Eric Rosengren: Economy Has ‘Definitely Slowed’ This Year

CNBC Exclusive: CNBC Transcript: Boston Fed President Eric Rosengren Speaks with CNBC’s Sara Eisen Today

Eric Rosengren

Image source: CNBC Video Screenshot

WHEN: Today, Friday, July 19, 2019

WHERE: Interview airing on CNBC’s “Closing Bell

The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Boston Fed President Eric Rosengren and CNBC’s Sara Eisen which aired on CNBC’s “Closing Bell” (M-F 3PM – 5PM) today, Friday, July 19th. The following is a link to video from the interview on CNBC.com:

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Boston Fed Pres. Eric Rosengren: Economy Has 'Definitely Slowed' This Year

All references must be sourced to CNBC.

SARA EISEN: I noticed that you don't mention President Trump in your speech. Why is that?

ERIC ROSENGREN: Because it's not specific to individuals. And central bank independence is really about how the central banker behaves and how they respond. And so, the speech highlights that  accountability is an important part of independence, and so we're very accountable to Congress. We're not independent from Congress, but what we do have is goals set out by Congress, but independence on how we move those tools, the tools being things like our balance sheet and interest rates. And so, it's very important in any kind of central bank that you have a clear goal that's set out by elected representatives, but nonetheless have the flexibility to do the more technical aspects of central banking.

SARA EISEN: Do you think his constant and very public attacks at rallies and in Tweets influences the credibility and independence in the Fed ultimately?

ERIC ROSENGREN: It has no effect on how I think about monetary policy. And people are entitled to opinions. If we hear interesting and important facts that we haven't thought about, we take that into consideration. And unless it's data driven, it doesn't have much of an influence on how I think about what we should be doing.

SARA EISEN: There's a new Tweet. I'll just read you part of it. I mean, he says, ‘There's a faulty thought process we have going for us at the Federal Reserve. We pay much higher interest rates than countries that are no match for us economically. In other words, our interest costs are much higher than their countries when they should be lower. No thanks to the Federal Reserve. Had they not acted so fast, so much, we would do-- be doing even better than we are right now.’ Is he right that if we hadn't seen all the tightening we've seen, we'd be more competitive?

ERIC ROSENGREN: Well, it's important to get back to what the goals of the Federal Reserve are. So, it's price stability and maximum employment. So, when we set interest rates, it's not to focus on the exchange rate, it's not to focus on the stock market, it's to focus on, in the medium to long-term, getting the right outcomes for inflation and unemployment. And that's what we really are focused on in the meeting. And so, there are lots of collateral things that can happen when we raise or lower interest rates. But really, the attention is not to some of the things that sometimes you highlight on CNBC. We're not focused on investors in particular. We really are focused on getting the right outcome for that Congressionally mandated price stability and maximum employment over time.

SARA EISEN: Do the Tweets get mentioned during the meetings?

ERIC ROSENGREN: They do not.

SARA EISEN: At all?

ERIC ROSENGREN: I can't recall them being mentioned at all.

SARA EISEN: And you think that actually has no impact psychologically, in the back of your mind, that the President is making it very clear what he wants to see in terms of policy?

ERIC ROSENGREN: All I can say is it's not influencing how I think about monetary policy.

SARA EISEN: I wanted to ask you about New York Fed President John Williams created quite some drama yesterday, a spike up in odds of a 50-basis point cut in the July meeting after saying that actions should be taken swiftly to prevent an economic downturn. They walked it back. What exactly do you think was the communication objective here?

ERIC ROSENGREN: So, I can't speak to other members of the FOMC. I really focus on how I'm seeing the economy. And my own view on the economy is that the economy is doing actually quite well. So, in terms-- we're not really having an economic slowdown. If you take it back to the middle of June and think about where we were in the middle of June, most of the data's come in pretty good. So, we had the G20, and while it wasn't a perfect outcome, it was certainly a good outcome that we didn't have further disruption in trade. If you look at the employment report, the June employment report was quite strong, much stronger than May. If you average over the last three months, a little bit over 170,000 payroll employment. That's a strong employment result for the economy. If you look at inflation, the CPI came in stronger than people expected. My own expectation is when we get the GDP report at the end of this week that core inflation is going to look pretty good and very consistent with what we're seeing with the Dallas Trimmed Mean, which is right at 2%. And finally, if you look at consumption, the consumption data has been quite strong. That's 70% of the economy. And that's quite consistent, I think, with getting an overall GDP report. We'll see next Friday what we actually get, but I'm expecting something around 2%, which is a pretty good outcome.

SARA EISEN: So, why are we talking about an interest rate cut in a few weeks?

ERIC ROSENGREN: So, my own view is that unless the data actually starts showing some slowdown, that's what we should really be focused on. And the data to date, we still have data before the meeting—

SARA EISEN: So, you're not in the cut camp?

