When: Today, Monday, June 6, 2011

Where: “Closing Bell with Maria Bartiromo” and “The Kudlow Report

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Eric Rosengren, Boston Federal Reserve President, today on “Closing Bell with Maria Bartiromo” and “The Kudlow Report.” All reference must be sourced to CNBC.

STEVE LIESMAN: I’m here in Boston at the Boston Federal Reserve Bank with the President of the Boston Federal Reserve, Eric Rosengren. President Rosengren, thank you for joining us.

ERIC ROSENGREN: Thank you for having me.

STEVE LIESMAN: --in reference to first question that I have to ask. The weaker jobs report, the weaker economic data. How serious are you taking the slow down?

ERIC ROSENGREN: Well, the data has come in weaker, as you highlighted. And the employment report was a disappointment. We were growing around 200,000 jobs for the first four months of this year, and the May report was less than half of that. Unemployment rate at 9.1 percent is the--. And so, the real question is whether this was a pause or whether it’s more of a pattern. I think it’s too soon to know that. But we certainly would like to be seeing the employment data-- growing more strongly than they have in --report.

STEVE LIESMAN: What else are you looking at? It looks like all the data has been at least below expectations if not some of it downright bad-- are you inclined to think this is more permanent?

ERIC ROSENGREN: Well, I must say for the first half of the year, it’s come in weaker than we expected. So, the first quarter was 1.8 percent on real G.D.P. This quarter looked like it’s going be a little bit above 2. So, averaging for the first half roughly at two percent. It is well below what people were expecting at the beginning of this year. Our statistical modeling still would indicate that we’re going have stronger growth in the second half of this year. And that’s what I’m expecting. But I think we’ll have to watch the incoming data to make sure that outcome actually occurs.

STEVE LIESMAN: Can you put numbers on both halves? What are you looking for G.D.P. wise for the first half? And what about the second half?

ERIC ROSENGREN: Well, for the second half, we’re looking at more at a three percent growth rate. Which is better than potential, but not a lot better than potential. And would be consistent with only a slow drifting down of the unemployment rate.

STEVE LIESMAN: Are you at a point yet where you’re beginning to consider whether or not this slowdown is something that necessitates additional Federal Reserve action?

ERIC ROSENGREN: I think it’s too soon to make that determination. We’ll have to see how the incoming data-- we’re still doing the-- government securities purchase through the end of this month. So, I think-- once we finish with the purchase program, we’ll need to make an assessment of whether the economy looks like it is picking up, as-- within our forecast. Whether we’re getting a more sustained-- growth rate than we’ve had over the last four or five months. But that’s yet to be determined. So, I think it’s too soon to determine what the next steps for monetary policy are.

STEVE LIESMAN: Is this fair to say that perhaps there’s already been an impact of the slowdown in that there’s less talk about exit strategies-- otherwise might have been. And I can say that I probably would have been here peppering you with questions about exit strategies, if not for the slowdown.

ERIC ROSENGREN: So, the slowdown does change where you think the timing might be for when an exit strategy would be appropriate. So, we’re still talking about what the appropriate exit strategy is, but in terms of the timing, it has to be dependent on how the incoming data come in. And as you’ve noted, the data’s been weaker than we expected and weaker than most private sector forecasters have expected.

STEVE LIESMAN: You could go out and buy trillions more bonds. But that would be a question asked in a political vacuum. Do politics limit how much the Fed can do if it were to need a QE3?

ERIC ROSENGREN: I think we need to do what’s right for the economy. So, with the quantit-- the last, when we started the large scale asset purchase program-- last fall, it was at a time where the inflation rate was quite low and there was concern about deflation. I think that program was quite successful in turning around those expectations and making everyone quite confident we were not going to allow that to happen. And I think it was also fruitful in getting financial markets to be more confident that there would be a pickup.

So, at this time, we have to just make an assessment of what the economy needs. I don’t think politics should play a large role in what we’re doing. It would be focused on what the right economic outcomes are and what the right monetary policy is to get those outcomes.

