Richard H. Clarida on Fed Policy: We Will Act On Repo Rates If Needed

CNBC Exclusive: CNBC Transcript: Federal Reserve Vice Chairman Richard H. Clarida Speaks with CNBC’s Sara Eisen Today

Richard H. Clarida

Image source: CNBC Video Screenshot

WHEN: Today, Friday, September 20, 2019

WHERE: CNBC’s “Squawk on the Street

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The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Vice Chairman Richard H. Clarida and CNBC’s Sara Eisen on CNBC’s “Squawk on the Street” (M-F 9AM – 11AM) today, Friday, September 20th. The following is a link to video of the interview on CNBC.com:

Watch CNBC's full interview with Fed vice chair Richard H. Clarida

 

SARA EISEN: Thanks, Carl and David. And good morning from the Federal Reserve. I’m here with the Vice Chairman of the Fed Richard H. Clarida. Thank you for taking the time. Big week for you guys. Big day as we close in on record highs. Biggest surprise I think out of the Fed is that the divide inside the Fed is growing. Why is that?

RICHARD H. CLARIDA: Well, you know, Sara, first of all, we have 17 folks around the table and the Fed has a long tradition of candid frank discussion about the economy. I think it’s the strength of our system. Chair Powell indicated that the other day. I think what it indicates is the economy is in a good place, but in the 11th year of an expansion there are also some risks. And the committee is looking at those risks and making a judgment on where to set policy. But we think that is healthy. And where the committee is united is our common goal, which is to sustain maximum employment and price stability. And that’s important.

SARA EISEN: But it’s a little confusing as far as the outlook, where seven members say there will be another cut this year and 10 members say stand pat or raise rates. What’s the market supposed to take away from that?

RICHARD H. CLARIDA: Well, I think what the market is supposed to take away from that is that there’s a range of views on the committee right now about the appropriate level of raise to sustain expansion. We all agree that we’re in a good place and we all agree that the momentum is solid, but there’s a range of views. I think it really comes down also to risk management. As Chair Powell said, we think that the adjustment we made this week and in July is providing some insurance against some downside risk to a favorable outlook.

SARA EISEN: So two insurance cuts. How much insurance do you need to buy -- this economy?

RICHARD H. CLARIDA: Well, of course, and I’m going to say probably what you expect, we’re going to take this meeting by meeting. We’re not on a preset course. And as we get into the October meeting and beyond, we’ll take it on a case by case basis. But again, we will act as appropriate to sustain a strong labor market and price stability.

SARA EISEN: One of the dissenters – well, two dissenters were out this morning, St. Louis Fed President James Bullard says you need to be more aggressive. He’s in favor of 50 basis point cuts, saying that he believes lowering the target range for the Fed funds rate by that amount at this time would provide insurance against further declines in expected inflation and a slowing economy, subject to elevated downside risks. Why not do more?

RICHARD H. CLARIDA: Well, again, Jim expressed that view and we understand that. Of course, there are views on the other side as well from the other dissenters, but I think the center of gravity – clearly the center of gravity on the committee is that the second adjustment was appropriate. And, again, going into October and beyond, we’ll go one meeting at a time.

SARA EISEN: Yeah, Rosengren also out this morning saying that this move risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage. Why is he wrong?

RICHARD H. CLARIDA: Well, we look at financial stability on a regular basis on the committee and we assess financial stability. And right now, we as a committee do not see those elevated risks. We’re very attentive to that. We’re very focused on that. I think President Rosengren was making a general point about past situations. But I think where we are right now, the committee thinks that we’re in a good place.

SARA EISEN: How likely is it that we just saw the final cut of the year?

RICHARD H. CLARIDA: I didn’t want to put probabilities on it. Again, as the Summary of Economic Projections indicated, seven participants thought that under the baseline view that further adjustment would be appropriate policy. But again, that’s not a commitment. We didn’t vote on it. We’ll take it on a case by case basis. But again, we’re going to be very attentive to the data, not only the baseline data but the risk to the outlook.

SARA EISEN: So, risk to the outlook, how much depends on what happens between the U.S. and China on trade?

RICHARD H. CLARIDA: I think that’s an element of it. Let me talk more broadly, Sara, about the risk. So, we clearly have a slowing global economy. The OECD just this week marked down its global outlook. Obviously, the U.S./China relationship is important. But there’s a broader global slowdown. There is a slowdown in global capital spending and global manufacturing. And there’s also some pretty important disinflationary forces. But obviously U.S. and China are part of that. And we refer to trade policy uncertainty as a factor in this. But it’s not the only factor.

SARA EISEN: So, global growth slowdown, trade policy uncertainty and disinflationary pressures. Are those all getting worse or better right now?

RICHARD H. CLARIDA: Well, certainly relative to where we were at the beginning of the year, I think they’ve been getting worse. And certainly, I think the global economy in terms of projections for global growth have been marked down since July. For example, the OECD downgraded it relative to this summer. So, I think in terms of global growth it’s getting worse. In terms of global trade and global investment, it’s been pretty soft for a while now.

