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CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC'S STEVE LIESMAN SITS DOWN WITH JEFFREY LACKER, FEDERAL RESERVE BANK OF RICHMOND PRESIDENT TODAY ON CNBC'S "POWER LUNCH"

WHEN: Today, Thursday, March 5th at 1:30PM ET

WHERE: CNBC's "Power Lunch"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Jeffrey Lacker, Federal Reserve Bank of Richmond President today on CNBC's "Power Lunch."

All references must be sourced to CNBC.

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LIESMAN: I'M HERE IN RICHMOND WITH THE PRESIDENT OF THE RICHMOND FED, JEFFREY LACKER. THANKS FOR JOINING US, PRESIDENT LACKER.

LACKER: MY PLEASURE.

LIESMAN: MY FIRST QUESTION HAS TO BE THIS.IVE COUNTED FIVE DISSENTS OUT OF NINE VOTES ON THE BOARD SINCE YOU STAERTED THIS. DOES ANYBODY SIT NEXT TO YOU AT THE MEETINGS?

LACKER: SURE. I'M AMONG MY COLLEAGUES AND THEY ALL EXPECT US TO BRING OUR BEST INDEPENDENT ASSESSMENT TO BARON IT'S A COLLEGIAL PROCESS .

LIESMAN: WHAT'S THAT LIKE THOUGH TO DESCENT IS IT AN EASY THING TO DO?

LACKER: YOU THINK LONG AND HARD ABOUT IT.YOU SET A HIGH THRESHOLD. YOU WORK LONG AND HARD WITH YOUR STAFF AND MAKE SURE YOU KNOW WHAT YOU'RE TALKING ABOUT.

LIESMAN: LET'S TALK ABOUT THE SUBSTANCE OF THE MOST RECENT ONE, WHICH IS ILLUSTRATIVE OF A DEBATE THAT IS GOING ON AT THE FEDERAL RESERVE IN GENERAL AND INDEED IN THE MARKETS WHICH HAS TO DO WITH THE WAY THE FEDERAL RESERVE SHOULD BE OUT THERE HELPING CREDIT MARKETS. YOU HAVE AN IDEA, IF I'M NOT MISTAKEN, OF DOING IT IN A BROAD WAY. WHERE AS RIGHT NOWTHE FED IS DOING IT IN A SPECIFIC WAY? WHAT'S YOUR OBJECTION OF THE WAY THE FED IS DOING IT RIGHT NOW?

LACKER: IT JUST STEMS FROM A DIFFERENT ASSESMENT OF HOW THOSE MARKETS ARE WORKING SO WHEN YOU TARGET CREDIT, IN PARTICULAR A MARKET SEGMENT, AS OPPOSED TO INTERVENING BROADLY IN A WAY THAT'S MORE NEUTRAL ACROSS MARKET SEGMENTS, YOU'LL GETLOWER INTEREST RATES IN THAT MARKET SEGMENT. BUT IT WILL MEAN HIGHER INTEREST RATES THAN YOU WOULD OTHERWISE SEE IN OTHER MARKET SEGMENTS. YOU MIGHT DO THAT IF YOU THINK THAT MARKET SEGMENT WAS DYSFUNCTIONAL IN SOME WAY AND NEEDED SPECIAL ASSISTANCE.MY ASSESSMENT OF THE MARKET IS FOR ASSET BACK SECURITIES THAT IT'S ISN'T QUITE IN THAT CONDITION.I THINK WHAT'S GOING ON IN RETAIL CREDIT MARKETS, THE CREDIT MARKETS THAT INDIVIDUAL CONSUMERS AND BUSINESSES TRY TO OPERATE IN WHERE THEY TRY TO GETFINANCING, SMALL BUSINESSES IN PARTICULAR, I THINK WHAT'S GOING ON THERE IS DRIVEN MORE BY THE WEAKENING ECONOMIC CONDITIONS THAN IT IS BY ANY PROBLEMS THAT ARE INTERNAL TO THE SECURITIZATION MARKET.