ERIC ROSENGREN: So, my focus is to see if there's any evidence that we're seeing a slowdown. And to date, I'm not seeing that. That doesn't mean there's not uncertainty, and there's certainly uncertainty in trade and a lot of focus with trade, and there's certainly uncertainty about some of our foreign trading partners. So, there's no doubt that China has been weakened by the trade concerns and their economy has been slowing down. There's concerns in Europe about a slowdown as well, particularly with the potential of a more disruptive Brexit. So, there's not-- there's certainly uncertainty in the world that we have to worry about. And you don't just worry about how the current data's coming in. You do have to think about how the data will be going forward. But I would say most of the news that we've been getting, at least over the last month, has been pretty good.

SARA EISEN: So, where are you on this idea of an insurance cut to cut rates, preserve the downturn as the uncertainties and the outlook pile up?

ERIC ROSENGREN: So, I think we need to separately a couple of ideas in that question. One is uncertainty. So, uncertainty about what? If you look at the VIX, the VIX is not particularly elevated-- so that's telling you that the stock market's not particularly volatile relative to its history. If you look at credit spreads, credit spreads aren't particularly elevated. If you thought we were about to go into a recession, normally you see those spreads widen. If you look at forecasting uncertainty and look at the Survey of Professional Forecasters, they're not particularly wide. They haven't changed dramatically—showing a concern of a recession. So, by those measures of uncertainty, we're not seeing substantial uncertainty. In terms of insurance and what you're taking insurance out against, I would say that insurance is something that we normally take out when the stock market declines very substantially.

SARA EISEN: We're at record highs.

ERIC ROSENGREN: So, think of 9/11, think of LTCM, think of October '87, those were all instances where we made the argument that we were taking out insurance. They were all periods where financial markets had moved very substantially, but we hadn't gotten economic data that indicated a slowdown, and so we did take out insurance around those three instances. As you just pointed out, the stock market is close to highs. The unemployment rate is close to a 50-year low. So, I think there are financial stability concerns. It's not costless to take out insurance. You pay a premium for the insurance. And one of the ways that you think about that cost is what you're doing to financial stability. So, financial stability can come in many different respects, but certainly a period where asset prices are elevated, you should be a little concerned about actually heating up those asset prices. If you think about leveraged loans and think about the corporate sector, we have taken on a lot of leverage over this course of this recovery and there are some concerns that when we have the next downturn, that could result in an amplification of that downturn. So, we have to think about some of the collateral effects of taking out that insurance. So, we need to think about the potential costs. I agree with the overall view that, if we are going into what is clearly a downturn, you want to act aggressively. And the reason for that is because we don't have that much room before we hit zero interest rates, so we don't want—

SARA EISEN: But you're not convinced that's where we are.

ERIC ROSENGREN: I'm not convinced that the data that we're seeing right now shows that. And the uncertainty is something that we have to live with. You know, by traditional measures of uncertainty, I don't think they're particularly elevated. Certainly, the trade concerns are a concern. Certainly, the foreign concerns are a concern.

SARA EISEN: See, I was going to ask you 25-basis points or 50-basis points cut. It sounds like you're not even in the camp that we should be cutting right now.

ERIC ROSENGREN: Wait and see how the additional data comes in. We have a GDP report and I don't have a make a decision until the--

SARA EISEN: The last print--

ERIC ROSENGREN: --week of the FOMC.

SARA EISEN: --had a three handle in front of it. I mean, and you've been saying all the positive data. So, it sounds like what you're saying is the cost of moving-- cutting while the economy is doing quite well is actually higher than the cost of not doing anything if we are headed into more uncertainty in a downturn.

ERIC ROSENGREN: Well, these are all judgment calls. And so, in order to determine whether the economy is-- the economy has definitely slowed down from where we were last year. We were growing around 3% last year. We're talking about more like 2% growth. 2% growth is definitely less than 3%, but it's still a little bit stronger than we-- what we think the potential for the economy is. So, given that the economy is quite strong, given that I do think that inflation is going to be very close to 2%, and given that the growth in the economy is satisfactory-- I think that's an environment where you don't have to take a lot of action. Now, should the economy change, if the trade situation changes dramatically, if we start getting surprised by how slow China or Europe are, then that's something we definitely should react to.

SARA EISEN: There are pockets of weakness, though: manufacturing, industrial production, capital spending. What story is that telling?

ERIC ROSENGREN: So, we care about GDP overall. We don't target individual components of GDP. So, consumption's quite strong. How do you get, with consumption strong, a 2% growth rate when consumption's 70% of the economy? It's implying that business fixed investment's going to be a little bit weaker. And it's implying that the Net export side's not going to provide a lot of oomph to the economy. So, when you balance that all out, 70% is pretty strong. The other 30% is a bit weak. One of the reasons it's weak is because of some of the trade issues that we've been seeing. But when you balance it out, we get an economy growing about what you would expect at this stage of the cycle.

SARA EISEN: What about the bond market? It's now pricing in multiple interest rate cuts for this year. What is the bond market seeing that you're not seeing?

ERIC ROSENGREN: So, one of the things that the bond market's showing, the ten-year has come down quite substantially. It's gone from roughly 3.25 down to the low twos. My interpretation of that is a lot of the easing that's occurred-- so, that is an-- an easing. It's a--

SARA EISEN: Yeah.