STEVE LIESMAN: There are some people who vehemently disagree with the quantitative easing strategy as the right eco-- monetary policy. And they say it’s led to, among other things, surging oil prices and surging commodity prices. How do you respond to that?

ERIC ROSENGREN: Well, oil prices go up and down. And I would highlight other factors that are affecting oil prices to a much larger degree. So, we’ve been seeing a lot of disruptions in the Middle East. It’s not just what’s been happening in Libya, but it’s also the unrest in the Middle East more generally.

But whenever there are supply shocks, you would expect things like oil prices to go up. We’ve also seen food prices go up. But by and large, that’s a reflection of agricultural prices being affected by things going on in Russia, Australia, and the Mid West in the United States, where weather conditions have been unfavorable for a number of crops.

So, those types of things are not something monetary policy can do anything about. We can’t produce more oil. We can’t create more crops. So, those are things that we have to take into account. But these various supply shocks should not be something that we focus on unless we think it’s going to affect the underlying rate of inflation.

STEVE LIESMAN: --set a relatively high bar for doing any additional quantitative easing after June. Saying that the costs outweigh-- likely outweigh the benefits. Do you agree with that?

ERIC ROSENGREN: So, the benefits depend on where the economy is. So, when we did the last announcement of a large scale asset purchase program, it was at a time where we were very concerned about deflation. If we became again concerned about deflation, an event that I’m not expecting, but if it were to happen, then quantitative easing or a large scale asset purchase program might again be appropriate. Again, we’ll just have to see how the incoming economic data come in. We shouldn’t rule anything out.

STEVE LIESMAN: One criticism of the Fed’s policy has been that it’s caused the dollar to depreciate and people say that that means that Americans’ living standards go down. How do you-- respond to the charge that the Fed policy has resulted in a deterioration of Americans’ living standards?

ERIC ROSENGREN: So, the mechanism that that would occur is if inflation were picking up quite rapidly. As you know, the PCE measure of inflation is only at one percent over the last year. We still have a very low inflation rate, by the CPI core measure, it’s 1.3 percent. So, with those kind of inflation rates, there’s not been the kind of pass through that really would affect our-- cause the deterioration in people’s living standards. So, while there has been some depreciation of the dollar, that does help our export. On the other side, there are some increases in import prices. But they’ve been fairly modest to date.

The pass through has been fairly-- modest to date. And as long as that’s true, I don’t think that’s the primary concern. And if we want to get the right exchange rate, the best way to do that is to have appropriate monetary policy that gets inflation rate around my long run goal of two percent. And an unemployment rate that’s closer to full employment.

STEVE LIESMAN: President Rosengren, thank you for joining us today.


STEVE LIESMAN: Maria, President Rosengren-- And we’re gonna put a little bit of this interview on tape and we’ll bring you a couple more minutes of that this evening. Lots more to talk about but I’ll send it back to you for now, Maria. Thank you.


STEVE LIESMAN: There’s a lot of talking Washington these days about fiscal piping. How much concern do you have that there could be too much of that too soon? Or you think it is appropriate now, the level of conversation that’s going on?

ERIC ROSENGREN: So, in the long run, we certainly need more fiscal austerity. And for the entitlement programs, we need to make them sustainable. So, there’s I don’t think any disagreement about in the long run where we need to be. I think the question is how much we should be front-loaded and how much of it should be back-loaded. And I would be concerned if too much of it was front-loaded in an economy that’s already growing relatively slowly.

STEVE LIESMAN: Is it possible-- are you concerned that the political dynamic gets away from the economic dynamic?

ERIC ROSENGREN: If we were to get a lot more austerity, it would indicate that we probably would expect a slower-growing economy. The unemployment rate at 9.1 percent is quite high. And so, I think actually our focus right now really should be on getting back to full employment.

STEVE LIESMAN: Does the Fed have to lean against the direction of fiscal policy sometimes?

ERIC ROSENGREN: We have to take into account what fiscal policy is. So, if fiscal policy is much more restrictive, then that would argue for monetary policy being somewhat easier going forward. And also, the opposite. If it was going to be a much easier fiscal policy, not that we’re anticipating that. Then monetary policy might appropriately be a little bit tighter. So, we have to take those kind of considerations into account.