LIESMAN: YOU DON'T REALLY SEE A CREDIT CRUNCH? YOU SEE A VERY DEEP RECESSION THEN?NOT A LOT DIFFERENT FROM OTHER RECESSIONS AND THE PULL BACK OF CREDIT THEN

LACKER: YEAH THERE'S NO DOUBT THAT IN PRINCIPAL CAUSALITY CAN FLOW BOTH WAYS YOU KNOW THE ECONOMY WEAKENS IT HAS A BIG IMPACT ON CREDIT MARKETS AND FINANCIAL INSTITUTIONS. WHEN FINANCIAL INSTITUTIONS OR CREDIT MARKETS ARE IMPAIRED, THAT CAN AFFECT AND BE A DRAG ON GROWTH BY REDUCING PEOPLE'S ACCESS TO CREDIT. MY ASSESSMENT OF THE CURRENT SITUATION IS THAT IT'S MORE THE FORMER.THE ECONOMY AFFECTING CREDIT MARKETS, THAN IT IS THE LATTER.

LIESMAN: HOW MUCH CONCERN DO YOU HAVE RIGHT NOW THAT THE FEDERAL RESERVE IS CREATING TOO MUCH MORAL HAZARD? SUCH THAT THE NEXT TIME WE GO AROUND INTO THIS, PEOPLE ARE GOING TO SAY, THE FED BAILED US OUT LAST TIME.THEY'LL BAIL US OUT AGAIN.

LACKER: THAT HAS TO BE A CONCERN FOR ANY POLICYMAKER THAT TAKES AN EXTRAORDINARY ACTION TO ASSIST AN INSTITUTION OR A BROAD MARKET SEGMENT TO AVOID DISRUPTION OR DISORDERLY FAILURE.I CAN UNDERSTAND WELL THE NEED TO AVOID INSTITUTIONS GOING DOWN IN A DISORDERLY WAY. BUT IT'S BOUND TO AFFECT MARKET PARTICIPANTS EXPECTATIONS. WHAT T'VE POINTED OUT IN PARTICULAR THAT WE'VE GONE WELL BEYOND THE BOUNDARIES THAT PEOPLE USED TO VIEW AS AROUND GOVERNMENT INTERVENTION AND CREDIT IN FINANCIAL MARKETS.

LIESMAN: JUST GOTTEN VERY FAR AND WIDE.

LACKER: THAT'S RIGHT. WE HAD A SYSTEM WHERE WE WERE UNDERSTOOD TO BE BACKSTOPPING A CERTAIN PART OF THE FINANCIAL SYSTEM.NOW PEOPLE ARE LIKELY TO BELIEVE THAT WE'RE GOING TO BACKSTOP A LARGER PART OF THE FINANCIAL SYSTEM. WE HAVE TO STRAIGHTEN THAT OUT. WE HAVE TO ALIGN OUR REGULATORY SUPERVISORY SYSTEM SO THAT IT'S WELL MATCHED WITH THE EXTENT OF THE FINANCIAL SAFETY NET.

LIESMAN: LET'S STRAIGHTEN THAT OUT AFTER THE BREAK.AND YOUR ECONOMIC OUTLOOK.MUCH MORE AFTER THE BREAK."POWER LUNCH" IS GOING TO BE RIGHT BACK WITH PRESIDENT JEFFREY LACKER FROM RICHMOND.

LIESMAN: THANKS VERY MUCH.CONTINUING THE INTERVIEW CONVERSATION WITH PRESIDENT LACKER. I GET A SENSE OF YOUR ECONOMIC OUTLOOK FOR THIS YEAR. IS THERE A TURNAROUND IN THE CARDS.

LACKER: I THINK WE'LL SEE POSITIVE GROWTH BY THE END OF THIS YEAR. I THINK THAT'S THE MOST LIKELY OUTCOME. A LOT OF UNCERTAINTY. CERTAINLY THE REPORTS HAVE BEEN DISMAL LATELY.WE'LL HAVE A FEW MORE DISMAL REPORTS AS WELL.PROBABLY ONE TOMORROW MORNING ON THE UNEMPLOYMENT REPORT. FOR THE NEXT COUPLE OF MONTHS, DECLINES. BUT I'M EXPECTING A BOTTOM AT THE END OF THE YEAR AND A TURNAROUND AND A LITTLE POSITIVE GROWTH.

