LIKELIHOOD OF MORE FISCAL STIMULUS AND REDUCED DOWNSIDE RISK TO THE ECONOMY.

LIESMAN: ITS THE 20-YEAR ANNIVERSARY OF IRRATIONAL EXUBERANCE, I WONDER IF YOURE WILLING TO REPEAT THAT IN TERMS OF WHERE WE -- ITS ALMOST, WHAT, 1,200 POINTS IN A COUPLE WEEKS, RIGHT? THAT KIND OF MOVE, DOES IT CREATE CONCERN?

DUDLEY: I DONT THINK I WOULD MAKE A JUDGMENT ABOUT WHERE THE STOCK MARKET SHOULD BE PRECISELY. I GUESS I'VE ALWAYS BEEN A LITTLE BIT MORE CONCERNED ABOUT WHERE THE BOND MARKET WAS WHEN BOND YIELDS, YOU KNOW, EVEN A FEW WEEKS AGO WERE EXTRAORDINARILY LOW RELATIVE TO THE LIKELY PATH OF MONETARY POLICY IN THE YEARS AHEAD. SO I THINK THE CORRECTION IN THE BOND MARKET PROBABLY A LITTLE BIT MORE OVERDUE.

LIESMAN: WHEN YOU LOOK AT WHATS HAPPENED TO MARKETS, HIGHER STOCK MARKET, TIGHTER – HIGHER YIELDS ON INTEREST RATES AND A STRONGER DOLLAR. ON NET, ARE FINANCIAL CONDITIONS TIGHTER, OR ARE THEY LOOSER THAN THEY WERE BEFORE?

DUDLEY: OBVIOUSLY IT DEPENDS ON HOW MUCH WEIGHT YOU PUT ON THOSE THREE FACTORS, BUT I GUESS MY JUDGMENT WOULD YOU KNOW BE A LITTLE BIT TIGHTER. I DON'T THINK ITS A BIG PROBLEM THOUGH FOR US IN TERMS OF THE FEDERAL RESERVE BECAUSE YOU HAVE TO ASK YOURSELF THE QUESTION OF WHY ARE FINANCIAL CONDITIONS TIGHTER. I DON'T THINK IT'S LIKE THE EARLY 2016 WHERE WE HAD A VERY SIGNIFICANT TIGHTENING OF FINANCIAL MARKET CONDITIONS BECAUSE OF INCREASE IN RISK AVERSION. PEOPLE WERE MORE FEARFUL ABOUT THE ECONOMIC OUTLOOK. THAT DOESN'T SEEM TO BE THE CASE THIS TIME.

LIESMAN: WELL, WHAT IS BEHIND THIS AS FAR AS YOU CAN TELL? WHAT IS MOTIVATING THE RECENT CHANGE IN ASSET PRICES?

DUDLEY: THE BEST I CAN TELL, ONE, THE UNCERTAINTY AROUND THE ELECTION IS OVER BECAUSE WE'VE HAD THE ELECTION. SO THATS PROBABLY HELPFUL. NUMBER TWO, THERE IS AN EXPECTATION THAT THE NEW ADMINISTRATION AND CONGRESS WILL WORK TOGETHER TO COME FORWARD WITH A SET OF PROPOSALS THAT MAKE FISCAL POLICY MORE EXPANSIVE AND THAT'S MORE SUPPORTIVE FOR GROWTH. SO PROBABLY A PROBABLY A LITTLE LESS WORRIES ABOUT DOWNSIDE RISK TO THE ECONOMY OVER THE MEDIUM TERM.

LIESMAN: HOW DOES THAT CHANGE YOUR OUTLOOK FOR POLICY, IF THERE IS INDEED GOING TO BE MORE FISCAL POLICY? DOES THAT MEAN YOU CAN DO LESS MONETARY POLICY, WHICH I GUESS TRANSLATES AS RAISE RATES FASTER?

DUDLEY: WELL, WELL HAVE TO SEE WHAT WE ACTUALLY GET. I MEAN, AT THIS POINT ALL WE HAVE AN EXPECTATION BY THE MARKETS THAT FISCAL POLICY IS GOING TO TURN MORE STIMULATIVE OVER TIME. WE DON'T KNOW WHAT THE FISCAL POLICY IS, WE DON'T KNOW HOW BIG IT IS AND WE DON'T KNOW WHEN IT'S ACTUALLY GOING TO OCCUR. SO ITS PREMATURE FOR US TO TAKE ONBOARD THESE MARKET EXPECTATIONS BECAUSE WE JUST DON'T KNOW WHAT IT IS YET. BUT IF FISCAL POLICY WERE TO TURN MORE EXPANSIVE AND THAT WOULD LEND SUPPORT TO ECONOMIC ACTIVITY, THEN PROBABLY THE FEDERAL RESERVE WOULD PROBABLY REMOVE ACCOMMODATION A LITTLE BIT MORE QUICKLY OVER TIME.

