WHEN: Today, Friday, April 20, 2018
WHERE: CNBC's "Power Lunch" – Live from the Minneapolis Federal Reserve Bank
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Minneapolis Federal Reserve President Neel Kashkari and CNBC's Steve Liesman on CNBC's "Power Lunch" (M-F 1PM – 3PM) today Friday, April 20th. Following are links to video of the interview on CNBC.com: https://www.cnbc.com/video/2018/04/20/neel-kashkari-flattening-yield-curve-shows-a-sign-of-caution.html?play=1 & https://www.cnbc.com/video/2018/04/20/neel-kashkari-we-see-stretched-valuations-but-no-red-flashing-lights.html?play=1.
All references must be sourced to CNBC.
MELISSA LEE: WELCOME BACK TO "POWER LUNCH." LET'S GET TO STEVE LIESMAN, WHO'S LIVE AT THE MINNEAPOLIS FED. STEVE.
STEVE LIESMAN: THANKS VERY MUCH. I AM HERE IN MINNEAPOLIS AT THE MINNEAPOLIS FEDERAL RESERVE BANK WITH THE PRESIDENT OF THE MINNEAPOLIS FED, NEEL KASHKARI. THANKS FOR JOINING US.
NEEL KASHKARI: THANKS FOR HAVING ME.
LIESMAN: I THINK WE JUST NEED TO FIRST POINT OUT, I DON'T KNOW IF THEY SHOW IT BUT WE'VE GOT THE GREAT MISSISSIPPI RIVER RUNNING BEHIND US, AND I THINK LIKE NINE OUT OF TEN AMERICANS DON'T EVEN KNOW THAT THE MISSISSIPPI RIVER RUNS THROUGH MINNEAPOLIS.
KASHKARI: I HAVE TO ADMIT, BEFORE I DECIDED TO COME THE MINNEAPOLIS FED, I DIDN'T KNOW THAT MISSISSIPPI RIVER RUNS THROUGH IT.
LIESMAN: YOU DIDN'T KNOW THAT, EITHER. AND WE'RE NOT GOING TO SPEND TIME TALKING ABOUT THE WEATHER, WHERE IT SNOWED HERE, 16 INCHES. EVEN THOUGH EVERYBODY'S TALKING ABOUT IT.
KASHKARI: EVERYBODY'S TALKING ABOUT IT. IT'S GREAT. IT'S GREAT TO BE HERE. IT'S BRISK.
LIESMAN: BRISK. WELL, LET'S TALK ABOUT WHAT EVERYBODY IS TALKING ABOUT, WHICH IS INTEREST RATES. AND ONE OF THE THINGS THAT'S HAPPENED RECENTLY, THE TEN-YEAR NOW AT 2.96, APPROACHING 3%. THERE'S TWO PARTS I WANT TO TALK ABOUT THAT. ONE IS THE LEVEL AND THE OTHER IS THE SPREAD. LET'S TALK ABOUT THE LEVEL FIRST. HAVE THINGS RISEN HIGHER THAN YOU HAD EXPECTED, SAY, AT THE BEGINNING OF THE YEAR?
KASHKARI: NO, I MEAN, I'M SURPRISED THEY HAVEN'T RISEN MORE. I WOULD HAVE EXPECTED ON THE BACK OF THE TAX CUT AND THE BIG SPENDING BILLS AND THE FACT THAT WE ARE SLOWLY ROLLING OFF OUR BALANCE SHEET, AS WE SAID WE WERE GOING TO DO, I THOUGHT THAT WOULD PUT MORE PRESSURE ON THE LONG END OF THE CURVE TO COME UP. AND SO, IT, YOU KNOW, LOWERED THERE FOR QUITE AWHILE, IT'S NOW COME UP A LITTLE BIT THIS WEEK. I'M SURPRISED IT'S NOT HIGHER.
LIESMAN: SO, WHEN YOU SAY YOU'RE SURPRISED IT'S NOT HIGHER, DOES THAT MEAN THAT YOU'RE NOT CONCERNED THAT AT THESE LEVELS IT HAS THE POTENTIAL TO RESTRAIN THE ECONOMY?
