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WHEN: Today, Thursday, June 1st
WHERE: CNBC's "Squawk on the Street"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Governor Jerome Powell and CNBC's Steve Liesman on "Squawk on the Street" (M-F, 9AM-11AM ET) today, Thursday, June 1st. Following is a link to the interview on CNBC.com:http://video.cnbc.com/gallery/?video=3000623588.
All references must be sourced to CNBC.
SARA EISEN: WELCOME BACK TO "SQUAWK ON THE STREET." LET'S SEND IT OUT NOW TO SENIOR ECONOMICS REPORTER STEVE LIESMAN, SITTING DOWN WITH A SPECIAL GUEST. TAKE IT AWAY.
STEVE LIESMAN: THANKS VERY MUCH. I'M HERE LIVE AT THE NASDAQ MARKET SITE WITH FEDERAL RESERVE GOVERNOR JAY POWELL, WHO WAS ALSO THE HEAD OF THE FEDERAL RESERVE BANK SUPERVISORY COMMITTEE. THANKS FOR JOINING US.
JEROME POWELL: THANK YOU FOR HAVING ME HERE.
LIESMAN: I WANT TO GET INTO THE REGULATORY THINGS IMPORTANT TO ALL INVESTORS OUT THERE ESPECIALLY THOSE IN THE BANKS. I WANT TO ASK YOU ABOUT MONETARY POLICY TO START WITH YOU SAID THAT YOU THINK THAT RATES OUGHT TO RAISE SLOWLY THIS YEAR. BUT I HAVEN'T HEARD YOU SAY HOW MANY TIMES YOU THINK RATES OUGHT TO RISE THIS YEAR. WHAT'S YOUR NUMBER?
POWELL: WELL, SO I HAVEN'T PUT A NUMBER OUT THERE. BUT I WOULD SAY THAT IF THE ECONOMY CONTINUES BROADLY ON THE PATH IT'S ON, I CAN SEE A COUPLE MORE RATE INCREASES THIS YEAR WHICH WOULD BE A TOTAL OF THREE.
LIESMAN: YOU ALSO SAID THAT YOU THINK THE FED OUGHT TO BEGIN REDUCING THE BALANCE SHEET. DO THOSE TWO THINGS WORK TOGETHER OR SEPARATELY? WOULD THE FED STOP RAISING RATES AND BEGIN TO REDUCE THE BALANCE SHEET?
POWELL: NOT NECESSARILY. SO WHEN WE REDUCE THE BALANCE SHEET THAT WILL INCREASE DEBT HELD BY THE PUBLIC WHICH COULD PUT UPWARD PRESSURE ON LONG TERM RATES. TO THE EXTENT THAT HAPPENS WE HAVE TO TAKE IT INTO CONSIDERATION. BUT THE EFFECT MIGHT BE FAIRLY SMALL. OF COURSE IF THERE'S A BIGGER EFFECT THAN I WOULD EXPECT, THEN THAT WOULD BE TAKEN INTO CONSIDERATION IN SETTING RATES.
LIESMAN: YOU TALKED IN YOUR SPEECH ABOUT SOME ESTIMATES FROM STAFF ABOUT THE EFFECTS. MAYBE YOU CAN PUT THEM INTO A BIT OF ENGLISH FOR US. HOW MUCH WOULD YIELDS RISE IF THE FED FOLLOWS THROUGH ON THE BALANCE SHEET PLAN HERE?
