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CNBC Exclusive: CNBC Transcript: Fed Vice Chair Richard Clarida Speaks with CNBC's Steve Liesman Today

WHEN: Today, Tuesday, June 4, 2019

WHERE: CNBC's "The Exchange " – Live from the Fed's business conference in Chicago, IL

The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Fed Vice Chair Richard Clarida and CNBC's Steve Liesman on CNBC's "The Exchange" (M-F 1PM – 2PM) today, Tuesday, June 4th. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2019/06/04/fed-vice-chair-richard-clarida-on-tariff-impact-rethinking-policy.html.

All references must be sourced to CNBC.

KELLY EVANS: Alright, Dom, thanks very much. Calls for a Fed rate cut this year are growing louder and louder on Wall Street. So, will they or won't they? Our Steve Liesman is standing by with the man who has a big say in the matter. He's Fed Vice Chair Richard Clarida. Steve, take it away.

STEVE LIESMAN: Kelly, thanks very much. I am here at the Chicago Federal Reserve Bank with Fed Vice Chair Richard Clarida. Richard, let's talk quickly about the conference—

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: —which is this Fed listens thing. And I wonder if you can boil it down to what the market needs to know about where this process could go.

RICHARD CLARIDA: Yeah—sure.

STEVE LIESMAN: Is it possible that it leads to a very different way of the Fed figuring out how to make policy as in a higher inflation target, an average inflation target, a pre-commitment to do quantitative easing if you get to the Zero Lower Bound?

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: What are we really caring about why you are listening and thinking about this process of making policy--?

RICHARD CLARIDA: Well, Steve, let's think: as we've indicated, we actually think our current framework is serving us well, so why do this at all? The economy is in a good place and we have the opportunity to see if we can do our job even better. We have a job assigned to us by the Congress, as you know, which is maximum employment and price stability. And this is all about having the best set of tools and strategy to achieve this. We're early on in the process. This is called Fed Listens for a reason. We're in listening mode now. But later in the year, within the committee, during our regularly scheduled meetings, we are going to start to think about drilling this into particular ways to refine the framework.

STEVE LIESMAN: And any of the things that I said, are those possibilities?

RICHARD CLARIDA: I think some of them are possibility. I'm not going to-- which are or which are not. But we're going into this with an open mind. However, as I and Chair Powell and others have indicated, Steve, this is not about economic theory. This is about refining our framework in a way that could be of practice use. And so, we are going to have a high hurdle for any major change to the framework.

STEVE LIESMAN: Alright. I want to come back to this concept later—

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: --because as a practical reality which is not hitting your inflation target.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: But before we get there, I think in the interest of transparency, can you tell us what you think you know about the impact of tariffs and higher tariffs on the economy? How does it work?

RICHARD CLARIDA: Okay. Well, okay. That is a great question because tariffs have a number of impacts on the economy. First, they push up prices. So, in that way, there's an increase in the price level. Typically, that is not inflationary, it is a one-time increase in the price level. Secondly, they potentially impact supply chains. And if they persist and if those impacts are large, that could have some impacts on productivity as well. I think what I can say is today, the tariffs that have been put in place on the economy have had a small effect in the aggregate and I think the others would agree with that consensus. As we move ahead and consider potentially more tariffs and potentially retaliation, that potentially has a more noticeable effect on the economy and we would have to take that into account.

STEVE LIESMAN: But how do you take it –

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: let me start off – let me get there in a second.

RICHARD CLARIDA: Yeah. Yeah.

STEVE LIESMAN: So, you are saying you see the sign as negative for growth, but the question is what number you put after the sign.

RICHARD CLARIDA: Yes. Sure.

STEVE LIESMAN: Is it a large number or right now do you think it is a small number?

RICHARD CLARIDA: Well, so far, I think we're confident in saying so far the tariffs in place have had a small impact, if at all, on growth.

STEVE LIESMAN: So, would you say your inclination, with more tariffs coming through—

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: -- is to address the back side of it, which is weakness in growth, or the front side of it, which is at least am initial impulse of higher prices?

RICHARD CLARIDA: Again, I think that we will confront that when we get to it. But I think the way that I think about it, Steve, as one member of the committee is I think textbook macro would indicate that you would tend to look through the price level effect because it is not really telling you about long run inflation. And I think that that would be my first instinct which would be to look through that on the price level.

STEVE LIESMAN: Okay, and now—

RICHARD CLARIDA: And then obviously slower growth means you want to do what you can to maintain growth at its potential.

STEVE LIESMAN: Would this be something that the Fed might consider to do preemptively in the wake of higher tariffs put in place? Or would you wait to see the effects of this?

RICHARD CLARIDA: Well, look. I think that the big picture that is very important for your viewers, Steve, we really focus on what is the outlook for the economy relative to our mandate. And we're going to look at a wide range of indicators, not just what you mentioned, but a broad range of indicators. And if we get a sense that the outlook is slower -- growth is slower than we expect, and if we get the sense that underlying inflation is below where we want it to be, then as Chair Powell and I and others have indicated, we're going to put in place appropriate policy to achieve those goals. And whether or not that means acting preemptively or when the data comes in, it's just going depend on the context at the time. But understand that our goal is to put in place policies that not only achieve, but sustain price stability and maximum employment. And we'll do that if we need to.

STEVE LIESMAN: So, there are things that you say that you're going to do and think about—

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: --And there are ways that the market has already figured out what you're going to do before you know you know you're going to do that.

RICHARD CLARIDA: Yeah, they do sometimes do that. Yeah, they do do that. Yeah.

STEVE LIESMAN: It is really quite amazing.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: So, the market has now priced in, there's a large—a greater than 50% probability of a rate cut in July.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: And in fact, there's two rate cuts built in through this year.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: Are you happy with where the market is priced right now?

