×

CNBC EXCLUSIVE: CNBC’S STEVE LIESMAN SPEAKS WITH JEFFREY LACKER, FEDERAL RESERVE BANK OF RICHMOND PRESIDENT, TODAY, FEBRUARY 25TH ON “SQUAWK BOX”

When: Today, Friday, February 25th at 8AM ET

Where: CNBC’s “Squawk Box”

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Jeffrey Lacker, Federal Reserve Bank of Richmond President on CNBC's “Squawk Box.”

All references must be sourced to CNBC.

STEVE LIESMAN: HEY BECKY, I AM HERE AT THE UNIVERSITY OF CHICAGO'S BOOTHS SCHOOLS U.S. MONETARY POLICY CONFERENCE. THEY HOLD IT EVERY YEAR IN NEW YORK FOR REASONS THAT ARE UNCLEAR TO ME AND I AM JOINED BY RICHMOND FED PRESIDENT JEFFREY LACKER. PRESIDENT LACKER THANKS FOR JOINING US THIS MORNING.

JEFFREY LACKER: GREAT TO BE HERE STEVE. GOOD TO SEE YOU AGAIN.

LIESMAN: LETS START OFF WITH THE HEADLINES THIS MORNING WHICH ARE ALL ABOUT OIL PRICES. HOW DO YOU PROCESS THAT? IS THAT SOMETHING THAT YOU SEE COULD POTENTIALLY DERAIL THE U.S. ECONOMIC RECOVERY?

LACKER: I DON'T THINK IT'S GOING TO DERAIL THE RECOVERY. LUCKILY, WE HAVE A LOT OF EXPERIENCE, A LOT OF TRACK RECORD, A LOT OF DATA TO PROCESS ON THIS BECAUSE WE HAVE BEEN THROUGH THIS BEFORE SEEING OIL PRICES SPIKE. SO IN THE FIRST INSTANCE, IT'S GOING TO PASS THROUGH TO CONSUMER PRICES. THAT WILL TAKE A LITTLE CHUNK OUT OF PERSONAL INCOME. SO FAR THIS SEEMS QUITE MANAGEABLE. THE REAL DANGER IS INFLATIONARY PSYCHOLOGY. IN THE LAST COUPLE OF DECADES, THESE HAVEN'T TENDED TO PASS THROUGH THE CORE OF BEYOND JUST A LITTLE BIT OF A BLIP IN A COUPLE OF MONTHS. SO I THINK AS LONG AS INFLATION EXPECTATIONS ARE MANAGED PRETTY WELL, I THINK WE ARE GOING TO GET THROUGH THIS WITHOUT A BIG BURST OF INFLATION.

LIESMAN: AT THE MOMENT, DO YOU BELIEVE INFLATION EXPECTATIONS ARE UNDER CONTROL AND ARE WELL ANCHORED?

LACKER: I THINK THEY ARE RIGHT NOW. HANGING IN AROUND 2% RECOVERED FROM THE LOW THEY HIT MIDDLE LAST SUMMER. I THINK IT'S EVIDENCE OF SOME CONFIDENCE THAT THE FED HAS COMMITTED TO PRICE STABILITY.

LIESMAN: OIL PRICES, THOUGH, LOOKS LIKE THEY COULD CUT EITHER WAY. ON THE ONE HAND YOU HAVE TO TAKE MORE OUT OF YOUR POCKET TO PAY FOR HIGHER OIL PRICES. THAT MEANS YOU SPEND LESS ELSEWHERE. ON THE OTHER HAND IT COULD SPARK AS YOU SAY THIS INFLATIONARY PSYCHOLOGY. IS THERE A NUMBER IN YOUR HEAD, $100 A BARREL, $150 A BARREL THAT YOU THINK THIS COULD CAUSE THE ECONOMY TO ROLL OVER?

LACKER: NO, YOU KNOW IT'S NOT A THRESHOLD THING LIKE THAT. EVERY LITTLE DOLLAR COUNTS. I THINK THAT WE'VE SEEN FAIRLY LARGE SPIKES, HUGE PERCENTAGE INCREASES IN THE PAST THAT WE'VE BEEN ABLE TO WEATHER PRETTY WELL. AND SO THAT GIVES ME CONFIDENCE THAT WE'RE WELL AWAY FROM THOSE SORT OF BUFFERS.

LIESMAN: OVERALL COMMODITY PRICES ARE UP PRETTY STRONGLY. NOT JUST OIL BUT COTTON AND WHEAT AND THE WHOLE SPECTRUM OF COMMODITY PRICES. IS THERE A DANGER THAT PEOPLE START TO SEE THESE PRICES GO UP AT THE CONSUMER LEVEL AND SAY, YOU KNOW WHAT, INFLATION IS ON THE WAY HERE?