POWELL: YOU LOOK AT IT THROUGH THE EYES OF THE HIGHLY COMPLICATED MODEL AND THEY SUGGEST PRETTY MODEST EFFECTS. A FEW BASIS POINTS HERE AND THERE. SO REALLY I THINK A BETTER WAY THAT I LIKE TO LOOK AT IT, HOW DID THE MARKET REACT TO THE NEWS THAT WE PUT OUT? I THINK BASED ON THE MARCH AND MAY MEETINGS WE TALKED ABOUT MOVING FORWARD THE EXPECTATIONS OF THE MARKET TO WHEN WE WOULD START --
LIESMAN: FROM MID 2018 TO --
POWELL: CORRECT. TO THE END OF 2017 WE WOULD START REDUCING FULL REINVESTMENT. THE MARKET REACTION WAS PRETTY SMALL ON THAT. THAT GIVES ME SOME CONFIDENCE THERE MAY NOT BE A BIG MARKET REACTION. AS I SAID IT'S VERY HARD TO PREDICT MARKETS. I TRY NOT TO DO THAT. AND IF THE MARKETS DO REACT MORE THAN I WOULD SUPPORT OUR REACTING --
LIESMAN: HAVE YOU SURPRISED THOUGH? I KEEP REPORTING THESE THINGS AND THINK THE MARKET IS GOING TO HAVE SOME SORT OF REACTION THAT THE $4.5 TRILLION BALANCE SHEET IS GOING DOWN. WHERE IS IT GOING DOWN TO? WHAT'S THE NUMBER TO THINK ABOUT?
POWELL: MY OWN THINKING IT REALLY DEPENDS ON A WHOLE BUNCH OF FACTORS WHICH HAVEN'T BEEN DECIDED YET. IT'S HARD FOR ME TO SEE THE BALANCE SHEET GETTING LOWER THAN 2.5 TRILLION, 2.5 TO 3 TRILLION. THAT ASSUMES THAT WE NORMALIZE THE BALANCE SHEET OVER THE COURSE OF THE NEXT FIVE YEARS. AND GO BACK TO A FAIRLY SMALL NUMBER OF RESERVES.
LIESMAN: LET'S TALK ABOUT THE ECONOMY. THE INFLATION NUMBERS HAVE BEEN GOING THE OTHER WAY ON YOU. THEY HAVE BEEN -- YOU WERE ON THIS APPROACH TOWARDS YOUR 2% GOAL AND NOW THEY HAVE COME DOWN FOR THREE MONTHS. IT HAS NOT MOVED TOWARDS YOUR 2% GOAL. HOW MUCH CONCERN IS THERE THAT INFLATION IS GOING THE WRONG WAY?
POWELL: I WATCHED THAT CAREFULLY. THE MARCH AND APRIL READINGS WERE WEAK, WERE SIDEWAYS AS YOU SAY BUT THERE'S GOOD REASON TO THINK WE'RE STILL ON THE PATH OF GRADUAL INCREASE IN PARTICULAR SPENDING DATA HAS BEEN PRETTY STRONG. LABOR MARKET DATA IS PRETTY STRONG. IF THOSE THINGS CONTINUE, I EXPECT THEM TO CONTINUE TO PUT SOME UPWARD PRESSURE ON INFLATION AND WE CONTINUE TO MOVE BACK TO 2%. THIS IS THE THING WHERE WE HAVE TO SHOW OUR COMMITMENT TO GETTING TO 2%. SO WE HAVE TO BE GUIDED BY THE INCOMING DATA.
LIESMAN: AND ONE OF THE THINGS YOU HAVE TO BE GUIDED BY IS THE EXPECTATIONS FOR FISCAL POLICY. HOW HAS THAT CHANGED OVER THE LAST SEVERAL MONTHS?
POWELL: MY THINKING HASN'T REALLY CHANGED BECAUSE I'VE ALWAYS FELT THAT FIRST OF ALL, I FEEL LIKE IT'S A 2018 EVENT. YOU KNOW, THE EFFECTS ON THE ECONOMY, IF ANY, WOULD BE FELT IN 2018. AND IT'S VERY DIFFICULT TO INCORPORATE ANYTHING INTO 2017 BECAUSE WE DON'T KNOW THE TIMING, WE DON'T KNOW THE SCOPE, WE DON'T KNOW THE CHARACTER OF WHAT WILL HAPPEN. IF YOU ASSUME, AS I DO SORT OF ASSUME THERE WILL BE SOME TAX CUT, THEN IT WOULD PROBABLY PROVIDE SOME SUPPORT FOR THE ECONOMY IN 2018. BUT IT WOULDN'T REALLY AFFECT 2017.