LIESMAN: I'M SORRY, I GOT TO GO BACK TO THE ORIGINAL QUESTION I ASKED WHICH YOU SAID THOSE THREE THINGS ARE UNKNOWN, HOW MUCH IT'S GOING TO BE, HOW BIG IT'S GOING TO BE, WHEN IT'S GOING TO BE, DOESN'T IT STRIKE YOU THAT THE MARKET IS OUT OVER ITS SKIS A BIT THEN?

DUDLEY: I THINK THEYRE MAKING SOME ASSUMPTIONS, BROAD DIRECTIONALLY. THE FISCAL POLICY GOING TO BE MORE EXPANSIVE, BUT WITHOUT ANY DETAIL. AND I THINK FOR US I THINK THE DETAILS IMPORTANT.

LIESMAN: WHAT WOULD BE THE EFFECT, WOULD YOU SAY, OF A SUBSTANTIAL FISCAL STIMULUS TO THE ECONOMY RIGHT NOW? WOULD IT CREATE MORE INFLATION? WOULD THAT BE WORRISOME TO YOU?

DUDLEY: I THINK IT DEPENDS ON WHAT IT IS. SO LETS IMAGINE WE HAD A LOT OF FISCAL SPENDING ON MORE SPENDING ON INFRASTRUCTURE WOULD ACTUALLY INCREASE PRODUCTIVITY CAPACITY OF THE ECONOMY. IT WOULD RESOLVE BOTTLENECKS. THINK ABOUT NEW YORK CITY, THE SECOND SET OF RAIL TUNNELS IN FROM NEW JERSEY. THAT'S PROBABLY DECADES OVERDUE. IT'S FINALLY MOVING FORWARD WITH THE GATEWAY PROPOSAL. SO DOING THINGS LIKE THAT THAT LIFT THE PRODUCTIVE CAPACITY, I DON'T THINK THATS A PROBLEM.

LIESMAN: WHAT ABOUT THE IDEA THAT THERE AREN'T A WHOLE LOT OF WORKERS RIGHT NOW AND THAT COULD LEAD TO HIGHER WAGES? WOULD THAT CREATE INFLATIONARY CONCERNS THROUGH A WAGE PUSH INFLATION SPIRAL?

DUDLEY: IT REMAINS TO BE SEEN. IT DEPENDS A LOT ON HOW BIG THE FISCAL STIMULUS IS, WHEN IT OCCURS. RIGHT NOW WE ACTUALLY WOULD LIKE TO SEE WAGES FROM A LITTLE MORE BECAUSE W'ERE ACTUALLY NOT AT -- WE HAVEN'T YET ACHIEVED OUR INFLATION OBJECTIVE OF 2%. SO INFLATION TODAY IF ANYTHING IS A LITTLE BIT TOO LOW. SO HAVING AN ECONOMY THAT GROWS PUTS MORE PRESSURE ON LABOR RESOURCES IN THE NEAR-TERM AT LEAST THATS A GOOD THING, NOT A BAD THING.

LIESMAN: WE'VE GOT A JOBS REPORT LAST WEEK THAT SHOWED THE UNEMPLOYMENT RATE FALLING BY 0.3 DOWN TO 4.6% BUT VERY LITTLE WAGE PRESSURE. DOES THAT TELL YOU THAT MAYBE THE FULL EMPLOYMENT RATE IS LOWER THAN YOU THOUGHT?

DUDLEY: WELL, I THINK WE DON'T KNOW. I MEAN, I THINK THE GENERAL TREND OVER THE LAST YEAR IS THAT WE'VE SEEN SOME UPTREND IN WAGE COMPENSATION INFLATION, BEEN VERY VOLATILE MONTH TO MONTH. SP LAST MONTH 2.8% AVERAGE HOURLY EARNINGS YEAR OVER YEAR, THIS MONTH 2.5% YEAR OVER YEAR. SO I THINK A LOT OF VOLATILITY IN THE MONTHLY NUMBERS. BUT I THINK THE GENERAL TREND HAS BEEN TO A BIT TIGHTER LABOR MARKET AND A BIT OF ACCELERATION IN LABOR COMPENSATION. NOTHING THATS DISTURBING. WE ACTUALLY WANT THIS TO HAPPEN. THIS IS PART OF THE MECHANISM THAT WILL DRIVE US BACK TO OUR 2% INFLATION OBJECTIVE.