ERIC ROSENGREN: --financial accommodation. The long-- it's less expensive now to borrow long than it was before. I would argue that the main reason that's occurring is because of the weakness in our trading partners. So, the ECB has made several announcements that they are likely to continue easing. If you look at the German ten-year bond, it's negative right now. So, the entire yield curve in Germany is negative. Rates in Japan are very low as well. So, when global rates of many of our major trading partners are coming down, that has an influence on U.S. markets. And so, one of the ways that would manifest itself is downward pressure on our ten-year rate. So, I don't take as much information from the ten-year bond being low right now in terms of what that means potentially for an economic downturn. I know there are plenty of people who do focus on slope of the yield curve or focus on the ten-year bond, but I think right now, in the current environment, where we're seeing such low rates around the world, it's not surprising at all to me that our rates have come down. They're still much higher than they are in Japan or German, for example.

SARA EISEN: You mentioned trade as one of the uncertainties weighing on growth. How much do you think the tariffs and the uncertainty that's created over the next move between the U.S. and China specifically is hurting the economy?

ERIC ROSENGREN: I think right now it's probably tense. If we had tariffs on the remaining amount of trade with China, and presuming that China would respond to that as well, I think then you would be talking about products that affected consumers in a much more direct way. So, in many respects, consumer-- it hasn't been as obvious to consumers because most of the products that have been targeted have not been consumer products. So, if there were another round, I think it would be much more visible. I think it would be concerning, particularly if that occurred in addition to additional tariffs on Europe. So, there has been talk about auto tariffs and other tariffs being imposed. That's not my expectation. So, when I'm making a forecast right now, I'm assuming that there's not another round of tariffs that occur.

SARA EISEN: Sort of on a similar line, how much do you think the strong dollar, which is overvalued by many measures, including IMF this week, is weighing on the economy?

ERIC ROSENGREN: So, we care about the overall economy right now. So, my forecast for the economy is roughly 2% growth for this quarter and continued around 2% growth over the rest of the year. So, is the trade sector slowing us down relative to where we otherwise would be? It certainly is. Is it slowing us down enough that I would be concerned? Not if we're growing at 2%. And that's because the consumer is also having a lot of good news. The stock market is at a high. The unemployment rate is at a low.

SARA EISEN: A lot of people think the stock market is at a record high and has taken this leg higher on expectation that the Federal Reserve is going to be cutting interest rates. So, do you factor that into your thinking when it sounds like what you want is not a cut and that would be a disappointment to the market?

ERIC ROSENGREN: So, one of the financial stability concerns is you want sustainable growth over time. And if you push financial markets too much, if you look at the last two recessions-- the recession with the dot-com bubble was that stock prices became too inflated and had to come down. And certainly, the financial crisis, it wasn't just the stock market, but it was certainly a contributing factor in why the economy got so weak. So, we should care about financial stability. The last two recessions have a very large financial stability component. So, we don't want interest rates to be so low that we push asset prices only temporarily up, only to be disappointed as time goes on and have more of a reaction on the negative side when the economy does slow.

SARA EISEN: Isn't that what's happenin, though?

ERIC ROSENGREN: Right now, it's all on the upside. But, I think as long as the economy's doing well, if that continues, we don't need accommodation.

SARA EISEN: Do you feel pressure by the fact that other central banks have sort of kicked into easing year-- this year, including some of the biggies, like you mentioned, the ECB?

ERIC ROSENGREN: Well, the other countries are in a very different place. So, their unemployment rate is not at 50-year lows and their stock market is not at all-time highs. So, each country has to decide for its own situation what appropriate monetary policy is. The fact that other countries are in a much weaker situation, it makes sense if I was in Japan or if I was at the ECB, that I'd seriously be thinking about easing. The U.S. economy is not at that point. The economy is actually quite-- quite reasonable at this stage. So, if that were to change, I'd be happy to ease at that point. But, I don't want to ease if the economy is doing perfectly well without that easing.

SARA EISEN: So, who's-- who's going to have a tougher job, Christine Lagarde or Jay Powell?

ERIC ROSENGREN: I think everybody has a tough job in central banking.

SARA EISEN: Another question. There has been a nomination, Judy Shelton, and-- for the Federal Reserve Board of Governors, obviously has to get Senate confirmation. She's been an advocate of the gold standard and this idea of sound money. Do you think that's a health conversation to have right now inside the Fed?

ERIC ROSENGREN: So, we welcome diversity of views. My own personal view is that we're not likely to go on the gold standard and that, in the kind of economy we have right now, that's an unlikely outcome. But, I welcome a diverse opinion on the board.

SARA EISEN: Speaking of diverse opinions and options, Libra, Facebook's cryptocurrency, has gotten a lot of attention. Threat or not a threat for central banks?

ERIC ROSENGREN: We need to get more details about exactly what they're thinking about doing. I do think there are a lot of things to be worked out. Money laundering, Bank Secrecy Act, those type of issues are issues that I think we have to be very thoughtful-- thoughtful about. So, I think we'll have to see how the conversation develops over time.




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Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver