CNBC Exclusive: CNBC Transcript: Federal Reserve Vice Chairman for Supervision Randal Quarles Speaks with CNBC's Steve Liesman Today

WHEN: Today, Thursday, May 31, 2018

WHERE: CNBC's "Power Lunch"

The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Vice Chairman for Supervision Randal Quarles and CNBC's Steve Liesman on CNBC's "Power Lunch" (M-F 1PM – 3PM) today, Thursday, May 31st. Following is a link to video from the interview on CNBC.com: https://www.cnbc.com/video/2018/05/31/feds-quarles-tariffs-interest-rates.html?play=1.

All references must be sourced to CNBC.

MELISSA LEE: WE SHOULD NOTE WE ARE JUST OFF THE SESSION LOWS RIGHT NOW WITH THE S&P 500 DOWN BY 20 OR ABOUT 0.75%. DOW NOW DOWN BY 1.1%. WHAT DOES THE FED THINK ABOUT THE TRADE TARIFFS? LET'S GO TO STEVE LIESMAN IN D.C. WITH FED GOVERNER AND VICE CHAIRMAN FOR SUPERVISION RANDAL QUARLES. STEVE.

STEVE LIESMAN: THANKS VERY MUCH, MELLISA. I AM HERE WITH RANDAL QUARLES, THE VICE CHAIRMAN FOR BANK SUPERVISION AT THE FEDERAL RESERVE. ONE OF ONLY THREE GOVERNORS. AND AS WE DO IN THE NEWS BUSINESS, WHEN THERE'S NEWS, WE SHIFT GEARS A LITTLE BIT. I WANT TO ASK YOU ABOUT THIS TRADE TARIFFS -- TRADE FIGHTS THAT SEEM TO BE GOING ON. HOW DO THEY AFFECT YOUR VIEW OF THE ECONOMIC OUTLOOK?

RANDAL QUARLES: WELL, I THINK, YOU KNOW, OVER THE LONG-TERM, OVER DECADES, THE U.S. HAS BENEFITTED FROM AN OPEN -- GLOBALLY OPEN TRADING REGIME. THAT'S SOMETHING THAT HAS TO BE MANAGED AND TO ENSURE THAT BROAD SUPPORT REMAINS FOR THAT REGIME OVER THE LONG-TERM. THE SPECIFIC MEASURES THAT HAVE BEEN PROPOSED UP TO NOW HAVEN'T REALLY HAD A DRAMATIC MACROECONOMIC EFFECT, THE DIRECT MACROECONOMIC EFFECT OF THE MEASURES, AND SO, YOU KNOW, I THINK WE WANT TO -- WE'RE HOPEFUL THAT THIS, YOU KNOW, AGAIN, OVER THE LONG-TERM, HELPS ENSURE SUPPORT FOR AN OPEN ECONOMY. THAT'S AT LEAST WHAT I WOULD HOPE WOULD CONTINUE TO HAPPEN. BUT THE NEAR-TERM EFFECT ON THE MACROECONOMIC OUTLOOK IS – IT DOESN'T CHANGE MY VIEW.

LIESMAN: AT THIS LEVEL, IF IT WERE TO ESCALATE, IF, FOR EXAMPLE, IT BECAME ONE WHERE WE PUT $50 BILLION OF TARIFFS ON CHINA AND THEY SLAPPED $50 BILLION BACK ON US, WOULD THAT CHANGE YOUR MIND IF IT ESCALATED?

QUARLES: YOU KNOW, AT SOME LEVEL, YOU COULD HAVE MEASURES TAKEN THAT WOULD HAVE AN EFFECT ON THE OUTLOOK BUT WE'RE NOT THERE YET.