LIESMAN: WHAT CHANGES TO CREATE THAT POSITIVE GROWTH.

LACKER: I PUT IT IN A NERDY WAY. THE PROCESS OF CUTTING DISCRETIONARY EXPENDITURES RUNS OUT OF STEAM AND REACHES THE POINT OF DIMINISHING RETURNS. THEN CONSUMER SPENDING, BUSINESSSPENDING REACHES A BASE. THAT GIVES PEOPLE SOME CONFIDENCE THAT WE'VE SEEN ALMOST THE WORST OF IT. THEY'RE WILLING TO TAKE MORE RISK.

LIESMAN: YOU DON'T THINK WE CAN CUT HOUSING ANY MORE THAN WE HAVE INTERMS OF NEW CONSTRUCTION.THAT HAS TO BOTTOM OUT TOO?

LACKER: YES.

LIESMAN: ALTHOUGH YOU'VE BEEN SURPRISED.

LACKER: PEOPLE HAVE JOKED ABOUT THE ZERO LOANS ON HOUSING STARTS. AND I DON'T WANT TO GO THERE BUT IT DOES SEEM LIKELY WE'LL SEE SOME EQUILIBRIUM EMERGE IN THE HOUSING MARKET IN THE LATTER PART OF THE YEAR. A LOT OF UNCERTAINTY AROUND THAT CAUSE I HAVE SAID THAT THREE TIMES BEFORE.

LIESMAN: WHAT ROLE DOES THE STIMULUS PACKAGE OUT OF WASHINGTON PLAY IN YOUR FORECAST?

LACKER: I THINK IT HELPS THE MARGIN. REALLY HARD TO KNOW HOW MUCH. I THINK WE'D RECOVER WITHOUT IT PERHAPS MORE SLOWLY. IT'LL HELP IN THE MARGIN. BUT NOT THE MAIN THING GOVERNING BUSINESS CYCLE DYNAMICS FROM HERE ON OUT.

LIESMAN: YOU'RE THE FIRST FED PRESIDENT I'VE GOTTEN TO INTERVIEW AT A WHERE WE DIDN'T HAVE TO DANCE AROUND WHAT YOUR INTENTIONS WERE FOR INTEREST RATES? IT'S PRETTY CLEAR WHAT YOU INTEND AND WHAT THE BOARD INTENDS FOR INTEREST RATES.GIVE US THE SHORT ON THAT.

LACKER: WELL IT'S GONNA BE PINS NEAR THE BOTTOM. WE HAVE A RANGE FROM ZERO TO 25 THAT'S EFFECTIVELY ZERO IT WILL BE PINNED THERE FOR A WHILE. THE BIG ISSUE IN TERMS OF STIMULUS HAS TO DO WITH OUR LIABILITY.THE MONETARY BASETHE SUM OF CURRENCIES IN BANK RESERVES. THAT'S GOTTEN AWFULLY GOOD.WE NEED MONETARY STIMULUS RIGHT NOW.IF WE NEEDED MORE, WE'D ADD IT BY INCREASING THE BASE.

LIESMAN: SO JUST TO BE CLEAR YOUR DISAGREEMENT WITH OTHER MEMBERS ON THE BOARD IS NOT GROWING THE BALANCE SHEET?AND IT'S NOT HAVING RATES AT ZERO FOR SOME SORT OF EXTENDED PERIOD OF TIME UNDETERMINED.IT'S THE CHARACTER THAT THE -- OF THE GROWTH REALLY TAKES.

LACKER: RIGHT. SO THE CREDIT PROGRAMS REALLY GREW OUR BALANCE SHEET AT THE END OF LAST YEAR.THAT COINCIDED WITH THE TIME WE NEEDED MORE MONETARY STIMULUS THAN WE WERE CAPABLE OF GIVING BY DRIVING INTEREST RATES TO ZERO. I'M FINE WITH THE MONETARY POLICY WHERE IT IS RIGHT NOW.