KASHKARI: WELL, NO. I'M MORE CONCERNED ABOUT THE FLATTENING OF THE YIELD CURVE. I WOULD HAVE EXPECTED THAT THE YIELD CURVE WOULD BE AT LEAST MAINTAINING ITS DEEPNESS AS WE'VE BEEN RAISING INTEREST RATES. THE FACT THAT IN THE BACK OF TAX CUTS, A LOT OF SPENDING, INCREASED SPENDING, AND OUR ROLL OFF OF THE BALANCE SHEET, THE FACT THAT THE YIELD CURVE IS FLATTENING INTO THAT, I ACTUALLY IT'S A SIGNAL THAT WE MAY NOT BE THAT FAR AWAY FROM NEUTRAL.
LIESMAN: I WANT TO GET THERE IN A SECOND. BUT FIRST I GOT TO CHECK SOMETHING OFF. A FLAT YIELD CURVE, NO SPREAD AT ALL, COMPLETELY FLAT, HAS BEEN A SIGNAL OF RECESSION.
KASHKARI: CORRECT.
LIESMAN: DO YOU THINK THIS IS A SIGNAL OF RECESSION?
KASHKARI: I THINK IT'S A SIGNAL OF CAUTION. IT'S AT LEAST A YELLOW LIGHT FLASHING. NOW, PEOPLE WILL SAY THAT THE TERM PREMIUM IS ARTIFICIALLY LOW AND SO IT'S APPLES AND ORANGES, YOU CAN'T MAKE A DIRECT COMPARISON TO PRIOR EPISODES. MAYBE. BUT EVERY TIME SOMEBODY SAYS, "THIS TIME IS DIFFERENT," IT GIVES -- IR MAKES ME NERVOUS ABOUT THAT. AND AGAIN, I LOOK AT THE FACT THAT THE COMMITTEES BEEN RAISING RATES AND THE YIELD CURVE HAS BEEN FLATTENING. I THINK WE NEED TO PAY ATTENTION TO THAT. I THINK THAT THERE IS INFORMATION CONTAINED IN THAT.
LIESMAN: OKAY, SO THEN LET'S GO BACK TO YOUR OTHER IDEA, THAT YOU THINK THE MARKET IS TELLING US THIS IS A NEUTRAL RATE HERE. THAT YOU WERE ABOUT WHERE YOU NEED TO BE TO KEEP THE ECONOMY NEITHER SLOWING NOR SPEEDING UP.
KASHKARI: YEAH, I THINK THAT'S ONE INTERPRETATION. WE'VE BEEN, I'VE BEEN ADVOCATING FOR SIMULATIVE MONETARY POLICY BECAUSE WE'VE BEEN UNDERSHOOTING OUR INFLATION TARGET FOR FIVE YEARS IN A ROW. INFLATION IS NOW -- I AGREE -- SLOWLY BUILDING.
LIESMAN: AND YOU DISSENTED THE THREE TIMES YOU HAD A CHANCE TO VOTE LAST YEAR.
KASHKARI: I DISSENTED BECAUSE I DIDN'T THINK THE DATA SUPPORTED RATE HIKES. BUT NOW I DO BELIEVE THAT INFLATION AND WAGES ARE SLOWLY CLIMBING. THEY'RE NOT ACCELERATING, BUT THEY'RE SLOWLY CLIMBING. THAT'S GOOD. WE'RE APPROACHING OUR TARGET ON INFLATION, SO WE SHOULD BE MOVING TOWARDS A NEUTRAL STANCE. SO NOW THE QUESTION IS, WHERE IS NEUTRAL? THE FACT THAT THE BOND MARKET IS TELLING US THE YIELD CURVE IS FLATTENING, ON THE BACK OF ALL OF THIS FISCAL STIMULUS AND TAX CUTS, THAT TELLS ME WE PROBABLY ARE CLOSER TO NEUTRAL. SOME PEOPLE THINK NEUTRAL COULD BE A 0% REAL INTEREST RATE, 0 PLUS 2% INFLATION IS A 2% FED FUNDS RATE. WE'RE NOT VERY FAR AWAY FROM THAT.