LIESMAN: LET ME MOVE ON AND TALK BRIEFLY ABOUT SOME OF THE ISSUES THAT YOUV'E BEEN VERY INVOLVED IN WHEN IT COMES TO BANKS AND BANK SUPERVISION. WE WERE JUST TALKING ABOUT THE ISSUE OF DEUTSCHE BANK. AND I UNDERSTAND -- I WANT TO SAY THIS AT THE OUTSET -- YOU'RE NOT ALLOWED TO DIVULGE ANY SUPERVISORY, REGULATORY INFORMATION ABOUT A BANK, INCLUDING WHETHER IT'S BEEN RATED AS TROUBLESOME OR NOT. I WANT TO ASK YOU THIS QUESTION. THE MARKET CARED A LOT WHEN THIS NEWS REPORT MOVED AND YOU CAN SEE THAT DEUTSCHE BANK STOCK, THE ADR, IS DOWN QUITE A BIT. THIS IS RELEVANT INFORMATION. DOES IT MAKE SENSE THAT THIS INFORMATION THAT YOU CAN'T TALK ABOUT REMAINS HIDDEN FROM THE PUBLIC, HIDDEN FROM INVESTORS? WOULDN'T IT SERVE A PUBLIC GOOD IF THIS WERE OUT THERE IN THE PUBLIC EYE?

QUARLES: SO, THAT'S AN INTERESTING QUESTION. WHEN WE HAVE QUANTIFIABLE SUPERVISORY INFORMATION, TAKE THE RESULTS OF THE STRESS TEST, FOR EXAMPLE, WE HAVE TRIED TO MAKE THOSE PUBLIC. I THINK THAT THERE'S BENEFIT WHEN THERE IS CONCRETE QUANTIFIABLE INFORMATION IN MAKING THAT INFORMATION AVAILABLE TO THE PUBLIC AND TO MARKETS. THE SUPERVISORY RATINGS ARE A RESULT OF A MORE SUBJECTIVE ASSESSMENT OF A VERY BROAD ARRAY OF FACTORS THAT I THINK THERE'S REASONABLE CONCERN COULD BE SUBJECT TO MISINTERPRETATION, IF THOSE WERE MORE OPEN AND OF COURSE THERE ARE LEGAL LIMITATIONS ON OUR ABILITY TO DO THAT.

LIESMAN: SO, LEGAL LIMITATIONS. YOU CAN'T TELL ME IF THEY'RE STILL TROUBLED OR CURRENTLY NOT TROUBLED ANYMORE? YOU COULDN'T DIVULGE THAT AND THE COMPANY CAN'T DIVULGE THAT?

QUARLES: I REALLY CAN'T, EXACTLY, CAN'T TALK ABOUT ANY INDIVIDUAL.

LIESMAN: MOVE ON. YESTERDAY, YOU PUT OUT A PUBLIC COMMENT – A REFORM OF THE VOLCKER RULE. INTERESTING – WE REPORTED ON IT IN DEPTH, BUT I WANT TO MOVE ON. IS THIS THE LEADING EDGE OF MORE BANK REGULATORY REFORM TO COME?

QUARLES: SO, THE GENERAL REGULATORY PROJECT, AT LEAST AS I SEE IT NOW, IS THAT WE HAVE HAD MANY YEARS OF EXPERIENCE WITH THIS BODY OF POST-CRISIS REGULATION. AND IT'S UNSURPRISINGLY ON THE BASIS OF THAT EXPERIENCE, THERE ARE A VARIETY OF WAYS IN WHICH WE CAN MAKE THAT REGULATION ACHIEVE ITS OBJECTIVES IN A MORE EFFICIENT WAY. AND WHEREVER WE CAN SEE THAT THAT CAN BE DONE, I THINK THAT WE'LL DO THAT. THE VOLCKER RULE IS AN EXAMPLE, AGAIN, WHERE THIS WAS NOT THE RESULT OF ASSUMPTIONS THAT A FEW OF US CAME IN WITH, BUT THE RESULT OF EXPERIENCE THAT ALL THE IMPLEMENTING AGENCIES HAD HAD OVER THE FOUR OR FIVE YEARS THAT THE RULE HAS BEEN IN PLACE, AND THE CHANGES THAT WE PROPOSED, WE THINK, WILL SIGNIFICANTLY REDUCE THE BURDEN WITHOUT UNDERMINING THE OBJECTIVE. I THINK THAT THERE ARE, YOU KNOW, A VARIETY OF PLACES WHERE WE CAN DO THAT IN LEGISLATION AND WE'RE LOOKING CLOSELY AT WHERE WE CAN DO THAT.

