WHEN: Today, Tuesday, March 6, 2018
WHERE: CNBC's "Squawk Box"
Following is an unofficial transcript of a CNBC EXCLUSIVE interview with Dallas Fed President Robert Kaplan and CNBC's Steve Liesman on CNBC's "Squawk Box" (M-F 9AM-11AM) today, Tuesday, March 6th. Following are links to video from the interview on CNBC.com: https://www.cnbc.com/video/2018/03/06/feds-kaplan-clearly-in-us-interest-to-have-strong-trade-relations-with-canada-and-mexico.html, https://www.cnbc.com/video/2018/03/06/feds-robert-kaplan-future-path-of-debt-could-become-headwind-to-growth.html, & https://www.cnbc.com/video/2018/03/06/feds-kaplan-expect-three-rate-hike-this-year.html.
All references must be sourced to CNBC.
BECKY QUICK: ALRIGHT, LET'S GET TO HOUSTON. STEVE LIESMAN JOINS US RIGHT NOW AND HE HAS A VERY SPECIAL GUEST. STEVE, GOOD MORNING.
STEVE LIESMAN: HEY. GOOD MORNING, BECKY. YOU KNOW, I'D LIKE TO SAY I'M GOOD, BUT REALLY I'M LUCKY. WE'RE HERE WITH ROBERT KAPLAN, THE DALLAS FED CHAIRMAN WHO SITS ON TOP OF THE REGION HERE THAT IS THE NUMBER ONE EXPORTING STATE AND MEXICO IS THE NUMBER ONE TRADING PARTNER.
ROBERT KAPLAN: RIGHT.
LIESMAN: THANKS FOR JOINING US.
KAPLAN: GREAT TO BE HERE, STEVE.
LIESMAN: SO LET'S TALK ABOUT THIS WHOLE DISCUSSION OF TARIFFS AND NAFTA THAT'S GOING ON RIGHT NOW. WHAT IS YOUR OPINION OF THE IDEA OF PUTTING STEEL AND ALUMINUM TARIFFS ON COUNTRIES LIKE CANADA AND MEXICO?
KAPLAN: WELL, THE MAIN THING I'D POINT OUT IS OUR TRADING RELATIONSHIP WITH MEXICO AND CANADA IS CRITICAL TO U.S. COMPETITIVENESS AND U.S. JOBS. O I DON'T WANT TO JUMP TO WHAT MIGHT ACTUALLY HAPPEN, WHAT MIGHT BE IMPLEMENTED, BUT I WOULD -- I WOULD SAY IT MIGHT BE WISE JUST TO WAIT A LITTLE BIT AND SEE HOW THIS UNFOLDS. I'M CONCERNED WE'RE IN THE MIDDLE OF A TRADE NEGOTIATION WITH BOTH COUNTRIES. THIS COULD HAVE SOME CHILLING EFFECT. BUT IT'S SO CLEARLY IN THE INTEREST OF THE UNITED STATES TO HAVE STRONG TRADING RELATIONSHIPS WITH BOTH OF THOSE COUNTRIES, I'D BE OPTIMISTIC ABOUT HOW THIS ACTUALLY GETS IMPLEMENTED.
LIESMAN: THE PRESIDENT SEES TRADE DEFICITS WITH MEXICO AND THE UNITED STATES AS A NEGATIVE OR WITH CANADA AND THE UNITED STATES AS A NEGATIVE. BEING ON THE BORDER WITH MEXICO, IS THAT A NEGATIVE FOR THE TEXAS ECONOMY, THAT WE HAVE THIS TRADE DEFICIT WITH MEXICO?
KAPLAN: YEAH, SO, BY THE WAY, IF YOU INCLUDE SERVICES, FOR EXAMPLE, WE RUN A TRADE SURPLUS WITH CANADA, AND SO YOU HAVE TO LOOK AT BOTH. I WOULD SAY OUR ANALYSIS SHOWS THAT THE TRADING RELATIONSHIPS WITH MEXICO AND CANADA ARE ACTUALLY PRIMARILY INTERMEDIATE GOOD RELATIONSHIPS, AS OPPOSED TO FINAL GOODS. WHAT DOES THAT MEAN? THESE ARE GOODS THAT ARE GOING BACK AND FORTH ACROSS THE BORDER WHICH ARE PART OF LOGISTICS AND SUPPLY CHAIN ARRANGEMENTS WITH U.S. COMPANIES THAT MAKE US MORE COMPETITIVE, ALLOW US TO ADD U.S. JOBS. IF WE DIDN'T HAVE THOSE ARRANGEMENTS, WE WOULD LIKELY LOSE JOBS, PROBABLY TO ASIA. AND SO IT'S NOT ENOUGH TO ADD A JOB IN THE UNITED STATES, IT'S GOT TO BE GLOBALLY COMPETITIVE OR THE JOB WON'T SUSTAIN. THOSE TRADING RELATIONSHIPS ALLOW US TO DO THAT.
LIESMAN: A LOT OF MOVING PARTS IN THE ECONOMY. WE JUST HAD A MAJOR TAX CUT PASS. AND SINCE YOU'VE HAD A CHANCE TO UPDATE YOUR FORECAST FORMALLY.
KAPLAN: RIGHT.
LIESMAN: THE THREAT OF TARIFFS WHICH COULD BE A NEGATIVE. BETTER ECONOMIC GROWTH, BETTER GLOBAL GROWTH. HOW DO YOU PUT THAT ALL INTO THE POT AND GIVE ME YOUR SENSE OF ECONOMIC GROWTH IN THE UNITED STATES RIGHT NOW?