LIESMAN: ALL OF THIS IS BY WAY OF ASKING YOU HAVE ANOTHER SET OF PROJECTIONS DUE TO THE FOMC IN ABOUT A WEEKS TIME. ARE YOU INCLINED TO RAISE YOUR OUTLOOK FOR GROWTH THE WAY THE MARKET HAS BEEN INCLINED TO PERHAPS FACTOR IN MORE GROWTH?

DUDLEY: I MEAN I THINK EVERYONE'S GOT TO MAKE THEIR OWN DECISION. I THINK FOR ME ITS A LITTLE PREMATURE BECAUSE I DON'T KNOW WHAT IT IS, WHEN IT IS OR HOW MUCH IT IS. SO EVEN IF I THOUGHT FISCAL POLICY STIMULUS WERE PROBABLY GOING TO BE MOVING IN A MORE EXPANIVE DIRECTION, IT WOULD BE HARD TO TRANSLATE THAT IN TERMS OF WHAT DOES IT MEAN FOR MONETARY POLICY. SO I WOULD LIKE TO SEE MORE DETAIL MYSELF.

LIESMAN: GIVEN WHAT'S HAPPENED WITH RATES HOWEVER, ESPECIALLY ON THE SHORT END, ARE YOU INCLINED TO RAISE YOUR FORECAST FOR HOW MUCH POLICY TIGHTENING THE FED WILL DO NEXT YEAR?

DUDLEY: AGAIN, I THINK IT'S A LITTLE TOO SOON TO MAKE STRONG JUDGMENTS ABOUT 2017. IN PART BECAUSE EVEN IF WE DO GET A FISCAL PACKAGE, IT'S GOING TO TAKE TIME FOR THAT FISCAL PACKAGE TO ACTUALLY COME TOGETHER AND ACTUALLY TAKE EFFECT AND FOR THAT STIMULUS ACTUALLY TO BE FELT BY THE ECONOMY. SO PERSONALLY FOR ME THIS IS MORE OVER THE HORIZON A LITTLE FURTHER.

LIESMAN: SO YOU'RE INCLINED REALLY TO KEEP YOUR FORECAST FOR GROWTH AND UNEMPLOYMENT AND RATES PRETTY MUCH UNCHANGED AFTER THE ELECTION.

DUDLEY: I MEAN, I THINK WHAT'S CHANGED IN MY THINKING IS THAT I JUST FEEL LIKE THE DOWNSIDE RISK TO THE ECONOMY ARE PROBABLY REDUCED.

LIESMAN: LET'S GO TO ONE OTHER ASPECT -- WELL, COUPLE ASPECTS HERE. THERE'S TALK ABOUT CHANGING DODD/FRANK, AMENDING DODD/FRANK. DO YOU HAVE CONCERN THAT THE REGULATORY REFORM THAT WAS DONE SINCE 2008 CAN POTENTIALLY BE WATERED DOWN OR OTHERWISE BE AMENDED IN A NEGATIVE WAY?

DUDLEY: WELL, I MEAN, I THINK THE DODD/FRANK ACT ISN'T PERFECT. SO I THINK IT'S COMPLETELY REASONABLE TO SORT OF LOOK AT THE DODD/FRANK ACT AND SAY HERE'S WHAT WORKED, HER'ES WHAT DIDN'T WORK SO WELL AND MAKE CHANGES. BUT THE IDEA OF JUST TAKING AWAY THE REGULATORY CHANGES THAT WERE MADE POST FINANCIAL CRISIS, I THINK, WOULD BE A GREAT MISTAKE. AND I THINK THE ONES TO ME THAT ARE PARTICULARLY IMPORTANT ARE RAISING THE CAPITAL REQUIREMENTS FOR BANKS SO MORE CAPITAL, HIGHER QUALITY CAPITAL, RAISING LIQUIDITY BUFFERS FOR BANKS, STRESS TESTING BANKS IN TERMS OF THEIR CAPITAL AEQUACY SO THEY CAN'T DO BUYBACK IFS CAPITAL IS COMPLETED IN A STRESS ENVIRONMENT. I THINK THOSE CHANGES ARE IMPORTANT. WE'VE ALSO MADE IMPORTANTSTRUCTURAL CHANGES TO THE ECONOMY IN TERMS OF MAKING IT MORE FINANCIALLY STABLE. MORE MONEY MARKET REFORM I THINK HAS BEEN A GOOD THING, REDUCE RISK OF PEOPLE HAVE LOANS FROM MONEY MARKET FUNDS WHICH OBVIOUSLY WAS SOMETHING THAT LED TO A MUCH MORE RAPID AND INTENSE FINANCIAL CRISIS.

LIESMAN: SHOULD I REACH SOMETHING THAT YOU DIDN'T MENTION THE VOLCKER RULE AS ONE OF THE THINGS YOU THINK IS IMPORTANT TO MAKING THE BANK SYSTEM SAFER?

