WHEN: Today, March 7th at 10AM ET
WHERE: CNBC's "Squawk on the Street"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Charles Evans, Federal Reserve Bank of Chicago President, today, March 7th at 10am ET on CNBC's "Squawk on the Street."
All references must be sourced to CNBC.
STEVE LIESMAN: Hey, Mark, thanks very much. Oil prices are up. The unemployment rate is down. QE2 probably coming to an end. What better time to talk to Chicago Fed president Charlie Evans. A voting member of the federal market committee this year. Charlie, thanks for having us here in Chicago.
CHARLIE EVANS: Good morning, Steve, welcome to Chicago.
STEVE LIESMAN: I-- I think the best place to start is that little ticker in the bottom right of our screen. The oil price at $104. How much concern does it give you over inflation?
CHARLIE EVANS: Well, it’s certainly the case that oil prices are high. And, you know, a good part of that is due to the fact that the global economy is strong and-- developing. Economies are putting pressure on that. That would have-- you know, it’s a headwind for the U.S. economy, obviously, at these high prices.
STEVE LIESMAN: Is it an inflationary head wind? Or is it a deflationary head wind?
CHARLIE EVANS: Well, I think it’s a head wind for the real economy. It’s obviously putting pressure on producers and-- their cost structure. I think in terms of inflation, it’s-- it’s a change in relative prices that should not-- end up in inflation not-- underlying inflationary pressures. It’s obviously something we have to watch, though.
STEVE LIESMAN: I have to tell you President Evans, there’s a lot of people who say that it’s the Federal Reserve’s loose monetary policy that is responsible for these high commodity prices. How do you respond to that?
CHARLIE EVANS: Well, monetary policy’s accommodative. And in fact, we are trying to get underlying inflation to increase closer to what I would say our objective is of two percent. Accommodative policy would put a little bit of lift on all prices, but nothing like what we’ve seen for oil and-- commodity prices. I think you have to look around the world to the pressures that we’re seeing developing countries-- droughts in the-- in Russia, uncertainty in the Mid East. I think there are a lot of other factors that-- you know, sort of swamp the effect of monetary policy.
STEVE LIESMAN: I just want to give you the rationale, which is that-- you create-- you crowd people out of the bond-- bond investments, the -- investments. Send them into riskier investments. Some have gone into stocks and so the Fed takes some credit for the rise in stock prices, but some have also gone into commodities. So, it is that preference that you’re creating that is responsible for the higher commodity prices.
CHARLIE EVANS: You know, I think the economic implications are really the first order when-- so the-- the demand for these commodities in oil is-- very strong around the world. And the supply is not as strong as-- that. And that puts upward pressure on it.
STEVE LIESMAN: Does the rise in oil-- well, let me come back to that in a second. We’ve had a pretty sharp drop in the unemployment rate. Do you think that is real?
CHARLIE EVANS: Well, I do think there’s been an improvement in the labor market. And-- that is something we’ve been looking for and it’s a very welcome sign. The unemployment rate moved quickly down to 8.9 percent from-- the nine and a half percent range. I was a little nervous that maybe there were-- it was just sort of artifacts in the data. That we might be seeing a rise in unemployment.
The fact that it moved down in the last month, you know, I take that as signal that the labor market is, in fact, improving. Payroll employment was up 192,000. 222 on--private. So, that’s a good report. We need more reports like that. I think a few more months of that and I’ll begin to have more confidence that the-- momentum is sustainable and the economy’s growing very-- very well.
STEVE LIESMAN: Now, I come back to the question I was going to ask. High oil prices on the one hand. A decline in the unemployment rate that you think is for real. Does it give you any pause about finishing out the policy that the Fed has laid out to purchase $600 billion of bonds into the QE2 program?
CHARLIE EVANS: Well, the-- the economy is growing nicely right now. And my outlook for-- this year is for four percent growth-- G.D.P. Four percent this year, four percent next year. So, I-- I’ve been looking for strong growth and we’re beginning to get the signs that that might come about. That’s part of my rationale for why $600 is a good number for our asset purchase size. I-- when we started this, I might have thought that, you know, $600 was a good start to the program and we might have to do more. It’s looking more and more to me that $600 is a good number for this. You know, we’ll have a discussion about that.
STEVE LIESMAN: So, you’re-- right now, wouldn’t be leaning towards the idea that $600 is too little. Or that you have more to do after this.
CHARLIE EVANS: I continue to think that-- the hurdle is pretty high for altering our currently announced plans. I think that-- you know, we’re imparting a level of-- greater clarity and certainty for anybody looking at policy actions. We’re going to continue to need-- I-- in my opinion, need-- short term interest rates to be low for an extended period of time, just like our FOMC statement says.
STEVE LIESMAN: Just something for-- our friends over at Chicago Board of Trade, who are going to be really interested in this. Every program the Fed has ended, it’s tapered, the ending of the program. Is that something that you are thinking about now, in terms of how to end the QE2 program?
CHARLIE EVANS: We will have discussions about all of these things. But the Treasury market is so deep and so liquid, there doesn’t seem to be a need in terms of market functioning for that type of tapering. I would not be surprised if when we decide to end this, we just ended.