LIESMAN: LET ME TURN TO MONETARY POLICY. WE'VE HAD SOME DEVELOPMENTS IN ITALY WHERE THERE'S CONCERN IN THE MARKETS AND WE HAD YIELDS FALL. THERE IS TRADE ISSUES THAT ARE OUT THERE. AND THE GENERAL FEELING IN THE MARKET HAD BEEN THAT YOU MIGHT DO ANOTHER THREE RATE HIKES THIS YEAR. WHAT'S YOUR SENSE OF WHERE RATES NEED TO GO RIGHT NOW, GIVEN ALL OF THE INFORMATION THAT'S OUT THERE RIGHT NOW AND THE CONCERNS AND THE RISKS?

QUARLES: SO, YOU KNOW, THE CONCERNS -- JUST TO TAKE ITALY AS AN EXAMPLE, AGAIN, I THINK THAT THE -- SO FAR, MARKETS HAVE BEEN ABSORBING THE NEWS OUT OF ITALY REASONABLY WEL., SOME VOLATILITY AROUND IT, BUT NOT KIND OF A DRAMATIC AND DURABLE REACTION. OBVIOUSLY, THERE'S FREQUENTLY, OVER THE GENERATIONS, THERE'S BEEN NEWS FROM ITALY, AND THE MARKETS HAVE GENERALLY SURVIVED THAT. SO, I THINK IT'S SOMETHING THAT WE NEED TO LOOK AT AND BE CAUTIOUS ABOUT, BUT I DON'T SEE ANYTHING THAT'S ON THE HORIZON RIGHT NOW AS REALLY CHANGING MY VIEW EITHER OF THE ECONOMIC OUTLOOK OR OF THE APPROPRIATE PATH FOR POLICY.

LIESMAN: DO WE GO TO NEUTRAL OR BEYOND NEUTRAL, AND WHAT'S NEUTRAL?

QUARLES: SO, I DON'T WANT TO PROPOSE A KIND OF A SPECIOUS PRECISION IN WHERE I THINK THE NEUTRAL RATE OF INTEREST IS. BUT I DO THINK THERE ARE REASONS TO THINK THAT THE NEUTRAL RATE IS RISING. A SIGNIFICANT PORTION OF THAT DEPENDS ON WHAT YOU THINK IS HAPPENING TO THE PRODUCTIVE CAPACITY OF THE ECONOMY AND NOT JUST WHETHER THERE'S PURELY DEMAND STIMULUS CURRENTLY. AND I THINK THAT, YOU KNOW, A VARIETY OF THINGS ARE HAPPENING THAT CAN IMPROVE THAT PRODUCTIVE CAPACITY OF THE ECONOMY, SO I SEE THE NEUTRAL RATE RISING.

LIESMAN: RANDAL QUARLES, BECAUSE OF THE FAST-MOVING WORLD OF NEWS THAT WE LIVE IN HERE, WE HAVE TO MOVE ON. BUT THANK YOU FOR JOINING US TODAY.

QUARLES: THANK YOU SO MUCH.

LIESMAN: RANDAL QUARLES, VICE CHAIRMAN FOR BANK SUPERVISION. TYLER, BACK TO YOU.

For more information contact:

Jennifer Dauble
CNBC
t: 201.735.4721
m: 201.615.2787
e: jennifer.dauble@nbcuni.com

Emma Martin
CNBC
t: 201.735.4713
m: 551.275.6221
e: emma.martin@nbcuni.com

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