LIESMAN: DO YOU HAVE A NUMBER THAT YOU'RE BUILDING IN THAT IF THESE THINGS HAPPENS THAT THIS MEANS "X" TO GDP?
POWELL: IT'S REALLY HARD TO SAY. I'M NOT ACTUALLY THINKING OF IT THAT WAY UNTIL IT GETS DONE. SO, WE DON'T HAVE TO DO THAT FOR THIS YEAR. SO, I THINK, YOU THINK ABOUT A TAX CUT THAT MIGHT BE IN THE RANGE OF 1% OF GDP. IT WOULD RAISE GDP BY A FRACTION GDP, YOU KNOW, OVER A PERIOD OF TWO OR THREE YEARS.
LIESMAN: LET'S TURN TO THE BANKING SIDE. STRESS TESTS ARE COMING OUT SOON. I GUESS SOMETIME AT THE END OF THIS MONTH OR SO, YOU'LL RELEASE THIS INFORMATION. BANKS HAVE COMPLAINED ABOUT THEM. THEY SAY THEY DON'T HAVE ENOUGH INFORMATION. YOU'RE NOT TRANSPARENT ENOUGH. NOW THAT YOU'RE IN THIS NEW JOB AS BEING HEAD OF THE BANK SUPERVISORY COMMITTEE FOR THE FED, HOW WOULD YOU WANT TO CHANGE THESE STRESS TESTS?
POWELL: WELL, WE'RE COMMITTED TO RUNNING A YOU KNOW, AS TRANSPARENT AS POSSIBLE AND EFFECTIVE AS POSSIBLE A SET OF STRESS TESTS. THESE ARE VERY SUCCESSFUL, VERY IMPORTANT POST CRISIS INNOVATION. AND WE WANT TO CONTINUE AND STRENGTHEN THAT. SO WE DO HEAR THESE COMPLAINTS AND, YOU KNOW, WE ARE WORKING NOW AS WE HAVE CONTINUALLY TO PROVIDE MORE INFORMATION, MORE TRANSPARENCY. PARTICULARLY WE'RE WORKING ON SOMETHING THAT WE'LL DO IN THE COMING MONTHS WHICH WILL PROVIDE MUCH MORE GRANULAR INFORMATION ABOUT OUR EXPECTATIONS FOR LOSS RATES ON PARTICULAR PORTFOLIOS, OF CORPORATE LOANS AND OTHER KINDS OF LOANS. THAT WILL HELP. WE'LL ALSO PROVIDE MORE GUIDANCE, WHEN WE ANNOUNCE THE RESULTS ON JUNE 22, WE'RE GOING TO PROVIDE MORE GUIDANCE ON HOW WE THINK ABOUT THE QUALITATIVE REQUIREMENT. AND WE'RE ALSO GOING TO SEEK COMMENT FROM THE PUBLIC ON HOW WE GO ABOUT PROVIDING MORE TRANSPARENCY.
LIESMAN: PRESIDENT TRUMP, WHEN HE SIGNED HIS EXECUTIVE ORDER, SAID HE WAS GOING TO DO A BIG NUMBER ON DODD/FRANK AND CALLED IT "A DISASTER." DO YOU AGREE THAT A BIG NUMBER HAS TO BE DONE ON DODD/FRANK AND IS IT A DISASTER?
POWELL: I WOULD SAY THAT THE POST CRISIS REFORM PROGRAM HAS BEEN MOSTLY COMPLETED AND HAS MOSTLY BEEN SUCCESSFUL. I THINK IT'S OUR OBLIGATION NOW, AS WE REACH COMPLETION OF IT, TO LOOK BACK OVER IT AND ASK WHAT ASPECTS OF IT MAY BE REDUNDANT OR INEFFICIENT OR UTTERLY ESSENTIAL AND SHOULD BE PROTECTED DOWN TO EVERY LETTER. BUT THERE ARE GOING TO BE SOME ADJUSTMENTS AND I THINK THAT'S ONLY APPROPRIATE. MUCH OF THIS NEW STUFF WAS NOVEL AND IT WOULD BE VERY SURPRISING IF WE GOT IT ALL EXACTLY RIGHT THE FIRST TIME.
