Following is the unofficial transcript of a CNBC interview with James Bullard, Federal Reserve Bank of St. Louis President and Dennis Lockhart, Federal Reserve Bank of Atlanta President. All references must be sourced to CNBC.

STEVE LIESMAN: Carl, thank you very much. And we're here in Jackson Hole at the-- Global Interdependent Center's-- annual summit. This is not the regular Kansas City one. This is an extra trip we have out here. And it's really a first we have on CNBC, maybe a first anywhere. Two fed presidents-- Dennis Lockhart from Atlanta and Jim Bullard from St. Louis. Thanks for joining us and waiting while we did all that-- that news there. Dennis, tell us how-- fed policy makers such as yourself is processing this news right now about the potential for a downgrade at or a default.

DENNIS LOCKHART: Well, I'm not really thinking deeply about that because I-- sincerely hope it isn't going to happen. Yeah, I think it's just essential that this debt ceiling increase get done. And I-- am really reticent to speculate on how the markets will react-- given the scenario that you've laid out.

STEVE LIESMAN: Jim, same question for you, is it something that you're beginning other think about if-- even if we-- pass a debt ceiling bill, there's a possibility of a downgrade of the U.S. government.

JAMES BULLARD: Yeah, I think that-- you know, failure to raise the debt ceiling would be-- have unpredictable consequences for the U.S. economy. That's my main concern. I do think a deal would get done-- eventually. There's-- obviously it's a very difficult political situation, there's a lot of wrangling going on. But-- I think at the end of the day we will see-- some kind of a deal. A lot of times when you get down to the end of a negotiation-- the differences start to be less and less and less and that's what brings votes into the process. So hopefully that'll happen this time.

STEVE LIESMAN: This-- is the fed going to need to act if the debt ceiling is not raised?

JAMES BULLARD: Well, we can't-- we can't do anything directly to fix this. If the treasury can't issue more debt, they can't issue more debt. We cannot buy debt directly from the treasury. So we can only buy debt in the open market. And-- so if they're not issuing more debt then that's-- that's a problem that the treasury has. If it led to a generalized crisis we can come in and provide liquidity to markets as we did in 2008 and 2009. But there's nothing that the fed doesn't have any ability to fix this situation. This is up to the congress and the president.

STEVE LIESMAN: Dennis, we've seen five-- sorry, go ahead.

DENNIS LOCKHART: Let me just say that Chairman Bernanke said just a few days ago not to look at the fed as an offset in some way for the economic damage that this could cause. So I think that's really the key point. Don't look to the fed to offset the damage that could be incurred here.

STEVE LIESMAN: But that's on-- for a sort of short-term technical basis, Dennis. What about-- the extent to which-- well, 600 points are off the Dow. We've seen consumer confidence numbers plummet. We had lousy GDP numbers to the extent that-- this whole crisis here is creating-- a negative influence on the economy. Is that something the fed might need to offset?

DENNIS LOCKHART: Well, certainly-- it's our job to run the monetary policy that influences the conditions in the economy and-- you know, I think you never say never when it comes to policy options you may have. I wouldn't take any policy options off the table to-- to respond to-- a really bad economy. But I think the key point is and Jim has just said this is I think it's our expectation this is going to get done. And it's going to solve the problem, at least in the near term. And-- a lot of speculation about it really isn't all that responsible.

STEVE LIESMAN: Jim, one thing that's not speculation is the numbers we got this morning on GDP, downgrading-- the first quarter to 0.4 percent. Simon Hobbs-- the anchor, asked me the question, had you known that it was going to be 0.4-- was 0.4 in the first quarter would you have done a third round of quantitative easing?

JAMES BULLARD: You know-- I don't really think so-- in the first quarter-- we knew that was weaker-- came in weaker than expected. This is kind of confirming that. It's down further from where we had it. And I think-- also the second quarter number-- really came in about where market expectations-- were-- as of the-- the announcement.

So I don't think this is all confirming what we already knew, which is that the first half has not been as strong as we like. And there's a good story to tell about where the reasons-- you know, what the reasons are behind that. We had-- higher oil prices-- we had the-- problems in Japan. Both of those have-- moderated some

We've had problems-- in Europe with the sovereign debt crisis and that has moderated some. And that leaves-- really just this-- U.S. fiscal situation. I do think we'll get a deal. And then we'll have those uncertainties off the table. I think we're in better shape for-- better growth in the-- in the second half of the year.

