When: Today, Tuesday, December 20th
Where: CNBC’s “Squawk on the Street”
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, today on CNBC’s “Squawk on the Street” (M-F, 9AM-12PM ET). Excerpts of the interview will air throughout CNBC’s Business Day Programming.
All references must be sourced to CNBC.
STEVE LIESMAN: Hey, Scott, and I just want to congratulate both you and Melissa, how great you've been at pronouncing the name of our guest here. It is the Minneapolis Federal Reserve president distinguishes himself by really-- being an expert on the macro economy and monetary policy but also having easily the most complicated name of any Federal Reserve president. Narayana Kocherlakota. And I-- they didn't mispronounce it all morning long.
NARAYANA KOCHERLAKOTA: That's great. Glad to hear that.
STEVE LIESMAN: Let’s start. Thank you for joining us.
NARAYANA KOCHERLAKOTA: Oh, I'm glad to be here.
STEVE LIESMAN: Let's start off by talking about the economy. We've got some better housing numbers. In general, the tenor has been a little bit better than expected. Are you more upbeat than you've been?
NARAYANA KOCHERLAKOTA: I am slight more upbeat. You know, I'm expecting in 2012 maybe-- two and a half to three, but maybe a little closer to three than I was. But you know, we you don't want to get hung up on one month or two months worth of data. But—I do think that-- I'm a little more optimistic than I was say a month ago or two months ago.
STEVE LIESMAN: Were you in that camp in August that was afraid we were headed for a recession given what was happening in Europe?
NARAYANA KOCHERLAKOTA: I was not in that camp. You know, I did think that what concerned me more was the fact that-- we had this revision of the first half of GDP. And that was certainly a lot lower than I had thought it was going to be. And that had me more concerned. But I did not think we were heading-- headed for a recession at that time. And now I'm even more convinced of that.
STEVE LIESMAN: Let's talk about those revisions. In other words, you were concerned that as we got down sort of into that 1%, you-- you're in that belief that there's this-- a stall speed for the economy?
NARAYANA KOCHERLAKOTA: Well, there's a lot it's more a question of there's persistence, right? And so-- you know, GDP growth I think had some persistence built into it. And, you know, then once you're down at that low level shocks can push you even further down. So it's that-- it's not so much about a stall speed story. It's just we're low and shocks can push us even lower at that point.
STEVE LIESMAN: So just before I came on I read a report from Ed Hyman at ISI but I guess you know him. He thinks the housing data, the inventory data-- and some of the other data, he seems to suggest maybe a 4% quarter in the fourth quarter. Is that too aggressive for you? Do you think it's possible we could hit 4%?
NARAYANA KOCHERLAKOTA: That's not a number I'm thinking of at this time. But--
STEVE LIESMAN: In general-- is there a case to be made? I know some members of the Federal Market Committee are making it for additional Federal Reserve easing at this point.
NARAYANA KOCHERLAKOTA: You know, the way I'm trying to think about this, Steve, and it's obviously a really important question is I think it's important for us to be framing what we're doing in a bigger picture. And-- so what I mean by that is we have two mandates. We have a price stability mandate. We have a maximum employment mandate.
The price stability mandate is generally understood is trying to keep-- inflation around 2%. Maximum employment mandate, it's harder to translate into a quantitative measure, but-- I think we generally agree unemployment's too high relative to that. I think we have to be clear about how pol-- what our objectives are in terms of employment and-- inflation.
And then we have to be clear about the strategy that we're using to try to archive those goals. So I-- I've been talking in the last couple months about what I call-- a mandate dashboard, which lays out metrics in terms of what we're supposed to be responsible for, inflation, future inflation-- unemployment, future unemployment. And I think we should be clear about how we're moving policy in responses to-- to-- to the changes in those variables. I think rather than the question of what are we supposed to do at the next meeting, we should have a systematic plan of attack for trying to get to-- the objectives--
STEVE LIESMAN: All right. So let's talk about those objectives. You've already told me that you've put the-- inflation dashboard at 2%. Where would you put the employment dashboard? And I would guess that no matter where you put it we're not hitting it.
NARAYANA KOCHERLAKOTA: So I should be clear. I mean, in terms of the dashboard, those are really the readings that are coming from the economy. They're not the objectives, per se. But-- I think right now that the-- I think it's fair to say that unemployment is-- elevated compared to what you would think was being consistent. I agree with that.
STEVE LIESMAN: So is that something the Fed should do something about?
NARAYANA KOCHERLAKOTA: You know, I think that it's always about trade offs, right? So if we follow a more accommodative policy that's going to-- increase the risks of inflation-- at the same time, have-- have positive effects on employment. So one of the things that gives me-- pause about doing more accommodation at this time is that when I look at a lot of measures of slack-- right now, look fairly consistent with what they looked like seven years ago, mid-2004.
So if you look at capacity utilization, it's basically the same now as it was seven years ago. If you look at hours per worker, how many hours companies are using each worker, that looks about the same as it did seven years ago. And if you look at the unemployment rate of people who have been unemployed less than six months, that's a little higher but it's basically the-- roughly the someone-- area as it was seven years ago. So all these measures of slack look the same as they did seven years ago.
The one metric that looks very different, of course, is the unemployment rate of those who have been unemployed for more than six months. That looks quite different. But what does that say? That means that we're going to be trying to-- if we use more accommodative policy, we're trying to use it to lower the long-term unemployment rate, the unemployment rate of people unemployed less than six months, 'cause we've got a much more accommodative stance in place now than we did in 2004.
STEVE LIESMAN: So you're saying that structural unemployment is not something the Fed can do something about?
NARAYANA KOCHERLAKOTA: I'm saying that the trade off between longer term underemployment and-- inflation might well be quite different from
STEVE LIESMAN: Cost you too much?
NARAYANA KOCHERLAKOTA: It might well be cost us too much. I'm not saying that's true, but it's something we should be very careful about--
STEVE LIESMAN: Let's talk about other scenarios, though. For example, if there was another shock from Europe or financial contagion, is that something that you think would cause you to support additional Federal Reserve--
NARAYANA KOCHERLAKOTA: You know, I--
STEVE LIESMAN: accommodations?
NARAYANA KOCHERLAKOTA: I've talked be this. I-- you know, we want to-- policies should evolve according to the condition of the economy. And if my inflation forecast was to soften-- below-- where we were in-- in the fall and unemployment was to rise above where we were, that would be an argument for further accommodations, certainly.
STEVE LIESMAN: If you dissented, along with three other known hawks-- on the-- two other known hawks. Do you consider yourself an inflation hawk?
NARAYANA KOCHERLAKOTA: You know, I think any-- central banker-- we have two matters I just mentioned. And you've got to be concerned about inflation as a central banker. But I think the reason I dissented in August is more that I didn't see providing more accommodation as being consistent with the evolution of the data.
What I mean by that is inflation and the outlook for inflation had-- had gone up since the end of 2010. Unemployment and the outlook for unemployment had gone down since the end of 2010. So our objectives are to-- to have low unemployment, have inflation around 2%. That's not consistent with providing more accommodations.
So even more-- and just as much of-- as being an inflation hawk, I think of myself as a consistency hawk, a credibility hawk. And I think it-- because I think it's really important for us to be consistent with the evolution of the data so that people believe that we are going after the things that we say we're going after.
STEVE LIESMAN: There's quite-- on that-- in that same vein, there's quite a robust discussion we understand going on at the Federal Reserve about putting out employment or inflation targets, changing the communication strategy. What's the outlook for that?
NARAYANA KOCHERLAKOTA: Yeah, I think-- you know, there's-- this is an ongoing dialogue. It's-- people who have been on the committee longer than me tell me it's been going on for a long time. And so I-- you know, I think it's-- we've got this communication subcommittee that the chairman has formed. I think it's been very productive and useful to-- way of shaping the conversation. And the conversation's ongoing.
STEVE LIESMAN: Do you think that's something that could come as soon as January that there'd be some form of new communication strategy from the Fed?
NARAYANA KOCHERLAKOTA: You know, as I said, I think the conversation's ongoing. We'll see where it goes.
STEVE LIESMAN: You talked about your GDP outlook. What about for job growth? Are you pessimistic on the ability to bring that unemployment rate down from 8.6% where it is now?
NARAYANA KOCHERLAKOTA: Well, I see us making continued progress on unemployment. And it's important to realize we have made progress. I became president of the Minneapolis Fed in-- late 2009. Nov-- my first meeting was November 2009. At that point, unemployment was 10% in that quarter. We're now down to 8.6. That's progress.
I think we're going to continue to make progress. It will not be as fast as we would like to see, but it will be progress. So what does that say? I'm saying towards the end of 2012 I we think of unemployment being between eight and eight and a half, hopefully closer to eight. End of 2013, between seven and a half and eight, closer-- hopefully closer to seven and a half.
STEVE LIESMAN: Okay. So with that in mind and given what you said earlier about measures of slack in the economy, if some of those measures are structural and other measures are down to levels we saw in '04, it would sort of begs the question you would think the Fed may be too wide open, too easy right now given what the Fed can affect at what cost.
NARAYANA KOCHERLAKOTA: Well, I think it's-- it—you so there-- there's-- this is going to show up probably in your-- in differences in inflation outlooks. You know, if you look at the central tendency of the committee in-- November-- you know, they're not forecasting inflation to be above 2%. So then you're-- the central tendency of the committee is saying that there's enough slack to pull down inflation. I was suggesting to you earlier that my own views on inflation might be that that pull from slack might not be as great as you might think because a lot of it is coming from longer term unemployment.
STEVE LIESMAN: Does the Fed have the ability-- and this is the last question I have for you-- if we have time for it. Is-- does the Fed have the ability to change on a dime and react if, in fact, all those excess reserves start to become high powered money?
NARAYANA KOCHERLAKOTA: Oh, I think that-- I have a lot of confidence in that-- our ability to do that. It's basically-- we have the ability to control inflation-- our ability to control inflation is independent of the size of the balance sheet. And the reason for that is we have the ability to pay interest on reserves.
So by paying sufficiently high interest on reserves, we can keep the reserves from flowing out. It's basically-- the question about monetary policy remains the same. Will the Fed raise interest rates sufficiently rapidly, keep inflation under control? And that's independent of the size of the balance sheet.
STEVE LIESMAN: And so what's the answer to that?
NARAYANA KOCHERLAKOTA: Oh, the answer is yes, of course
STEVE LIESMAN: You can't say anything but that, right?
NARAYANA KOCHERLAKOTA: But I do feel that confidence. I mean, I certainly do.
STEVE LIESMAN: Okay. Narayana Kocherlakota, thanks for joining us.
NARAYANA KOCHERLAKOTA: Oh, thanks, Steve. Appreciate it.
STEVE LIESMAN: Guys, back to you from Minneapolis-- Fed president, Narayana Kocherlakota.
STEVE LIESMAN: You did not dissent in the last meeting. How come?
NARAYANA KOCHERLAKOTA: I think that-- the way I think about our committee-- operations is it's an ongoing process. It's ongoing dialogue. I registered my concerns with the actions that the committee took in August and September. I don't think there's any real point to going back and re-litigating that. You take those decisions as given. We move on to the next decisions.
Especially I think the committee-- think about the action the committee took in August, which was to say that we now expect to be keeping interest rates extraordinarily low-- at least through mid-2013. There's a certain air of you don't want to be undoing that and saying-- taking that off the statement at the next meeting or two meetings later. That would really I think undercut the kind of credibility that I think is very important for the committee to maintain.
STEVE LIESMAN: Do you object in general or would you like to see-- an improvement on the idea of promising to keep rates low by specific calendar dates and replacing that with numbers?
NARAYANA KOCHERLAKOTA: I actually-- you know, I'm not as concerned about that as some of my colleagues are. I think that people want to know how long we're going to be keeping rates low. If I had to change that language, I would have made two changes. I would have not have "at least." I think that leaves a lot of vagaries about exactly how long we think it's going to be.
And I would make it, instead of a calendar date, I would make it a duration. And the reason for that is if you say "at least through mid-2013" and now we're three months later, you're sort of automatically tightening policy.
And if you have a duration, you say-- whatever it is, two years? Then you're no automatically tightening policy. The policy is remaining as accommodative as you move from meeting to meeting. So those are the-- but I-- I regard those-- the first one I think is more substantive. The second one is more a minor I think. But--
STEVE LIESMAN: What about the threat that's posed by Europe to the U.S. economy? How much concern do you have?
NARAYANA KOCHERLAKOTA: So I always think about this in two pieces. One is on the trade dimension. And a trade with Europe is important but-- even on-- a relatively steep recession in Europe would have only moderate impacts on U.S. GDP through the trade effect because trade with Europe is important, but trade is-- we're a relatively closed economy in the U.S. So trade is a relatively small part of our GDP.
And then Europe on top of that is a relatively small part of our trade. So all told, the trade component, the trade channel is not the big threat. What's more worrisome is on the financial side. And there what you're worried what I worry about is just psychological-- build up of risk aversion in markets that I don't worry about the exposure of our financial institutions per se to Europe. I think we're in a much, much stronger position than we were three years ago on that.
But what I do worry about is that if things start to go-- more awry in Europe, people become averse to all forms of risk and start to pull back. And that would be-- that would be-- problematic.
STEVE LIESMAN: Can the U.S. economy survive a recession in Europe without a recession here?
NARAYANA KOCHERLAKOTA: Oh, I think the answer is definitely yes to that. We can as long as that recession is not associated with-- the kind of build up and risk aversion in the financial markets that I talked about, that-- that-- that could be very problematic for us. But as long as people are-- retain the confidence in American financial institutions, American-- risk assists, then I think we can certainly-- have-- a positive growth experience and a non-recessionary outcome in the U.S.
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