LIESMAN: YOU'VE TALKED ABOUT SCRAPPING THE VOLCKER RULE AMONG OTHER THINGS. WHAT ARE SOME OF THE OTHER IDEAS THAT SHOULD HAPPEN WITH DODD/FRANK?
POWELL: WELL, IN THE VOLCKER RULE IT'S NOT – WHAT WE'RE WORKING IS A WAY TO IMPLEMENT IT – CONGRESS MAKES THE LAWS, WE IMPLEMENT THEM. AND WE'RE WORKING ON A LESS BURDENSOME WAY TO IMPLEMENT THAT. I THINK WE'RE ALSO WORKING NOW ON A RESET REALLY OF HOW OUR SUPERVISION INTERACTS WITH BOARDS OF DIRECTORS. WE'RE GOING TO MOVE TO A MORE PRINCIPLES-BASED APPROACH AND WE'RE GOING TO ELIMINATE MANY OF THE REALLY SPECIFIC DIRECTIVES THAT WE GIVE TO BOARDS OF DIRECTORS. THE IDEA BEING WE WANT DIRECTORS TO FOCUS ON THEIR MAIN JOB OF OVERSEEING AND HOLDING ACCOUNTABLE THE MANAGEMENT. NOT RUNNING THE COMPANY AND NOT GETTING TIED UP IN A LOT OF CHECK LISTS. BUT BEING FREED UP TO THINK ABOUT THE STRATEGY OF THE COMPANY AND THE PERFORMANCE OF MANAGEMENT.
LIESMAN: FINALLY, JAY, THERE'S A COUPLE JOBS OPEN ON THE FED RIGHT NOW. THIS VICE CHAIR OF BANK SUPERVISION IS OPEN. THERE COULD BE A FED CHAIR JOB OPEN. YOUR NAME WAS MENTIONED AS A POTENTIAL FED CHAIR IN A RECENT WALL STREET JOURNAL ARTICLE. ARE THESE JOBS YOU'RE INTERESTED IN AND HAVE YOU BEEN TALKING TO THE ADMINISTRATION ABOUT THESE JOBS?
POWELL: SO RIGHT NOW, I ALREADY HAVE SEVERAL JOBS AT THE FED AND I'M EXTREMELY BUSY THESE DAYS DOING THEM. SO, I'M NOT GOING TO HAVE ANY COMMENT FOR YOU ON THAT TODAY.
LIESMAN: SO, YOU DON'T SAY IF YOU'RE INTERESTED OR NOT ON IT. JUST NO COMMENT?
LIESMAN: ALRIGHT. THE LAST QUESTION I HAVE FOR YOU. WHEN WE GO AND POTENTIALLY REDUCE OUR – OR SCALE BACK – SOME OF THE DODD/FRANK RULES, YOU'RE ALSO GOING OVERSEAS TO BASEL AND DEALING WITH OUR INTERNATIONAL PARTNERS. IS THERE A DANGER THE U.S. WON'T BE LEADING THE WORLD ANYMORE TOWARDS TOUGHER FINANCIAL REGULATIONS?
POWELL: I BELIEVE THAT WE WILL REMAIN A COMMITTED AND COLLABORATIVE PARTICIPANT IN INTERNATIONAL FORMS, INCLUDING BASEL. I THINK THAT THE CHANGES WE ARE MAKING WILL BE IN HARMONY WITH WHAT WE HAVE AGREED AT BASEL AND WILL BE ABOUT MAKING BANK REGULATION MORE EFFICIENT AND MORE EFFECTIVE AND WILL NOT FUNDAMENTALLY CHANGE WHAT WE HAVE DONE.
LIESMAN: FED GOVERNOR JAY POWELL, THANKS FOR JOINING US THIS MORNING.
POWELL: THANKS, STEVE.
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