SARA EISEN: Have you been surprised to see the resilience of the U.S. economy in the face of a worsening global economy?

RICHARD H. CLARIDA: You know, Sara, I’m not surprised in the sense that the U.S. economy is a resilient economy. You know, we have really been the star pupil in the class of the global economy for some time now, with a, you know, very strong labor market, strong growth, and low inflation. And I think a lot of other countries in the world would envy where we are right now. So, you know, I’m not surprised by the resilience, but we don’t take it for granted either. So, that’s why I think the risk management approach that Chair Powell outlined is the appropriate place to be right now.

SARA EISEN: Do you feel that you tightened too much last year?

RICHARD H. CLARIDA: You know, Sara, I don’t like at it that way. We take these decisions a meeting at a time. I think what’s important, and of course you know, I discussed this in April, what’s important is that Chair Powell communicated early in year that we would be adopting a patient stance for policy. And of course, we were very patient from January until July of this year. And the economy has done well this year. Both in terms of underlying growth and labor market. So, we’ll just take it one meeting at a time.

SARA EISEN: You mentioned we’re the star pupil in the world, in terms of economic. Do you care that the trade weighted dollar index is near the highs and continues to rise?

RICHARD H. CLARIDA: Well, Sara, as a Federal Reserve Vice Chair, one the first things you learn is that the Treasury Secretary is giving the U.S. view on the dollar. So, I’m not going to comment on the dollar.

SARA EISEN: Do you think it’s hurting the outlook?

RICHARD H. CLARIDA: Well, what we can say is that financial conditions are a part of the outlook. The dollar is a piece of that. But also, credit spreads and equity values. And of course, dollar exchange rates up move up and down for a variety of reasons. And that’s all I’ll say about that.

SARA EISEN: So, the other global growth story is the tremendous amount of negative yielding bonds right now. $17 billion. How do you see that? Is that problematic?

RICHARD H. CLARIDA: Well, I won’t -- first of all, it’s a symptom of very, very slow growth and powerful disinflationary forces in Europe and Japan. You know, I meet with European colleagues on a regular basis and Japanese colleagues. And certainly, they would like their economies to be away from negative rates because it’s really a symptom of the challenges they face. But importantly, and of course as your viewers understand, the U.S. is part of a global capital market so those negative rates impact our capital markets in some complex ways. And we have to factor that in to take that into consideration.

SARA EISEN: How is that? Is that the explanation for the unburdened yield curve and the veracious demand for U.S. debt?

RICHARD H. CLARIDA: Well, that’s certainly an element of it. We’re in a global capital market and I think, I myself think, a lot of the reason for the flattening of the yield curve this year was capital flowing in the U.S. to take advantage of our higher yields compared to Europe. So, I think we have to factor that into the yield curve and we have to factor that into the low level of treasury yields and other elements of the economy. But yes, it’s a big factor.

SARA EISEN: The President on Twitter, and I know you’re not going to go there on the politics or the Tweets, but he puts out this idea that it’s an enviable position, that governments can borrow for nothing or even get paid to do so. And that their currencies are much weaker. And therefore, they’ve got the edge in this global competition. Is that a valid argument?

RICHARD H. CLARIDA: Well, again, I think -- the way that I think about it, Sara, is that those negative rates and those low rates are a symptom of very, very slow growth. The European economy is growing at about half the pace of the U.S. economy. In japan they’ve been fighting off deflation now for two decades. So, I think the U.S. economy is in a much better position now, even though our rates aren’t negative. That’s a symptom of strength, not weakness.

SARA EISEN: And the Chairman says he does not think we are going down the path of negative rates.

RICHARD H. CLARIDA: Well, let me just restate what the Chair did say which is that the Fed looked at the possibility of going to negative rates after the financial crisis, and it decided that, in the U.S. context, that that was actually not a desirable place to go. And it’s certainly not something that I anticipate that we would be considering.

SARA EISEN: Is the takeaway from that that you would be reluctant to lower rates further from here, because you don’t want to have to get to a place where you’d have to do that during a recession?

RICHARD H. CLARIDA: I think, Sara, what the evidence shows and what our thinking shows is that the Federal funds rate is our primary instrument and we have the ability to use that instrument. And in particular, because we face potentially, in a future downturn, hitting the zero down, I think our thinking indicates that it’s important to act when you can, responsibly and preemptively to try to stay away from that bad situation.

SARA EISEN: Talking about acting preemptively to stay away from bad situations, fourth day of repo operations from the New York Fed. Talk to us about the level of alarm bells that is setting off inside the Federal Reserve and how you guys are seeing that turbulence.

