WHEN: Today, Monday, March 20th
WHERE: CNBC's "Squawk on the Street"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Philadelphia Fed President Patrick Harker and CNBC's Steve Liesman on CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET) today, Monday, March 20th. Following is a link to video on CNBC.com: http://video.cnbc.com/gallery/?video=3000602736&play=1.
All references must be sourced to CNBC.
LIESMAN: SARA, THANKS VERY MUCH. I'M HERE AT THE PHILADELPHIA FEDERAL RESERVE WITH PRESIDENT PATRICK HARKER FOR HIS EXCLUSIVE INTERVIEW AND INAUGURAL CNBC INTERVIEW. THANK YOU FOR JOINING US.
HARKER: THANK YOU FOR WELCOME TO PHILADELPHIA.
LIESMAN: LAST WEEK, YOU VOTED TO RAISE RATES.
HARKER: YES.
LIESMAN: TELL US WHY?
HARKER: WELL I THINK IT WAS THE PRUDENT ACTION. COMING INTO THIS YEAR I THOUGHT THAT THREE RATE INCREASES MADE SENSE, I LIKE TO PACE THOSE OUT THAT IS I DON'T WANT TO GET BEHIND THE CURVE BUT WE'RE NOW IN ANY RUSH EITHER. SO I THINK WE HAVE TIME TO INCREASE OVER THE COURSE OF THIS YEAR AND I THOUGHT HAVING ONE IN MARCH JUST MADE SENSE GIVEN THE DATA WE'VE SEEN.
LIESMAN: WE'RE STILL BELOW THE INFLATION LEVEL. AND ONE OF YOUR COLLEAGUES, NEEL KASHKARI, DISSENTED IN PART BECAUSE WE ARE BELOW THE INFLATION LEVEL, DO YOU FEEL THAT YOU MET THAT GOAL OF YOURS?
HARKER: OBVIOUSLY THERE'S A LAG TO INFLATION AND WE HAVE TO BE CAREFUL ABOUT NOT GETTING BEHIND THE CURVE. HEADLINE PCE IS AT 1.9% WITHIN SHOOOTING DISTANCE OF OUR TARGET. CORE IS AT 1.7%. OBVIOUSLY OUR TARGET IS ACTUALLY HEADLINE, SO I THINK WE'RE THERE AND WE'RE MOVING IN THE RIGHT DIRECTION. THERE WILL BE A LITTLE BIT OF AN OVERSHOOT, AND THAT'S OKAY. AND THAT'S APPROPRIATE. SO IT'S NOT --
LIESMAN: OVERSHOOT OF INFLATION ABOVE 2%?
HARKER: YEAH, IT'S NOT A CEILING. IT'S JUST A TARGET. AND WHAT YOU NEED TO BE CONCERNED ABOUT IS NOT SO MUCH THE NUMBER ITSELF BUT THE MOMENTUM. SO PEOPLE OFTEN THINK IT'S A THRESHOLD OR IT'S -- WHAT'S THE EXACT RANGE, TO ME IT'S MORE OF WHAT IT FEELS LIKE. IS IT ACCELERATING IS IT DECELERATING? WE WANT TO STAY AROUND 2%. AND I THINK WE'RE PRETTY CLOSE TO THAT. AND THE MOMENTUM IS IN THE RIGHT DIRECTION.
LIESMAN: ON THE OTHER SIDE OF NEEL KASHKARI ARE THOSE WHO THINK MAYBE YOU'RE BEHIND THE CURVE. DO YOU HAVE ANY CONCERN AT ALL RIGHT NOW THAT INFLATION MIGHT BE GETTING -- STARTING NOW AND GETTING SOME MOMENTUM?
HARKER: NO, I DON'T SEE IT GETTING THAT MOMENTUM YET. ALTHOUGH AS THE LABOR MARKETS CONTINUE TO TIGHTEN, THAT IS SOMETHING WE'LL HAVE TO WATCH.
LIESMAN: HAVE YOU YET FACTORED IN ANY POSSIBILITY OF FISCAL POLICY INTO YOUR FORECAST AND INTO YOUR RATE FORECAST?
HARKER: NO. BECAUSE I DON'T KNOW EXACTLY WHAT THEY ARE. AND I EMPHASIZE THEY BECAUSE IT'S NO ONE POLICY THAT MATTERS. IT'S A COLLECTION OF POLICIES THAT MATTER. SO, FOR EXAMPLE, IF WE HAVE CORPORATE TAX REFORM, WHICH MAKES SENSE TO ME, BUT WE ALSO RAISE TRADE BARRIERS THAT MIGHT HURT SOME INDUSTRIES HERE IN THE U.S., WHAT'S THE NET EFFECT OF THAT? WELL, THE DEVIL'S IN THE DETAILS, RIGHT? UNTIL WE SEE THE DETAILS OF WHAT THAT ALL MEANS, IT'S HARD TO FACTOR IT INTO A FORECAST.
LIESMAN: BUT SOME OF YOUR COUNTERPARTS, OECD AND IMF HAVE ALL RAISED THEIR FORECASTS IN ANTICIPATION OF FISCAL POLICIES, THE MARKET CERTIANLY SEEMS TO HAVE RAISED ITS FORECAST, WHY IS THE FED RIGHT IN WAITING?
HARKER: WELL, AGAIN, I THINK I CAN'T SPEAK FOR THE FED. I CAN ONLY SPEAK FOR ME. I DON'T KNOW EXACTLY WHAT THOSE POLICIES ARE YET. ONCE WE SEE SOMETHING THAT LOOKS LIKE IT IS LIKELY TO BE VOTED UPON SUCCESSFULLY AND THE PRESIDENT APPROVE, THEN I CAN FACTOR THAT IN. BUT RIGHT NOW I DON'T KNOW WHAT THEY ARE.
LIESMAN: WHEN YOU THINK ABOUT THINGS LIKE TAX CUTS FOR INDIVIDUALS, TAX CUTS FOR CORPORATIONS, ADDITIONAL INFRASTRUCTURE SPENDING.
HARKER: RIGHT.
LIESMAN: ARE ALL OF THOSE THINGS IF THEY WERE TO PASS WOULD CAUSE YOU TO RAISE YOUR LEVEL OF GDP?
HARKER: OH, YEAH.
LIESMAN: ALSO ALONG WITH YOUR OUTLOOK FOR RATE HIKES?
HARKER: OH, YEAH, POTENTIALLY. AGAIN, THE DEVIL'S IN THE DETAILS. WE NEED TO SEE EXACTLY WHAT THAT IS. RIGHT NOW AS YOU KNOW CONSUMER CONFIDENCE IS HIGH, BUSINESS CONFIDENCE IS HIGH, OUR MANUFACTURING BUSINESS OUTLOOK SURVEY HERE IN PHILADELPHIA HAS HIT A 33-YEAR HIGH. BUT CONFIDENCE HAS TO TRANSLATE INTO ACTION.
LIESMAN: HAVE YOU SEEN IT YET?
HARKER: NO, NOT TO A LARGE EXTENT. NOT ON THE BUSINESS SIDE. WHEN I TALK TO BUSINESS LEADERS THROUGHOUT THE DISTRICT AND THROUGHOUT THE COUNTRY, THEY WANT TO SEE THE SPECIFICS, JUST LIKE I DO, BEFORE THEY'RE WILLING TO MAKE THOSE INVESTMENTS.
LIESMAN: BUT IF THOSE PLANS OR LAWS – IF IT BECOMES LAW – AND IT RAISES OUTPUT, IS THAT FAIR TO THINK THAT MAYBE ONE SHOULD BE THINKING ABOUT MORE THAN THREE RATE HIKES THIS YEAR?
HARKER: POSSIBLY. I MEAN, I WOULDN'T RULE ANYTHING OUT AT THIS POINT, BUT WE NEED TO SEE HOW THIS PLAYS OUT.
LIESMAN: ARE YOU A PERSON WHO LIKES TO HIKE RATES AT PRESS CONFERENCES OR DOES IT NOT MATTER TO YOU?
HARKER: NO, TO ME I THINK EVERY MEETING SHOULD BE A LIVE MEETING. I THINK IT'S JUST PRUDENT FISCAL POLICY THAT IN THE CASE THAT WE HAVE TO ACT EITHER ON THE UPSIDE OR THE DOWNSIDE, WE CAN DO THAT AND WE'RE NOT CONSTRAINED TO JUST PRESS CONFERENCE MEETINGS.
LIESMAN: ANOTHER TOOL IN THE FED'S TOOLBOX IS THE BALANCE SHEET.
HARKER: SURE.
LIESMAN: WILL THE FED ANNOUNCE A PLAN THIS YEAR OR IS IT CURRENTLY DISCUSSING A PLAN TO THINK ABOUT REDUCING THE BALANCE SHEET?
HARKER: YEAH, WE ARE DISCUSSING IT. TO ME, I THINK ONCE WE GET WELL NORTH OF 1%, SO WE HAVE SOME LEGROOM –
LIESMAN: I GOT TO STOP YOU THERE, WHAT'S WELL NORTH?
HARKER: I DON'T KNOW YET.
LIESMAN: 3% IS WELL NORTH OF 1%.
