Fed Governor Lael Brainard: Trade War’s Impact On The Economy

CNBC Exclusive: CNBC Transcript: Fed Governor Lael Brainard Speaks With CNBC‘s Steve Liesman On “Squawk On The Street” Today

Fed Governor Lael Brainard

Image source: CNBC Video Screenshot

WHEN: Today, Wednesday, November 20th

WHERE: CNBC’s “Squawk on the Street”

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Fed Governor Lael Brainard on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Wednesday, November 20th. Following is a link to the video on CNBC.com:

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Steve Liesman: good morning, carl. Thanks very much inside the federal reserve special library with Federal Reserve Governor Lael Brainard thanks for joining us.

Lael Brainard: thanks for inviting me.

Liesman: so a couple months ago when we thought about doing this interview the idea was maybe there was going to be a trade deal and I would have been interested in your comments about how to incorporate that into the outlook but there is none now, at least not yet how do you think about that? How does the trade dispute or trade war as it’s going on factor into your outlook?

Brainard: well, I would say over the course of the last year trade uncertainty has been a major theme and we see it in the decline in business investment, we see it on exports and we see it in the manufacturing sector so trade uncertainty has been a major factor weighing on the economy for the past year.

Liesman: did you factor in the idea that perhaps there would be some easing of trade this year and that tariffs would not go up?

Brainard: so it’s certainly the case that as I’ve thought about my outlook, prominent among the down side risk to that outlook has been trade conflict and we’ve taken out some insurance against that, but we still hear from our business conflicts -- contacts that they’re sitting on the sideline waiting for some of this uncertainty to be resolved. I don’t think the expectation is for a major deal, but even a truce would be a significant reduction in uncertainty for a lot of businesses around the country that are sitting on the sidelines in terms of investment.

Liesman: how would it change your outlook if there were additional tariffs in december?

Brainard: well, certainly that would be a negative factor. That would be a realization of some of that downside risk that we’ve been seeing, but some of the research that we see suggests that just uncertainty alone can be a factor for reducing business confidence and reducing business investment, we think we’ve seen that in the data.

Liesman: definitely in your prior life and to some extent in your prior life with the treasury you were deeply involved international economies and with international economic relations. How much does the trade war bear responsibility for the global economic weakness or is that a separate phenomenon?

Brainard: yeah, so I think it’s hard to pull those apart they are completely intertwined for china, of course, china already had some big imbalances in domestic credit that it was working through and trade conflict has greatly exacerbated the challenges that they’re facing, but if you look at the euro area, their brexit has been a factor, but there are other factors that are also affecting the euro area outlook. And japan, too, has been certainly affected by trade conflict in the region, but there’s some internal factors that are also weighing on their growth prospects.

Liesman: if you put it all together, the new york fed’s now cast, the atlanta fed’s gdp now they are both at 0.4% for the current quarter. Is that where you are in terms of thinking about economic growth right now?

Brainard: yeah, so that’s quite a bit lower than a lot of the consensus forecats that are out there. I mean, I think we did have some strength in the first half, we expected somewhat of a moderation, we’re seeing that in the second half, but just don’t forget the u.S. Consumer, the u.S. The consumer has proven enormously resilient if you look at retail sales, if you look at consumer sentiment the u.S. Consumer continues to feel good about the job market and the job market continues to be strong. Most of the businesses that we talk to that are consumer facing continue to be quite upbeat.

Liesman: so our cnbc rapid update which we take a median of all the tracking drafts is at 1.5. Can you tell us where you are for this quarter and your outlook say for the next year?

Brainard: yeah, so I can’t give you my precise forecast but I will say that we have seen a bit of slowing, which I would expect. We also saw some special factors weighing on the manufacturing sector that we will begin to see turn around in the first quarter of next year, so we will see some bounce back from those special factors there, but certainly if I look out over the next year, you know, I see the economy growing slightly above trend, I see continued tightening in a very strong labor market and I see inflation continuing to move up two and hopefully a little bit above 2%.

Liesman: a lot of wall street economists think the fourth quarter or perhaps the first quarter of 2020 is the bottom of the slowdown is that kind of how you see it cycling out?

Brainard: so, you know, it really matters here whether you’re talking about the slowdown in manufacturing and trade globally, and I think that’s still a question mark, but certainly in terms of the domestic economy, again, powered by the consumer I do expect to see a trend or above trend growth actually continuing out over the course of the next year, year and a half.

Liesman: I want to ask about your policy outlook, but I’d like to ask you first about the president who says that rates should be used to weaken the dollar and that u.S. Rates should be below european rates does that make sense to you?

Brainard: so we have a framework under law that we operate under and so we are according to law asked to set interest rates to keep the economy with the labor market operating at maximum employment and inflation coming at 2%, which is our target, and that’s the set of criteria that we use in assessing the appropriate path of policy rates I will say relative to some of the jurisdictions where you see negative rates today our economy is just much stronger.