RICHARD H. CLARIDA: Okay, so -- excellent question. So, let’s provide a little context. And so, this week, there were some shocks in the repo market, and really due to two factors. One, some poorly tax payments and the need for primary dealers to finance some treasury holdings that they had acquired. We and others in the markets expected some adjustment upward in repo rates and I think the reality is that the upward adjustment in the market was larger than the markets than we expected. We acted decisively on Tuesday and the rest of this week by doing very simple overnight repo operations to provide liquidity.

The technical point is the instrument of our Federal funds rate, not the repo rate. But the two markets are obviously connected. So, repo dislocations did spill into Federal funds. And as we’ve indicated in all of our statements, the objective of our policy is to keep the funds rate in that range. And when there is a risk that goes above that range, we have said we will act and we did act.

SARA EISEN: But it’s not normal, right, what you’re having to do. So, is it a sign that people should be concerned about –

RICHARD H. CLARIDA: I don’t think -- it’s not a sign of concern about the economy. The economy is in a good place. BUT it is an indication that the repo markets and the Federal funds markets are absorbing some supply now and there are some adjustments there that we’ve been making.

SARA EISEN: Chair Powell mentioned that he would be willing to expand the balance sheet organically in order to deal with this. How do you think about this? QE?

RICHARD H. CLARIDA: Let’s talk about that. First of all, in July, at our July meeting, we made the decision and then announced that we were going to stop shrinking our balance sheet. So, the balance sheet been constant for almost two months. We’ve also indicated repeatedly throughout the year at some point we would revisit that decision and we began to let our balance sheet grow organically. As Chair Powell indicated at the press conference, we will be discussing that. That will be on the agenda at the October meeting. Let me just say when that process commences, it will not be QE.

It’s just central banking 101. Essentially, Sara, currency is our liability. So, as the demand for currency goes up, in order to keep the financial system in a good place, you essentially have to provide that liquidity by allowing the balance sheet to grow organically. It was true before the crisis and it would not be QE.

SARA EISEN: So then, don’t call it QE. Got it. Wanted to also ask you about oil, huge story this week. Big spike. Does that change the outlook at all?

RICHARD H. CLARIDA: Sara, you know, I began my career decades ago -- in college in the 1970s and oil shocks were a big part of the economy. Our economy is much different than it was then, for a couple reasons. One, we produce a lot more oil. We still import or net some oil but much less. So, when oil prices go up, they do have an impact -- you know, gasoline prices go up. On the other hand, oil producers in the U.S. do well. So, our metric estimates indicate that the U.S. is much less sensitive to oil shocks than it was decades ago. And of course, you know, obviously since the initial move up earlier this week, oil prices have come down somewhat, as well.

SARA EISEN: Also raises the question about the resilience of the U.S. consumer. It has remained strong throughout some of these head winds. How much confidence do you have that the consumer can continue to be strong and carry this economy?

RICHARD H. CLARIDA: I have a lot of confidence. The consumer, in my professional career looking at economics, I cannot think of a time when in the aggregate the consumer has been in better shape. The savings rate which I view as a robustness feature is elevated. So, households are now saving which means they have an opportunity to boost consumption. Household net worth is at high levels. The level of distress in the household sector is low. And obviously, employment gains are strong. Wages are growing up. So, we’re in a virtuous circle with the consumer. And of course since consumption is nearly 70% of the economy, it’s good that the consumer is in good shape.

SARA EISEN: Finally, Fed Listens. Tell us a little bit about this effort, what you’re learning from the regional Feds and how you might change your communication as a result. I know it’s an important effort for you.

RICHARD H. CLARIDA: Well, thank you, Sara, for asking. You know, Fed Listens is an innovation that Chair Powell has put in place. And essentially what we’re doing is we’re going around the country -- by the end of October, we will have done 14 Fed Listens events in every Federal Reserve district and here at the Board of Governors -- and the key point about Fed Listens is we’re listening, we’re not doing the talking.

And, in particular, we’re casting a wide invitation list to hear from folks beyond, you know, bankers and academics. So, we’re hearing from labor leaders, small business people, folks involved in education and training. And I think I would say two things, Sara. The first thing that we’re learning is the really substantial and important benefit of operating an economy at full employment.

The real important gains across the economy to having a strong labor market. And we’re also hearing the importance of price stability on both sides. You know, we don’t want to go back to the bad old days of hyperinflation or double digit, but we don’t want to go to the Japanese situation of deflation. So, I think we’re hearing those -- on both sides.

SARA EISEN: Where are we on inflation?

RICHARD H. CLARIDA: Inflation right now, Sara, on our preferred measure, which is the PCE Index, is starting to trend up towards 2%. As Chair Powell and others have indicated, I’ve indicated, over the past eight years our preferred measure of inflation has been running below 2% and we do think it’s important to put in place a policy in which inflation will eventually operate at our 2% objective.

SARA EISEN: Without giving a hint as to the next move, thank you very much for having us here at the Federal Reserve.

RICHARD H. CLARIDA: Well, thank you, Sara.

SARA EISEN: The Vice Chairman of the Fed.




About the Author

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