RICHARD CLARIDA: I don't think that I want to get in to that. What I will say is we'll have a meeting in June, a regularly scheduled meeting, and we're going to look at a broad range of indicators not only where the economy is, but where it is going. Obviously, we'll look at market pricing. As you know, you're a veteran, market pricing can go up and down, so we can't be handcuffed to that, but obviously we'll look at a range of indicators at where the economy is. But again, it's very simple. We will put in place policies that need to be in place to keep the economy which is in a very good place right now and our job is to keep it there.

STEVE LIESMAN: Richard, you spend a lot of time watching the Fed and being a major academic. So, you know, you're damned if you do, damned if you don't. So I'm hearing you not lean very heavily against where the market is priced right now. And so, I'm wondering if -- I'm okay with this. I don't that there is a reason to change where the market is priced.

RICHARD CLARIDA: I guess what I'm saying to your viewers, Steve, is I think that our reaction function is very clear. We will -- we have in place policies that are our last meeting we thought were appropriate policies. Since our last meeting, there has been information and we will factor that in. And that is why we have a committee of 17 now. It will be discussed but I won't get into market pricing.

STEVE LIESMAN: You sat down with my colleague Sara Eisen back in March.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: And you talked about two things.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: One was the possibility of an insurance rate cut.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: How do you feel about that today?

RICHARD CLARIDA: Well, I think what I said to Sara and what I'll say to you is I'm not going to look into a crystal ball. I will look at the past, though. And in past episodes, in the '90s, we did have insurance cuts by the Fed. We had one in 1988, in the Fall of 1988, in part because of global turbulence in global markets, and the Russia/Asia crisis. And then, in '95, the Fed also put in place some insurance cuts. So, I'm not going to get into what we're going to do going forward, but that has been in the monetary policy tool kit in the past.

STEVE LIESMAN: I said we'd get back to this idea of inflation—

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: —and not hitting your target.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: How much of a concern is that to you and at what point do you say, 'You know what, we need to do something about it' and do it with policy?

RICHARD CLARIDA: Steve, I'll say -- repeat what I said in a speech in New York last week. Speaking for myself, there are 17 folks around the table. I think price stability means not just do we have 2% inflation, but that the markets and the households and firms expect to have 2% inflation. We don't observe inflation expectations. We have to infer them from the data. In my own personal opinion, those measures indicate that we are probably at the lower end of a range that I would consider consistent with the 2% expected inflation. So, I think it is very important.

STEVE LIESMAN: I've asked so many detailed question, I really didn't get your outlook on the economy.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: What happens this year to economic growth and what happens to unemployment?

RICHARD CLARIDA: Well, I think that certainly, as of our last meeting, which was end of April/early May, our view was for growth in the neighborhood of 2% or perhaps somewhat above 2%. We see – we saw inflation gradually rising up to 2%, but did note that inflations pressures are muted. You know, the labor market is strong, but so far that has not shown any indication of cost push pressure. And so, so far, we're looking at the labor market, but as we said in May, we think policy was in a good place then and we're going to let the data flow in to indicate if we need to make any adjustments.

STEVE LIESMAN: What are the risks out there that you are most concerned about, Richard?

RICHARD CLARIDA: Well, obviously, you know, there are—you know, markets have reacted to uncertainty about global developments, including trade. We've had a slowdown in European growth. There is some evidence of some loss of momentum in the global economy. And I think your viewers need to understand that when the global economy slows, it does impact us through exports and through financial conditions. So, I think that those are probably the major risks right now. And we also said muted inflation is a risk. We don't want inflation to be at 2%. We want it to be up at our target of 2%.

STEVE LIESMAN: Apologies to our control room. One more quick question. You're calm about these risks, but the yield curve, the three-month to ten-year—

RICHARD CLARIDA: Yeah. Yep.

STEVE LIESMAN: --is a little less calm.

RICHARD CLARIDA: Yes.

STEVE LIESMAN: When you met with Sara, you were still on the positive side of the zero-line.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: Now, you're minus 21 basis points.

RICHARD CLARIDA: Yeah.

STEVE LIESMAN: What signal is that yield curve inversion sending your way?

RICHARD CLARIDA: Well, that is a great point because I do think that you have to look at the yield curve. I think historically a flat yield curve doesn't convey a lot of information. If the yield curve inverts, as you note it has, and if that persists for some time, that is off obviously something that I would definitely take seriously. I think that you have to look at more than just the yield curve. But historically, a persistent inversion of the yield cruve is something that –

STEVE LIESMAN: Are we at "some time" now? What is "some time"? Is it six months? Is it a year?

RICHARD CLARIDA: Well, it's only been, no -- I think there are different indications. I would not view this as a strong signal of concern. But we're early into it and it's certainly something that we'll keep looking at.

STEVE LIESMAN: Richard, thank you for joining us and listening to my questions.

RICHARD CLARIDA: As always, thank you.

STEVE LIESMAN: Thank you. Richard Clarida, Vice Chair of the Federal Reserve. Back to you, Kelly.

KELLY EVANS: Steve, I'm just going to say-- and I don't know if you want to put this back to him-- but it sounded a little to me like a June rate cut might be on the table.

STEVE LIESMAN: Okay. I will put it back to him. Kelly Evans asked-- the question is that it sounds to her, listening to you, that a June rate cut could be on the table.

RICHARD CLARIDA: We're going to be meeting in June. There's no need to anticipate what we'll discuss. So, I'll leave it at that.

STEVE LIESMAN: Kelly, I asked that question out of respect, but I was 100% sure that's what his answer would be.

KELLY EVANS: I appreciate it. Thank you both very, very much.

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