LACKER: THAT IS A RISK. WE'VE SEEN OVERALL INFLATION RUNNING OVER 2% FOR A COUPLE OF MONTHS NOW. EVEN THOUGH THE YEAR OVER YEAR NUMBERS ARE STILL -- HAVE A HANDLE OF ONE -- 1.6 ON THE CPI THE MOST RECENT NUMBER. SO WHAT WE'RE HEARING FROM CONTACTS AROUND THE DISTRICT IS THAT THE INPUT PRICE PRESSURE THEY'RE SEEING IS SQUEEZING MARGINS. THEY'RE NOT ABLE TO PASS ON THOSE COST INCREASES NOW BUT THEY EXPECT TO BE ABLE TO, SOME OF THEM, IN LATER PART OF THIS YEAR. IF THAT WERE TO HAPPEN, THAT COULD PUSH INFLATION RATE UP OVER A BROAD RANGE OF PRICES AND THAT WOULD BE A VERY WORRYING CONCERN FOR A CENTRAL BANKER.

LIESMAN: WORRYING CONCERN FOR CENTRAL BANKER BUT MAYBE NOT FOR A CENTRAL BANKER WHO IS ONE TRYING TO INCREASE INFLATION. WASN'T THAT ONE OF THE INTENTIONS OF THE QUANTITATIVE EASING POLICY?

LACKER: AS I'VE BEEN SAYING INFLATION IN THE MID-- BETWEEN ONE AND TWO SEEMS FINE TO ME. SEEMS PRETTY CLOSE TO PRICE STABILITY. THERE WERE THOSE WHO WERE WORRIED ABOUT INFLATION WHEN IT GOT DOWN TO SEVERAL MONTHS BELOW ONE. THAT WAS A LEGITIMATE CONCERN. I THINK WE'VE SEEN THE BOTTOM OF CORE INFLATION. I THINK IT'S GOING TO STABILIZE OR HEAD UP FROM HERE.

LIESMAN: THE NUMBERS THAT YOU'RE TALKING ABOUT DOWN THE ROAD, ARE THEY HAVE NUMBERS THAT WOULD NECESSITATE SOME FORM OF ACTION FROM THE CENTRAL BANK OR SOMETHING YOU WOULD LOOK THROUGH BECAUSE YOU SEE IT AS TRANSITORY AS THE INPUT PRICES WORK THROUGH THE CONSUMER PRICE INDEX?

LACKER: I'M LOOKING FROM THE POINT OF VIEW THE BROADER CONTEXT OF THE NEXT PHASE OF THE BUSINESS CYCLE WHERE RECOVERY HAS BEEN WELL ESTABLISHED. GROWTH IS GOING TO PICK UP. IT'S PICKED UP ALREADY FAIRLY CLEARLY IN THE FOURTH QUARTER. I EXPECT THAT TO CONTINUE. THIS POINT IN THE BUSINESS CYCLE WE NEED TO WITHDRAW MONETARY POLICY STIMULUS AT SOME POINT IN THIS PHASE IN ORDER TO PREVENT INFLATION RISING. AND IT'S OFTEN IN THIS PHASE THAT INFLATION PICKS UP. WE SAW THAT IN 2004 IN THE FIRSTHALF. WE'VE SEEN IT IN OTHER RECOVERIES AS WELL. WE HAVE TO GET THE TIMING JUST RIGHT IN A SENSE.

LIESMAN: DO YOU THINK IT'S TIME RIGHT NOW TO RE-EXAMINE THE QUANTITATIVE EASING POLICY TO PURCHASE $600 BILLION WORTH OF BONDS?

LACKER: AS THE COMMITTEE SAID IN STATEMENTS WE'RE RE-EXAMINING EVERY MEETING AND I THINK THAT'S WARRANTED. TO MY MINDS IT WAS A CLOSE CALL TO BEGIN WITH. AND SINCE NOVEMBER WHEN WE INSTITUTED THE PROGRAM, THE IMPROVEMENT IN THE GROWTH OUTLOOK HAS BEEN NOTICEABLE ENOUGH TO TILT THE CASE FURTHER AGAINST QE-2. AND SO I THINK IT DESERVES RE-EXAMINATION AT EVERY MEETING.

LIESMAN: IF YOU HAD A VOTE, WOULD YOU VOTE IN MARCH TO STOP IT?

LACKER: I DON'T KNOW. IT'S NOT MARCH YET. SO I DON'T HAVE TO DECIDE THAT NOW.

LIESMAN: IT'S REAL CLOSE, THOUGH.

LACKER: THAT'S TRUE. I'LL LOOK AT ALL THE DATA I SEE WHEN WE GET IN THE MEETING.