STEVE LIESMAN: If the Fed is not responsible for high oil prices, which is what you contended earlier, is it possible that it becomes the Fed’s responsibility in the sense that there are some people on the floor this morning who were saying, "You know what? Given the negative impacts of high oil prices, the Fed could do a lot of good for the economy, by acting to reduce commodity prices and raising rates."
CHARLIE EVANS: Well, I just think that the strength of the global economy and other factors are-- so important that even if we were to tighten monetary policy, you know, that could bring down commodity prices a percentage point, maybe two percentage points. But, you know, when you’re worried about 15 percent or more increases and commodity prices, reducing it down to 13 percent, that’s what you would tend to expect, if we were to reduce overall inflation. Oil prices following-- falling, but-- we’d also see the prices that are more like one percent declining to-- rate more like half a percent or so. So, I don’t think we can have as big an effect as your question suggests.
STEVE LIESMAN: When you go to a cocktail party, outside of the academic and the monetary policy discussion and tell people there’s no inflation, I mean, what kind of reaction do you get from people?
CHARLIE EVANS: It has been interesting during this time period that people who I socialize with in a variety of formats, who have never paid attention to the state of monetary policy do ask me, "Hey, Charlie, what’s up with this QE2 program? And will I ever get, you know, something positive on my passbook savings?" Yes, I have gotten-- commentary like that. I think that-- you know, it-- inflation is not always well understood. We focus on the prices that are going up, the things that catch our attention.
My daughter, 23, she drives to work every day. And she tells me what the latest gas price is on-- on a regular basis. So, I’m well aware of this. But there are a lot of prices that have not been rising quickly. Rent, car prices have not been rising quickly. Recreation prices. Men’s clothing. There’s-- you know, by some-- measures, a month or two ago, 80 percent of all goods in the consumer basket were increasing at a rate of two percent or less.
STEVE LIESMAN: President Evans, if you could sit right there, we’re going to take a break, come back, and then my colleagues in New York at the New York Stock Exchange, Mark and Erin have some questions for you.
CHARLIE EVANS: All right.
STEVE LIESMAN: So, hang on; Mark and Erin back to you right now.
STEVE LIESMAN: Bertha, thank you very much. I’m here in Chicago with the Chicago Federal Reserve Bank president, Charlie Evans. Charlie, we were just talking about oil in a place you heard that oil is now lower-- because of some developments that were being reported by the D.B.C. from the pan-Arab-- you know, that whole -- that Bertha just correctly laid out there. Does this suggest to you that there’s at least a lot of political unrest froth in the price of oil right now?
CHARLIE EVANS: Oh, there’s a lot of uncertainty obviously, around the world. And-- oil, you know, a lot of it comes from the Mid East. So, it’s not at all surprising that-- you know, you get volatility from that. Not from monetary policy being the effect there.
STEVE LIESMAN: Another bit of uncertainty is the fiscal outlook. How much of-- what you do in the policy front of monetary policy is linked to whether or not the government gets control of the deficit?
CHARLIE EVANS: Well, from a monetary policy standpoint, we have to understand the implications of what the fiscal authorities are doing for, you know, how the economy’s going to grow. And then ultimately what the inflationary pressures are going to be. So, more spending, less spending, we take that into account as to what aggregate demand will be.
I think it’ll be beneficial if-- everybody can get control of the current, you know, situation. I think the chairman put it very well that if this, you know-- shows improvement over the next five to ten years on the deficit planning, that would be a big plus.
STEVE LIESMAN: Okay, Erin has a question back home.
CHARLIE EVANS: Well, there’s a lot of volatility in the headline number. And when you look at the components that consumer’s buy, the prices are all over the place. I mean, it’s certainly the case that food and energy are high. But car prices have been lower. Rent has not been increasing very much. Recreation has been-- negative. Men’s clothing. There’s just-- many, many goods that are, you know, growing in the one to two percent range or less than that.
Eighty percent a couple of months ago. Eighty percent of all goods were-- growing at less than two percent. So, we-- what gets our attention are the ones that are growing that are more costly. That are, you know, really obnoxious. And what we tend to forget are the fact that technology’s improving and those prices are going down. So, we have to pay—
CHARLIE EVANS: Oh, absolutely. And we have to pay attention to underlying inflation pressures. So, we have gotten to the point where we refer to core inflation. And we certainly get a lot of criticism that, you know-- you know, I don’t eat core-- inflation. And-- you know, driving-- is not included in that. But-- you know-- if you look at median inflation or other measures of the underlying growth rate, it’s low.
STEVE LIESMAN: Let me follow up on that right there. What’s the better predictor of future inflation? Is it core inflation or headline inflation tells us where things are going?
CHARLIE EVANS: Well, core inflation gives us some idea of the smooth underlying tendency that inflation is going to-- you know, follow over the next-- you know-- median term, over the next couple of years. You know, it was just the case that during-- during the recession that, you know, headline inflation at one point in 2008 was very high. Then it fell, and it was negative-- you know, after that. We didn’t talk about, you know, those negative consequences to the same extent. We sort of looked at the smooth change in-- core inflation and-- and median inflation.
STEVE LIESMAN: Charlie, I think we have to leave it there.
CHARLIE EVANS: All right.
STEVE LIESMAN: President Evans, thanks for joining us.
CHARLIE EVANS: Well, thanks very much, Steve.
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