LIESMAN: SO, IF YOU THINK THE MARKET IS TELLING YOU NEUTRAL, IF YOU THINK MARKET IS TELLING YOU NEUTRAL, YOU CAN'T SOUND LIKE A GUY WHO'D WANT TO RAISE RATES AGAIN IN JUNE, EVEN THOUGH THE MARKETS AT 89% OR 90% FOR THAT.
KASHKARI: I WANT TO LOOK AT THE DATA. I WANT TO LOOK AT WHAT'S HAPPENING: ARE WE IN FACT HITTING OUR INFLATION TARGET? WHAT'S HAPPENING TO WAGE GROWTH? WHAT'S HAPPENING TO INFLATION EXPECTATIONS? AND THEN I AM GOING TO PAY ATTENTION TO WHAT IS THE BOND MARKET TELLING US AND OUR OTHER MODELS. YOU KNOW, ASSESSING – THIS IS A FUNDAMENTAL POINT FOR CENTRAL BANKERS, WHERE IS NEUTRAL? I WISH WE COULD TELL YOU WITH PRECISION. WE HAVE TO MAKE ESTIMATES OF IT. THE BOND MARKET IS ONE INPUT INTO THAT ESTIMATE.
LIESMAN: BUT – I DON'T WANT TO PUSH YOU FURTHER THAN YOU WANT TO GO BUT I GOT TO DO THIS, WHICH IS GIVEN WHAT YOU KNOW NOW, WOULD YOU THEN NOT RAISE RATES IN JUNE?
KASHKARI: AGAIN, I DON'T WANT TO MAKE SUCH COMMITMENTS BECAUSE I WANT TO LOOK AT THE DATA. BUT I THINK WE ARE CLOSER TO NEUTRAL THAN OTHER PEOPLE MIGHT THINK.
LIESMAN: LET'S TALK ABOUT ANOTHER THING PEOPLE ARE TALKING ABOUT WHICH IS TRADE. THIS AREA HERE, A LOT OF TRADE GOING ON, A LOT OF AGRICULTURE RIGHT HERE, BUT ALSO IN SOME OF THE HIGHER TECH MANUFACTURED GOODS AS WELL. AND THE BEIGE BOOK WAS FULL OF COMPLAINTS, IT APPEARS, FROM BUSINESSES TO THE FED ABOUT THIS AS TRADE ISSUE. HOW SERIOUS IS THIS BEING TAKEN AROUND HERE, THIS POTENTIAL OF A TRADE WAR?
KASHKARI: IT'S BEING TAKEN VERY SERIOUSLY. I HEAR ABOUT IT ALL THE TIME FROM BUSINESSES ACROSS OUR REGION. WE'RE VERY EXPORT CENTRIC. IN FACT, IN THE LAST TWO DAYS FROM OUR BOARD OF DIRECTORS AND FROM A MAJOR LOCAL MANUFACTURING OR CONSTRUCTION COMPANY SAID THAT STEEL PRODUCTS FIRMS ARE RAISING PRICES BECAUSE THEY CAN. BECAUSE THEY'RE POINTING TO THE TARIFFS AND SAYING, "THE TARIFFS ARE COMING, WE'RE RAISING PRICES NOW," EVEN THOUGH THE TARIFFS HAVE NOT ACTUALLY TAKEN EFFECT YET. SO A LOT OF PEOPLE ARE ALARMED BY THIS. NOW I ADMIT, I DON'T KNOW HOW THIS IS GOING TO PLAY OUT. I DON'T KNOW WHAT EFFECT IT'S GOING TO HAVE ON THE ECONOMY, AND I AM SYMPATHETIC WITH WANTING TO PUSH CHINA TO OPEN UP THEIR MARKETS AND HAVE FAIR TRADE. WE NEED TWO-SIDED FREE TRADE, NOT JUST ONE SIDED FREE TRADE, BUT IT'S HARD TO GAME THIS OUT.
LIESMAN: AND HOW CONCERNED ARE YOU ABOUT WHAT IMPACT IT COULD HAVE ON THE ECONOMY?