LIESMAN: DOES IT REALLY MATTER IF YOU HAVE STOPPED IT IN MARCH OR RUN LET IT THROUGH TO JUNE? IS THAT PERIOD OF TIME A CONSEQUENTIAL PERIOD OF TIME OR THE AMOUNT OF BONDS THAT COULD BE PURCHASED CONSEQUENTIAL?

LACKER: I THINK EVERY HUNDRED BILLION COUNTS. WE'RE TALKING ABOUT WHERE THE STARTING LINE IS LIKELY TO BE FOR THE PROCESS OF UNWINDING MONETARY STIMULUS AT SOME POINT WHEN THE TIME COMES. I DON'T WANT TO MOVE THE STARTING LIKE TOO FAR BACK.

LIESMAN: CAN YOU WALK ME THROUGH HOW YOU FORESEE THE FED WITHDRAWING STIMULUS? IS IT REDUCING THE SIZE OF THE PORTFOLIO FIRST AND RAISING INTEREST RATES? ARE THEY TOGETHER? ARE THEY SEPERATE? WHAT'S THE PROCESS BY WHICH YOU WOULD PREFER?

LACKER: I THINK WE'D HAVE MORE-- PERSONALLY MY SENSE IS THERE ARE PLUSES AND MINUSES ON EITHER SIDE, ONE OF THE ADVANTAGES OF REDUCING THE ASSET PURCHASE -- UNWINDING THE ASSET PURCHASES FIRST IS I THINK WE HAVE A BETTER HANDLE ON HOW THE AFFECT OF INCREASING INTEREST RATES THROUGH INCREASING THE INTEREST WE PAY ON RESERVES WE HAVE A BETTER HANDLE ON HOW THAT'S GOING TO EFFECT OTHER RATES IF THE SIZE OF BANK RESERVES IS SMALLER.

LIESMAN: WE'RE GOING TO RUN OUT OF TIME SOON. I KNOW ONE OF THE THINGS YOU'RE THINKING ABOUT HERE IS REFORMING FANNIE AND FREDDIE. IT SEEMS LIKE THERE'S A BIT OF A BLUEPRINT OUT THERE FOR A BUNCH OF IDEAS, NOT REAL RAPID MOVEMENT IN WASHINGTON ON THIS. WHAT ARE YOUR THOUGHTS ON THAT?

LACKER: I WAS GLAD TO SEE THE TREASURY CAME OUT RECOMMENDING WE WIND DOWN FANNIE AND FREDDIE. I THINK THAT'S A GOOD IDEA. THE DEBATE IS GOING TO BE JOINED NOW ON WHETHER WE REPLACE FANNIE AND FREDDIE WITH SOME BROADER GOVERNMENT GUARANTEE FOR MORTGAGES AGAIN. I PERSONALLY THINK THAT WOULD BE A MISTAKE. IT'S ONE THING -- IMPORTANT TO REMEMBER THERE ARE TWO QUESTIONS-- IT IS ONE THING TO SUBSIDIZE HOUSING. IT'S ANOTHER THING TO CHOOSE TO SUBSIDIZE HOUSING BY SUBSIDIZING HOUSING LEVERAGE AND DEBT. IF YOU WANT TO SUBSIDIZE HOUSING IF YOU WANT TO PROMOTE HOME OWNERSHIP DO IT THROUGH EQUITY, NOT DEBT.

LIESMAN: WHEN YOU SAY NOT DOING IT THROUGH DEBT DO YOU MEAN WE SHOULD WITHDRAW THE GUARANTEE ALTOGETHER OF THE GOVERNMENT?

LACKER: I THINK OUR HOUSING FINANCE MARKET WOULD BE BETTER OFF WITHOUT BROAD BASED GUARANTEES ON U.S. MORTGAGES.

LIESMAN: PRESIDENT LACKER THANKS FOR JOINING US. LOOK FORWARD TO YOUR DISCUSSIONS IN THE CONFERENCE TODAY.

LACKER: MY PLEASURE, STEVE.

About CNBC
With CNBC in the U.S., CNBC in Asia Pacific, CNBC in Europe, Middle East and Africa, CNBC World and CNBC HD+, CNBC is the recognized world leader in business news providing real-time data, analysis and information to more than 390 million homes worldwide. The network's 16 live hours a day of business programming in North America (weekdays from 4:00 a.m.- 8:00 p.m.) is produced at CNBC's global headquarters in Englewood Cliffs, N.J., and includes reports from CNBC News bureaus worldwide. CNBC.com and CNBC Mobile Web (mobile.cnbc.com) offer real-time stock quotes, charts, analysis and both on-demand and live streaming video.

Members of the media can receive more information about CNBC and its programming on the NBC Universal Media Village Web site at http://www.nbcumv.com/mediavillage/networks/cnbc/