STEVE LIESMAN: You made some really interesting comments about money markets. To what extent do you think money markets need to have some form of government guarantee?

ERIC ROSENGREN: So, money market funds played a significant role in our last crisis. And because there was a credit loss that caused a run on the money market funds, as a result-- there was a lot less stability in the short term credit markets and the Federal Reserve had to intervene. So, I don’t think we need a solution that makes sure that we don’t have to worry about money market funds breaking their stable net asset value with a credit loss.

But I don’t think the right answer to that is extending the government safety net. I think there are a variety of other solutions that we ought to be looking at. A number of them have included having the net asset value fluctuate. Some of them have included requiring money market funds to have a capital requirement. Which solution we pick, I think is less important than that we start moving to a solution. So, we’re almost two and a half years after the crisis with the money market funds. And that is one area where we haven’t addressed kind of the credit risk in those organizations.

So, the S.E.C. has done some very useful programs in terms of thinking about the duration of money market funds. And I think that is very helpful. But we haven’t really addressed the credit risk that’s still embedded in some of the money market funds.

STEVE LIESMAN: I mean, in the absence of any formal decision, you have a little more-- problem. Where money markets should believe at this point that they’re going be bailed out in the next crisis.

ERIC ROSENGREN: So, that is exactly why we should be spending some time focusing on how to make sure that in the next crisis, the money market funds aren’t playing a role in causing any of the instability that they did contribute to in the last crisis.

STEVE LIESMAN: Treasury Secretary Tim Geithner spoke today and expressed some concern at the momentum, at the pace of regulatory reform. And he seems to feel like there are loopholes that are getting in there. He seems to feel like we need to reinvigorate the international cooperation. Do you have concern that we’re-- losing a little momentum when it comes to regulatory reform?

ERIC ROSENGREN: I think that certainly is a risk. And it’s surprising how short people’s memories are of how serious the problems were in the fall of 2008. So, I think it is critically important. I would say with the Dodd-Frank implementation, at least in the United States, there’s an awful lot at work going on. And so, I think some of that is still to be rolled out over the next-- six to nine months. But I think we have made some progress in that direction, but I would agree with-- the treasury secretary that we probably could be moving more quickly on the international front.

STEVE LIESMAN: Would you just help me out with my colleagues at Squawk Box in the mornings who argue all the time that core inflation is useless and shouldn’t be used at all. Would you tell me why-- core inflation is a useful tool for the Fed?

ERIC ROSENGREN: Certainly. So, it’s not that we just focus on core inflation. We look at all prices and we look at all indexes. So, you shouldn’t dismiss any one index. But the reason why many economists focus on the core rate of inflation is because since 1985, when the total inflation rate has diverged from the core inflation rate, for example, with the oil supply shock that has caused the price of oil to go up.

The tendency has been for the inflation rate to come back to the core rate of inflation. So, the reason people have been using the core rate of inflation is it’s been a better forecast of where total inflation will be a couple years out than focusing just on total inflation. So, it’s more an indicator property of where the overall inflation rate’s going to go.

So, we do focus on all prices, we do focus on all measures of inflation, but core inflation does take out some of the noisiest measures which are what’s happening with food and energy prices. And that’s why so many people focus on the core rate of inflation.

STEVE LIESMAN: But people say, "You know what? Food and energy prices have just been going straight up. There’s no volatility in it. It’s been essentially a rise over the past several years."

ERIC ROSENGREN: So, that actually hasn’t been the pattern. I don’t have a chart in front of me. But if you recall, the oil got up to $145 a barrel in August or July of 2008. And then came down quite abruptly. And oil price, again, went up during this period. Got up to over $110 a barrel and it’s now a little bit below $100 a barrel. So, there have been quite a few fluctuations in oil prices. There have been fluctuations in food prices, as well. Those tend to be transitory and they tend not to have that much of an impact on other prices in the economy.

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