DUDLEY: I THINK THE VOLCKER RULE, I MEAN I THINK THE VOLCKER RULE DOES REDUCE THE RISK OF FIRMS BEING VERY AGGRESSIVE IN TERMS OF PROPRIETARY TRADING. BUT DO I THINK THAT WAS THE CENTRAL ELEMENT OF THE FINANCIAL CRISIS? NO.

LIESMAN: ONE OTHER ASPECT THAT'S MENTIONED AS A NEGATIVE BY MANY ECONOMISTS IS THE POTENTIAL FOR TRADE, RESTRICTIONS IN TRADE AND TARIFFS. AS A FED OFFICIAL YOU DON'T NECESSARILY GET INVOLVED IN THAT. HOW WOULD YOU FACTOR IN GREATER PROTECTIONISM AT THE BORDER IN TERMS OF YOUR ECONOMIC OUTLOOK?

DUDLEY: WELL, AGAIN, I THINK IT'S PREMATURE TO SPECULATE ON WHAT'S GOING TO HAPPEN ON TRADE. WE COULD END UP WITH BETTER TRADE DEALS AND STILL HAVE PRETTY OPEN TRADE. I THINK THAT WOULD'NT BE A BAD OUTCOME. OR WE COULD HAVE NOT AS MUCH FREE MOVEMENT OF GOODS AND SERVICES, WHICH I THINK WOULD BE A NEGATIVE OUTCOME FOR THE ECONOMY BECAUSE IT WOULD ACTUALLY PROBABLY DRIVE UP INFLATION. AND PROBABLY OVER TIME REDUCE PRODUCTIVITY GROWTH. SO I THINK IT REALLY DEPENDS ON WHERE WE END UP.

LIESMAN: THE DOLLAR IS STRONGER, WHICH IS SOMETHING THAT CAN BE SEEN AS A NEGATIVE FOR THE ECONOMY. HOW MUCH CONCERN DO YOU HAVE THAT WHAT COULD HAPPEN FOR EXAMPLE HIGHER INTEREST RATES FROM THE FED, MORE STIMULUS FROM THE FISCAL SIDE, COULD CREATE NEGATIVE OUTCOMES FROM A STRONGER DOLLAR?

DUDLEY: WELL, IF THE DOLLARS FIRM BECAUSE PEOPLE VIEW THE U.S'S ECONOMY AS HAVING A BETTER OUTLOOK, THATS CERTAINLY A GOOD THING. I THINK GENERALLY CURRENCY STRENGTH TIED TO PEOPLES PERCEPTIONS ABOUT THE HEALTH OF AN ECONOMY IS A POSITIVE ELEMENT AND RISING STRONGER CURRENCY IS ALSO CONSISTENT WITH RISING LIVING STANDARDS. SO THAT'S NOT SOMETHING I WOULD BE PARTICULARLY CONCERNED ABOUT.

LIESMAN: LAST QUESTION, BILL. DO YOU AS A POLICYMAKER, THERE'S BEEN THE BASIC NARRATIVE OVER THE LAST SEVERAL YEARS IS IT'S BEEN THE FED ON THE FRONT LINES IN DOING ALL THE HEAVY LIFTING. DO YOU WELCOME THE POSSIBILITY THAT THE FISCAL SIDE MAY COME OVER AND HELP WITH THE ECONOMY?

DUDLEY: WHAT I'D LIKE TO DO IS ENSURE THAT FISCAL POLICY AND MONETARY POLICY ARE WELL ALIGNED. ONE THING I WOULD LIKE TO SEE IS GREATER AUTOMATIC FISCAL STABILIZER PRESSURES IN THE CASE OF ECONOMIC DOWNTURN. ONE OF THE CRITICISMS OF THE FED IS THE FED BEEN TOO AGGRESSIVE IN TERMS OF MONETARY POLICIES, QUANTITATIVE EASING, FORWARD GUIDANCE. WE HAD TO DO THAT BECAUSE THAT WHAT WAS NECESSARY TO GENERATE PROGRESS TOWARDS OUR GOALS OF MAXIMUM SUSTAINABLE EMPLOYMENT AND PRICE STABILITY, BUT IT WOULD HAVE BEEN HELPFUL IF WE HAD MORE FISCAL SUPPORT DURING THE ECONOMIC DOWNTURN AND MAKING THOSE STABILIZERS AUTOMATIC I THINK WOULD BE HELPFUL BECAUSE THEY WOULD COME IN PLACE MUCH MORE QUICKLY AND PEOPLE COULD COUNT ON THEM.

LIESMAN: BILL DUDLEY, THANKS FOR JOINING US.

DUDLEY: THANK YOU.

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