STEVE LIESMAN: Dennis just said that he wouldn't take any options off the table. One of your counterparts in Dallas said there's-- he wouldn't vote for QE3 under any circumstances. What's where does St. Louis come out between-- Atlanta and Dallas?

JAMES BULLARD: Well, Dennis is exactly right. Our monetary policy's an ongoing process and-- and I've tried to emphasize state contingency and monetary policy. You've got—

STEVE LIESMAN: I'm going to just explain that. State intensities--

JAMES BULLARD: --you've got data coming in on the economy, you have to react to the data and you have to adjust policy in reaction to the data. So I don't-- I think Dennis is exactly right. You should never say never. Having said that, we've already got an ultra easy monetary policy. We've got interest rates at zero, they've been a zero for a long time.

We've got the extended period language and we've got an enlarged balance sheet, which we've ratcheted up with QE2. So just because QE2 had ended we still have a very easy policy. It's threatening-- higher inflation in the U.S. economy. We have to be cognizant of that-- going forward.

STEVE LIESMAN: Dennis-- one of the big stories in this morning's GDP report was what's happening to core PCE inflation. It seems like it's on the rise. It was-- I think it was above two percent this morning. Are you beginning to be concerned about or does that stay your hand for additional-- stimulus for the economy?

DENNIS LOCKHART: The rising core has lasted longer than I expected. So in that sense it's been a little bit of a surprise to me. There appears to be some pass through effect that just has continued anecdotally. I talk to businesses frequently about their ability to pass through, their intention to pass through prices rises as they incurred earlier in the year.

I'm still hearing that there are intentions to pass through. So some of this in core, I think is this pass through effect. The here may also be some seasonality aspects of it. I still believe that we're going to see inflation subside-- both at a core and a headline level.

Also we cut the inflation numbers in 15 or 20 different ways and there are certainly some angles-- of-- optics at the underlying inflation that are still quite benign. So I think the transitory inflation story will and is in fact playing through.

STEVE LIESMAN: Jim, are you as optimistic on the core inflation as Dennis is?

JAMES BULLARD: Well, I think as you know I've been arguing against-- focus on core inflation. I'd like to focus more on headline inflation than we have in past-- smooth that out a little bit by looking at headline inflation over the past year. I-- you know, we cannot have this disconnect with America where you're-- you're saying-- we're not going to pay attention to food prices and we're not going to may attention to energy prices when we're talking about inflation in the U.S.

And people see those prices, they know what they are, they experience them every day. So I think it's incumbent on us as policy makers to accept that-- headline inflation has moved up, it's higher than we'd like it to be. We do think it will come down, but we're going to watch it very carefully.

STEVE LIESMAN: Jim, what about other options-- for the fed to help the economy? For example, lowering the interest pay on reserves from 25 basis points to zero.

JAMES BULLARD: Yeah, I-- there's been more talk about that recently. It's been discussed on and off over the last-- all the time we've been paying interest on reserves. I once described it as a dead-end policy. You can make one more and then you're—

STEVE LIESMAN: Then you're done.

JAMES BULLARD: --then you're done. Unless you want to go negative territory and then—

STEVE LIESMAN: To charge banks money for—

JAMES BULLARD: --charge-- yeah—

STEVE LIESMAN: --holding money account of the fed.

JAMES BULLARD: Sweden has done that-- without too much impact it—

STEVE LIESMAN: Didn't work.

JAMES BULLARD: --sounds like to me. But-- I just don't think there's a lot of room on this dimension to have a lot of impact on the economy—


JAMES BULLARD: --I-- yeah, I'm not, like, dead set against it, but it just—

STEVE LIESMAN: Dennis, you want to take this?

DENNIS LOCKHART: I'm not-- dead set against either, but I think it's a relatively small action-- in a situation where, you know, the situation calls for something stronger conceivably.

STEVE LIESMAN: I just want to kind of sum up what you guys were talking about, additional quantitative easing. It sounds like, Dennis, the bar's pretty high here.