KAPLAN: SO THE TRADE DISCUSSION AT THIS POINT PROBABLY WON'T CHANGE MY ECONOMIC FORECAST BECAUSE AS I'VE SAID, ON OTHER ISSUES BEFORE, LET'S SEE WHAT'S ACTUALLY IMPLEMENTED. IT MAY BE DIFFERENT THAN IS BEING DISCUSSED RIGHT NOW. ON THE TAX LEGISLATION, WHAT I'VE ALSO SAID, IS IT HAS CAUSED US TO MARKUP OUR 2018 GROWTH FORECAST AND FOR 19 AND 20 TO A LESSER EXTENT. MY CONCERN IS THIS. THERE ARE ELEMENTS OF THIS RECENT LEGISLATION THAT WILL ACTUALLY IMPROVE SUSTAINABLE GROWTH IN THE UNITED STATES BUT THE ELEMENTS OF THE RECENT BILL AND ALSO THIS BUDGET AGREEMENT, ACTUALLY I'M CONCERNED WILL ACTUALLY TURN OUT TO BE A STIMULUS FUNDED BY INCREASING THE DEBT WHICH WILL GIVE US A BUMP IN 18, LESS SO IN 19 AND 20 AND WE'LL RETURN BACK DOWN TO TREND GROWTH EXCEPT WE'RE GOING TO BE HIGHLY LEVERAGED. I THINK THAT LEVERAGE AT THE GOVERNMENT LEVEL AND THE FUTURE PATH OF DEBT COULD BECOME A HEADWIND FOR ECONOMIC GROWTH IN THE UNITED STATES. IT CERTAINLY MAKES US A LOT MORE INTEREST RATE SENSITIVE WHICH IS A VULNERABILITY WE'RE CREATING.
LIESMAN: ARE YOU SURPRISED BY WHAT'S HAPPENING WITH THE YIELDS OR IS IT ALONG THE LINES OF HOW YOU THOUGHT THE TEN YEAR OR THE LONGER TERM RATES MIGHT HAVE REACTED GIVEN WHAT THE FED IS DOING IN THE SHORT END?
KAPLAN: WELL, PART OF THE YIELD INCREASE MIGHT BE STRONGER ECONOMIC GROWTH. PART OF THE YIELD INCREASE – MY CONCERN WOULD BE PART OF THE YIELD INCREASE MAY BE THE PROSPECT OF GREATER U.S. SUPPLY THAT HAS TO GET SOLD IN THE YEARS AHEAD.
LIESMAN: RIGHT.
KAPLAN: THAT WOULD BE A MORE OMINOUS REASON FOR THE INCREASE IN YIELDS. AND SO MY CONCERN IS WHEN YOU ADD AGING DEMOGRAPHICS, SLOWING WORK FORCE GROWTH, SLUGGISH PRODUCTIVITY AND NOW A THIRD ISSUE WHICH IS THE FUTURE PATH OF GOVERNMENT DEBT, I'M WORRIED THAT THAT'S A VERY BAD COMBINATION FOR FUTURE GROWTH IN THE U.S. ECONOMY.
LIESMAN: I NEED TO BRING IT BACK FOR INVESTORS WHO ARE TRADING TODAY, TOMORROW, NEXT WEEK AND SIX MONTHS AND TALK ABOUT THE PATH OF RATES HERE. WHEN YOU TALK ABOUT MORE GROWTH IN 2018 BECAUSE OF THE TAX CUTS, WHAT DOES THAT DO TO YOUR PREFERRED PATH OR OPTIMAL PATH WHEN IT COMES TO MONETARY POLICY? WHICH IS A LONG WAY OF ASKING THREE OR FOUR THIS YEAR.
KAPLAN: SO MY BASE CASE, AS YOU'VE HEARD ME SAY, HASN'T CHANGED. IT'S THREE FOR THIS YEAR I THINK WE SHOULD GET STARTED SOONER RATHER THAN LATER THOUGH. AND WEL'L SEE AS THE YEAR UNFOLDS WHETHER THE BASE CASE SHOULD STAY AT 3 OR IT SHOULD BE SOMETHING MORE, SOMETHING LESS BUT FOR NOW ID SAY THREE AND I THINK WE SHOULD GET STARTED SOON.
LIESMAN: WHAT WOULD BE THE THING THAT WOULD BRING OVER THE TOP, IS IT THE INFLATION RATE? IS IT THE GROWTH RATE? IS IT THE UNEMPLOYMENT RATE? IS IT THE THING THAT WOULD SAY, YOU KNOW WHAT, WE'RE A LITTLE BIT BEHIND THE CURVEBALL OR –
KAPLAN: THE THING I'M PARTICULARLY SENSITIVE TO, WE THINK THE UNEMPLOYMENT RATE IS GOING TO GET INTO THE 3s DURING 2018, I.E.,, BELOW 4%. SO WE ARE EITHER AT OR BEYOND FULL EMPLOYMENT RIGHT NOW. I THINK ON THE BRIGHT SIDE, IT MEANS MORE PEOPLE WILL HAVE JOBS. IT SHOULD LEAD TO SOME WAGE PRESSURE. BUT THE THING I'LL BE WATCHING IS, THE HISTORY OF OVER SHOOTING FULL EMPLOYMENT IN THE UNITED STATES AND HAVING A SOFT LANDING, IT'S NOT A LONG HISTORY. THE HISTORY IS –
LIESMAN: IT'S A NON-EXISTENT HISTORY.
KAPLAN: RIGHT. AND SO, WHAT I – THE REASON I WANT TO START REMOVING ACCOMODATION, RAISING THE FED FUNDS RATE, IS I THINK THAT WILL GIVE US THE BEST CHANCE TO EXTEND THIS EXPANSION FOR LONGER.
LIESMAN: ROBERT KAPLAN, DALLAS FED PRESIDENT. THANK YOU FOR JOINING US.
KAPLAN: THANKS, STEVE. GOOD TO SEE YOU.
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