LIESMAN: AS A REPORTER COVERING THE FED AND WHO UNDERSTAND THE IDEA OF FED INDEPENDENCE, IT'S STRANGE TO GET A LOT OF PRESS RELEASES FROM THE FED AND THE TREASURY TOGETHER. IS THERE A DANGER OF THE FEDERALRESERVE LOSING ITS INDEPENDENCE HERE?

LACKER: WELL, THE IMPORTANT THING FOR US IS TO BE ABLE TO INDEPENDENTLY CONTROL THE SIZE OF OUR BALANCE SHEET. RIGHT NOW WE HAVE ALL THESE CREDIT PROGRAMS A BALANCE SHEET AS WELL. THE RISK WE DON'T WANT TO RUN IS THAT PEOPLE BECOME AFRAID THAT WE MIGHT ABRUPTLY TERMINATE A CREDIT PROGRAM WHEN WE NEEDED TO WITHDRAW MONETARY POLICY. OR THAT WE ABRUPTLY -- OR THAT WE MAKE THE MONETARY BASIS MORE STIMULATIVE THAN IT OTHERWISE WOULD BE AND MAYBE RISK COMPROMISING ON THE INFLATION OBJECTIVE. WE DON'T WANT THAT RISK TO PRESENT ITS.

LIESMAN: YOU'D HAVE TO BREAK WITH TREASURY. THERE MAY BE A SITUATION WHERE YOU AND TREASURY WOULD HAVE DIFFERENT INTERESTS, EVEN THOUGH THEY'RE NOW ALIGNED.

LACKER: I THINK WE HAVE THE SAME INTERESTS IN GROWTH AND STABLE INFLATION FOR THE ECONOMY.I THINK OUR INTERESTS ARE WELL ALIGNED. THERE COULD BE SOME TENSION BETWEENKEEPING THESE CREDIT PROGRAMS ON OUR BALANCE SHEET.AND WHAT WE SEE IS WARRANTED TO DO WITH THE MONETARY BASE. IN PARTICULARLY, WHEN WE MIGHT WANT TO WITHDRAW THE MONETARY STIMULUS IN PLACE.

LIESMAN: IF YOU COULD DO ONE THING TO FIX THE BANKING SYSTEM, ONE HUGE BANKS IN YOUR AREA HERE.BUT YOU'VE BEEN A BANK SUPERVISOR FOR A WHILE HERE. IT'S A BIG CENTER FOR BANKING. WHAT WOULD IT BE?

LACKER: FIX YOUR MIND ON WHAT IT'S GOING TO LOOK LIKE AFTER THIS WHEN WE COME OUT OF THIS BANKING CRISIS. BANKS ARE GOING TO BE ABLE TO RAISE PRIVATE EQUITY AND GO ON GROWING. AND GROWING IN A HEALTHY WAY. FOR THAT TO HAPPEN, IT HAS TO BETHE CASE THAT WE SOLVED THIS DEAD OVERHANG PROBLEM. THIS ISSUE THAT LOST -- THE PROBABILITY DISTRIBUTION AROUND LOSSES IMPLIES A CHANCES OF LOSSES THAT WILL LEAD THROUGH ALL THE EQUITY. A NEW EQUITY INVESTOR NOW IN PART SUB SID DIESES DEBT HOLDERS. THE OTHER PROBLEM IS THAT PRIVATE EQUITY IS NOW DISCOURAGED CAUSE OF THE PROSPECT OF FUTURE GOVERNMENT INJECTIONS SO WE NEED TO GET THROUGH THAT. AND THE WAY TO DO THAT IS DO WHAT WE CAN TO LIFT THOSE RISKS OFF OF ALL BANK'S BALANCE SHEETS AND GETTHEM INTO A WELL CAPITALIZED SITUATION.I THINK THAT'S ESSENTIAL.

LIESMAN: PRESIDENT LACKER, THANK YOU SO MUCH IF FOR YOUR TIME TODAY.




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