HARKER: YEAH BECAUSE AGAIN, TO ME, IT COMES BACK TO WHAT'S THE HEALTH OF THE ECONOMY AT THE TIME.
LIESMAN: RIGHT.
HARKER: THAT NUMBER SHOULD NOT BE A TRIGGER OR A TARGET. IT REALLY IS SAYING WHAT'S THE MOMENTUM OF THE ECONOMY. ONCE I FEEL LIKE THE ECONOMY CONTINUES ON THIS PATH OF STRENGTHENING AND WE'RE SOLIDLY IN THAT ZONE, THEN WE CAN STOP REINVESTMENT.
LIESMAN: CAN I NAIL YOU DOWN A LITTLE BIT ON THAT THOUGH?
HARKER: SURE.
LIESMAN: IS WELL NORTH OF 1% BETWEEN 1% AND 1.5%?
HARKER: YEAH, SOMEWHERE IN THAT RANGE. OR MAYBE 1.5%. I DON'T KNOW YET. BECAUSE AGAIN, TO ME, IT'S NOT JUST THAT NUMBER, BUT IT'S ALSO WHAT WE'RE FEELING IN TERMS OF MOMENTUM.
LIESMAN: DO YOU HAVE A NUMBER IN YOUR HEAD AND A TIME PERIOD THAT IS THE RIGHT LEVEL FOR THE BALANCE SHEET?
HARKER: SO WE'RE WORKING ON THAT, TOO. I MEAN, THE BALANCE SHEET OF COURSE, CONSISTS OF OUR LIABILITIES WITH RESPECT TO THE OUTSTANDING CURRENCY, OUR ACCOUNT WITH THE TREASURY AND THEN, OF COURSE, THE RESERVES. IT FUNDAMENTALLY COMES DOWN TO WHAT LEVEL OF RESERVES DO WE WANT TO EFFECTIVELY MANAGE MONETARY POLICY AND THAT IS AN AREA OF ACTIVE DEBATE AND DISCUSSION.
LIESMAN: DO YOU HAVE A FEELING ABOUT THE MAKEUP OF THE BALANCE SHEET? SHOULD IT BE ONLY TREASURIES?
HARKER: SO I THINK THE MIX HAS SERVED US WELL RIGHT NOW. I TEND TO THINK THAT WEIGHTING MORE TOWARD TREASURIES IS A PRUDENT POLICY GOING FORWARD. I WOULDN'T SAY WE WOULD COMPLETELY GET OUT OF MBS, BECAUSE THAT DECISION HASN'T BEEN MADE, BUT I THINK THERE'S A TILT, DEFINITE TILT, TOWARD MORE TREASURY AND LESS MBS.
LIESMAN: I HAVE ONE MORE QUESTION FOR YOU ABOUT A PROJECT HERE THAT YOU GUYS ARE INVOLVED IN, WHICH DEALS WITH THE ISSUE OF THERE ARE JOBS IN THIS COUNTRY.
HARKER: RIGHT.
LIESMAN: AND THE PEOPLE ARE NOT CLOSE TO THOSE JOBS. THERE'S MOBILITY ISSUES, AND WE CAN'T FILL A LOT OF THE JOBS. TELL US WHAT PHILLY FED IS DOING IN THAT REGARD?
HARKER: SO OUR MANDATE AT THE FED IS STABLE PRICES AND MAXIMUM EMPLOYMENT. I TAKE THAT LAST PART – BOTH PARTS – BUT THAT LAST PART VERY SERIOUSLY AS WELL. WE NEED TO BRING MORE PEOPLE INTO THE WORKFORCE. THERE ARE PEOPLE WHO HAVE BEEN OUT OF THE WORKFORCE FOR A LONG TIME BECAUSE THEY DON'T HAVE THE RIGHT SKILLS. WHAT WE'RE SEEING IN THIS JOB MARKET IS THERE ARE JOBS, LOTS OF JOBS, BUT PEOPLE DON'T HAVE THE SKILLS TO FILL THEM. AND A LOT OF THESE JOBS DON'T NEED A COLLEGE DEGREE. THEY'RE TRUCK MECHANICS AND WELDERS AND SO FORTH. WE NEED TO FOCUS ON THREE THINGS. HOW TO BRING THE JOBS TO THE COUNTRY AND TO THIS DISTRICT, GET THE SKILLS THAT PEOPLE NEED TO FULFILL THOSE JOBS AND THEN ALSO HAVE THE INFRASTRUCTURE – THE HOUSING, THE TRANSPORTATION – SO PEOPLE CAN LIVE NEAR THE JOBS OR GET TO THE JOBS.
LIESMAN: PATRICK HARKER, THANKS VERY MUCH FOR JOINING US.
HARKER: THANK YOU.
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