DENNIS LOCKHART: I think I and Jim and others and many-- many of us said it's a very high bar. I don't completely rule it out as I said a moment ago. But it's a high bar. We have as Jim pointed out, a very accommodative policy today. We're holding the balance sheet essentially even and we have the overnight interest rate as low as it can conceivably go. That's a very accommodative posture.

I think now we need to wait and see. Jim's view and I share the view is the second half is going to be stronger-- that-- and my view at least is inflation will subside-- and that we're going to see a much better picture when we get to the end of the year looking back. So you know, I'm quite willing to say policy is about right where it needs to be for the moment.


JAMES BULLARD: Yeah, it's very accommodative right now. And I, you know-- we need to see if the-- if the second half is going to come in-- stronger. I think a lot of the data that we've received-- in the last-- six or eight weeks has just been confirming a story over and over which is that the second quarter and the first half generally was just weaker than we expected for all the reasons--

STEVE LIESMAN: Are there any good signs at all for the third and fourth quarter that you've been watching?

JAMES BULLARD: Well, one simple one is I think-- you know, it certainly looks like auto is going to come-- come back. So just mechanically that's going to be-- a positive.

STEVE LIESMAN: You know, there's a lot of talk in Washington right now that the probably with the economy is government spending. Dennis, do you have an opinion on that? When you look at the problems in the economy right now is the amount of government spending a problem for now or is it a problem for down the road?

DENNIS LOCKHART: Well, my view is that-- it's a serious imbalance that has got to be corrected and it will take a number of years to correct. And we're talking about a multiple year process to get the spending levels in relation to GDP at a sustainable level and work the debt-- in relation to GDP into a ration that the world will generally accept as sustainable and-- and sound. That's going to take some time. But-- clearly it's part of the economic story. And in the relative short term-- reducing public spending without the private sector filling in-- is, you know, is-- a concern.

STEVE LIESMAN: Well, Jim, pick up on that. Because is there a level of government austerity coming that would-- is causing you to downgrade your forecast or do you upgrade your forecast because the government is cutting back spending?

JAMES BULLARD: Getting the U.S. fiscal house in order would be a plus for the U.S. economy, I think. You it's a cloud over the U.S. economy to have all this uncertainty sitting out there in the medium term and the long term promises that it doesn't look like we'll be able to keep.

You know, you'd like to get rid of that, you'd like to have a stable structure-- that makes sense and that pays the bills and-- and is the right one for the-- the economy in a growth sense-- going forward. So-- I think there's tremendous upside to fixing this if we could.


JAMES BULLARD: But obviously it's a tough road.

STEVE LIESMAN: --and you think that that's hurting the economy right now?

JAMES BULLARD: Yeah, I think it is. And I think-- you know, you really see it in Europe where-- debt levels have gone too high, deficits who are way too high. And you really see a lot of countries get into a lot of hot water, a lot of trouble and—

STEVE LIESMAN: But this morning in the GDP report in the United States government spending declined overall and that brought the GDP down.

JAMES BULLARD: Yeah, I mean, you want the government spending there to be high rate of return investments in public goods and services and go ahead and provide those. And that's congress's judgment that they have to make about where that is. But I don't think every dollar of government spending is that high rate of return-- expenditure.

STEVE LIESMAN: Dennis, if we get to come back here a year or now, which I don't know I'll get invited, you guys definitely will. But-- are we going to be talking about exit strategy by then?

DENNIS LOCKHART: If the-- second half is strong and that strength carries over into 2012-- I think-- certainly we can begin to-- to see the conditions developing where a serious discussion of exit is possible.

STEVE LIESMAN: Jim, your thoughts on the same question?

JAMES BULLARD: I'm sorry, you said--

STEVE LIESMAN: If we're here-- yeah, we're going to be talking about exit strategy. When will we start talking about exit strategy in your-- outlook?

JAMES BULLARD: I think we'll be normalizing by next year, yeah, yeah.

STEVE LIESMAN: But next year, the beginning of next year?

JAMES BULLARD: Well, I wouldn't want to put timing on it. It does-- you know, I've been advocating that you have to pay attention to the economy. But I think the economy will improve and we'll be in a position to-- to begin normalizing.

STEVE LIESMAN: You gentlemen have been very gracious with your time. Thanks for joining us this morning on CNBC.

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