KASHKARI: I THINK THE BIGGEST IMPACT ON THE DOWNSIDE RISK, I THINK RIGHT NOW, MOSTLY, IT'S A LOT OF RHETORIC, AND NOT A LOT OF ACTION, YET. BUT IF IT LEADS TO A CRISIS OF CONFIDENCE IN THE GLOBAL ECONOMY, AND IN TRADE GOING FORWARD, THEN THAT COULD LEAD TO A PULLBACK OF INVESTORS AND MARKET PARTICIPANTS. THAT'S THE PART THAT'S VERY HARD, THE PSYCHOLOGICAL ELEMENT OF THIS, THAT'S VERY HARD TO MEASURE.
LIESMAN: LET'S TALK ABOUT A FINAL THING THAT EVERYBODY IS TALKING ABOUT, WHICH IS MARKET VALUATIONS. PEOPLE MAY OR MAY NOT KNOW THIS ABOUT YOU BUT YOU WERE ONE OF THE PRINCIPAL PEOPLE INSIDE THE TREASURY THAT DEALT WITH THE AFTERMATH AND WHILE IT WAS GOING ON. I COVERED YOU WHEN YOU DID THAT. I DON'T WANT TO DO THAT AGAIN. I THINK YOU DON'T WANT TO DO THAT AGAIN. HOW CLOSE ARE WE TO EXPERIENCING THAT AGAIN? ARE WE IN THE MIDDLE OF A BUBBLE RIGHT HERE?
KASHKARI: WELL, YOU HAVE TO SEGMENT. WE HAD A TECH BUBBLE THAT BURST IN 1999 AND 2000 AND THAT DID NOT LEAD TO A FINANCIAL CRISIS. JUST BECAUSE STOCK PRICES ARE HIGH, DOES NOT MEAN A CORRECTION LEADS TO A FINANCIAL CRISIS. THE DIFFERENCE IS, THERE'S ALL THIS DEBT UNDER THE HOUSING MARKET. THERE'S NOTHING – YOU KNOW, WE AT THE FEDERAL RESERVE ARE LOOKING EVERYWHERE WE CAN FOR SIGNS OF A POTENTIAL FINANCIAL CRISIS. WE'RE NOT SEEING BRIGHT RED FLASHING LIGHTS THAT THERE'S A CRISIS THAT'S COMING. WE DO SEE THAT ASSET VALUATIONS ARE STRETCHED. BUT I'VE BEEN SAYING IF MARKETS CORRECT AND INVESTORS TAKE LOSSES, THAT'S THE POINT OF MARKETS. SO BE IT. WE'RE NOT HERE TO TRY TO SUPPORT INVESTORS FROM BEARING LOSSES. WE DO WANT TO AVOID FINANCIAL CRISES, BUT IF IT'S JUST A MARKET CORRECTION, THAT'S PART OF LIVING IN A FREE MARKET ECONOMY.
LIESMAN: DO YOU THINK MARKETS ARE OVERVALUED HERE?
KASHKARI: I'LL LEAVE THAT TO OTHER – OTHERS TO FIND, BUT IF MARKETS CORRECT, I DON'T THINK THAT'S GOING TO BE WHAT DRIVES OUR INTEREST RATE POLICY.
LIESMAN: LAST QUESTION. GDP THIS YEAR. CAN WE DO 3%? ARE YOU CHANGING YOUR OUTLOOK FOR WHAT THE POTENTIAL RUN IS, AND WHAT DO YOU HAVE FOR A NUMBER FOR THIS YEAR?
KASHKARI: I THINK HIGH 2s THIS YEAR. IT'S POSSIBLE WE COULD HIT 3%. IT'S POSSIBLE. BUT IT'S EASY TO GET SHORT-TERM ECONOMIC GROWTH BY CUTTING TAXES AND SPENDING MORE. THAT DOESN'T TAKE A LOT OF SCIENCE TO DO THAT. THE QUESTION IS, IS THIS GOING TO LEAD TO A HIGHER POTENTIAL GROWTH RATE FOR THE ECONOMY OVER THE LONG-TERM? SO FAR, THAT'S ENTIRELY UNCLEAR.
LIESMAN: NEEL KASHKARI, MINNEAPOLIS FEDERAL RESERVE BANK PRESIDENT ON THE BANKS OF THE MISSISSIPPI IN THE GREAT STATE OF MINNESOTA. BACK TO YOU GUYS IN THE GREAT STATE OF NEW JERSEY.
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