Liesman: would you use rates to weaken the dollar and help the manufacturing industries?

Brainard: so, again, that’s outside of our statutory framework. Our statutory framework is very clear, we are supposed to use monetary policy to achieve maximum employment and inflation target and, you know, we’re pretty pleased with the labor market, you know, we’ve seen the employment to population ratio returning to pre crisis peaks, we’re seeing more people coming into the labor market, we’re seeing consumers feeling good about their job prospects. So we’re really seeing a lot of progress there inflation has been slower, but it’s certainly something that we’re going to track and make sure that we see 2% inflation, which is our target.

Liesman: the market took a strong message of pause from the last statement and the chairman’s last press conference. In fact, the december fed futures was trading with a 0.8% chance of a rate cut, which means in a room of 100 people you can’t get one full person to say the fed is going to hike in december is that the right message to have taken from that.

Brainard: well, I can certainly tell you my own thinking is that the committee has made pretty substantial adjustment in the path of rates over the last few meetings three rate cuts and, you know, it will take some time to see that work through the economy. So I certainly want to monitor and assess how the economy is reacting to those cuts we’re starting to see some improvement in residential investments and turn around there which is the kind of thing you would expect to see in a lower rate environment so I think for my own part I want to monitor, I want to wait for a little bit as I assess how the outlook is adjusting.

Liesman: one of the assessments out there right now is that there’s two bars, one to hike and one to cut, but that the bar to hike is quite a bit further, that the fed is no longer normalizing rates for normalizing sake, but that the only reason it would hike is if inflation were higher above the 2% target for a sustained period. Is that a right way to think about it is the bar relatively low to cut but relatively high to raise?

Brainard: I think, first of all, I would be looking carefully at incoming data and seeing whether there is some set of factors that calls for a material kind of change in the outlook which would lead me to want to reassess that rate path. So I’d really be looking for material change. In terms of how do I see the balance of risks, certainly the balance of risks has been tilted to the downside for some time as we assess potential upside risk to the economy, they just seem to be somewhat less prominent than the risks that we talked about earlier which are risk of trade conflict, risks of global slowing.

Liesman: a big portfolio inside the fed here and I want to get to all of it, but one area where you specialize is on this idea of financial stability and it’s not unrelated to the discussion we just had. With rates down the market is at an all time high or near one almost every day, do you worry about systemic risk building in markets, particularly fueled by low interest rates?

Brainard: I do worry about financial imbalances rising in this environment. We certainly called out in our financial stability report the risks associated with a low for long environment globally, which is greater accumulation of debt, greater reach for yield behavior and the one area where I’m seeing some imbalances that I think merit heightened vigilance is in the area of business debt, particularly debt among risky business borrowers and credit spreads in that area are low relative to historic levels which that combination we’ve seen in previous business cycles tends to amplify any downward shocks.

Liesman: so what do you want to do about that? I mean, also what about the stock market as well being at all time highs?

Brainard: yeah, so in my own kind of assessment the way that we should be addressing those financial imbalances that are building is through macro prudential tools, through building greater buffers that would help to cushion any amplification of shocks to the downside you know, we are actually not doing as much of that as I’d like to do, I’ve proposed turning on the countercyclical buffer, it was intended to be used for precisely these kinds of circumstances, others haven’t shared my assessment, but those are the kinds of macro – what we call macro prudential tools that I think are appropriate I don’t see monetary policy as the first line of defense.

Liesman: I’m sorry to keep coming back to this, but with the stock market at all time highs, does that also give you concern is that something that the fed should be addressing?

Brainard: so we don’t look at any particular set of valuations, we really look for broader patterns of valuations in a variety of markets that might be out of line with either historical norms or kind of fundamentals, relationships, and that’s the basis on which we make our financial stability assessments and as I said earlier, the thing that I’ve been very focused on is that area of business debt, particularly to the riskiest borrowers.

Liesman: you recently gave an in-depth speech about climate change and said that the federal reserve needs to be involved with assessing this the journal wrote an editorial that said bankers aren’t climate scientists. How do you respond to that?

Brainard: yeah, so I think financial sector participants and central bankers both do and have historically taken into account all of the material risks to valuations, to the economy and that’s appropriate you think about globalization, for instance that was very pertinent to us in terms of monetary policy, it was very pertinent to financial markets, risk assessments. Climate change by all accounts is going to have important impacts differentially across the economy over a long period of time.

You just look at areas that have been afflicted by wildfires or by more frequent historic levels of flooding. Those areas you may find that property becomes unsureable. That’s a risk for financial institutions that may be holding some of those loans on their books. So already we’re seeing ratings agencies looking at this, the insurance sector taking a very close look at it and of course banks are also assessing their risks and in our kind of risk management framework we would expect them to be taking those risks into account.

Liesman: governor brainard, thank you for joining us.

Brainard: thank you.



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