Richard Harris Clarida on the Coronavirus’s economic impact

The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Reserve Vice Chair Richard Harris Clarida and CNBC’s Steve Liesman on CNBC’s “Squawk Box” (M-F 6AM – 9AM) today, Thursday, February 20th. The following is a link to video of the interview on

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Federal Reserve Vice Chair Richard Harris Clarida on the Coronavirus's economic impact

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ANDREW ROSS SORKIN: We’re going talk a lot more about the economy right now, potentially hurdles ahead. In yesterday’s latest release of minutes from the Federal Reserve, officials expressed some alarm about the possible economic impact of the Coronavirus. And Steve Liesman joins us with a special guest on this and so much more. Steve?

STEVE LIESMAN: Andrew, thank you very much. Good morning from the Federal Reserve. We’re here with Federal Vice Chairman Richard Harris Clarida. Vice Chairman Clarida, thank you for joining us.


STEVE LIESMAN: I really want to start – I wasn’t planning to start -- I want to jump off this Philly Fed number. And I think I’ll say what you said during the break, you said, "that’s a beat." The estimate was 8. 36.7, Rick says it’s a 20-year high. What do you make of that?

RICHARD HARRIS CLARIDA: Well, look, I think the fundamentals of the U.S. economy were solid in 2019 and continuing into 2020. Obviously, that’s one number. I haven’t seen it in advance. But absolutely, the fundamentals in the U.S. are strong, sustained growth, the strongest labor market in 50 years, price stability with inflation close to our goal. So, yes, it’s a good picture.

STEVE LIESMAN: And when you see a jobless claims number which seems to be permanently below this—I don’t know, if I said 220, I know I’d be accurate, but I could be accurate if I went skinnier at 210. What does that tell you about the job market and where payroll—

RICHARD HARRIS CLARIDA: Well, historically, you know, jobless claims are an important indicator of the state of the labor market. And it reaffirms what I just said, the labor market is very strong and robust and that’s a huge positive for the economy. And of course, as you know and your viewers know, Steve, we have a dual mandate, maximum employment and price stability. So, it’s good news that we’re operating here.

STEVE LIESMAN: I want to pick up on the Philly Fed number. Which obviously, you didn’t see the details, I didn’t see them. One of the things in the minutes yesterday did say their trade tensions had come down, and Rick talked about this idea that, is it possible we could be seeing the early stages of a turn-around in business investment after the decline of the uncertainty from the trade deal?

RICHARD HARRIS CLARIDA: Well, there are two pieces to that, Steve. So, let me address both. I think there’s no doubt there’s been a decline in trade policy uncertainty. We have USMCA. We have Phase One of U.S./China. And obviously Brexit has occurred. We’ve seen that. And so, there’s less trade policy uncertainty. And to the extent that was a factor holding back investment, that should be a positive. This year, obviously financial conditions are certainly accommodative, policies policy accommodative. So, I think, coming into the year, certainly I was open to the view that we could see a rebound in business investment. And, of course, the housing sector has been strong and will continue to support growth.

STEVE LIESMAN: Let me turn to another issue you talked about in the minutes yesterday which was the Coronavirus. And I want to ask you about your sort of daily routine. Do you watch data about the Coronavirus every day now? And what are you watching?

RICHARD HARRIS CLARIDA: Well, Steve, obviously we have a very capable staff here, who is doing that. And I’m getting either verbal or email briefings on that. And --

STEVE LIESMAN: On a daily basis?

RICHARD HARRIS CLARIDA: Certainly, I’m getting daily emails on it. Yes. And what I would say about that is obviously let’s begin with this human tragedy for all those afflicted with the Coronavirus in China. It’s obviously something that is probably going to have a noticeable impact on Chinese growth, at least in the first quarter of this year. And we won’t know that really until April when we get their GDP statistic. But what Chairman Powell and we have said, is vis-a-vis the U.S., what we would be looking for is some body of evidence that suggests we need to make a material reassessment of our outlook. And certainly, we have not done that yet. But we are monitoring it because China is a huge part of the global economy.

STEVE LIESMAN: I’m interested, though, in how you think about this.


STEVE LIESMAN: How--what’s happening in China, with the shutdown of factories, the cut-off of tourism, how do you expect that will affect the U.S.? Where will you be looking for how it will affect the United States?

RICHARD HARRIS CLARIDA: Well, I think there are several different pieces, Steve. First of all, there is exports to China, and obviously part of the commitments in the Phase One deal was for U.S. exports to China to ramp up. So, obviously, we’ll be looking at that. Supply chains are very important, so to the extent the supply chains are disrupted by the Coronavirus, that could show up in terms of inputs to the U.S. economy. And obviously, you have the effect overall in global economic activity. So, we’re really looking at multiple indicators right now. But I think the fair point is sitting here in February, it is too soon to tell you about. But we’re monitoring closely.

STEVE LIESMAN: Is it something that--how do you make a distinction between something that you write off, in other words it’s just a one quarter or two quarter phenomenon, and something that’s more inherent or important to development to the U.S. economy?

RICHARD HARRIS CLARIDA: Well, again, that’s a judgment call, and we’re going to be looking at a broad range of data on that. And I think the fair thing is it is just too soon to tell. We are tuned to it, and it’s obviously is something that we should be, and we are monitoring closely.

STEVE LIESMAN: We turn to what’s been going on with the market right now. And I note you were at PIMCO for a dozen years.


STEVE LIESMAN: And so, you have a keen sense of what’s going on. Right now, they’re pricing a rate cut in July.


STEVE LIESMAN: 60% probability, something along the lines. How do you react to that?

RICHARD HARRIS CLARIDA: Well, Steve, first of all, and you and I have discussed over the years, market pricing on rate cuts is a little tricky, because there’s the market expectation for rates, there can also be terminal liquidity premiums. So, what I prefer to look at surveys that many folks do of market participants about what they think we’ll do. So, I just checked my stream this morning on Bloomberg, and they survey about 70 Wall Street economists, and asking them where they think the Federal Fund rates will be at year end. And of the 70 that they reach out to, 50 do not think there will be a rate cut. So, there’s obviously a probability of outcomes. But, I don’t think when you ask folks, they’re pricing in that rate cut, even though market pricing might suggest that.

STEVE LIESMAN: When you look at the level of the stock market, there are a lot of comments in the minutes yesterday about asset valuations being high. Do you worry about the level of the stock market here?

RICHARD HARRIS CLARIDA: Well, let me talk more broadly about financial conditions, Steve. And what we do here at the Fed is we really look at four aspects. We look at valuation. And we also look at leverage. We look at capital in the financial system and liquidity. And if you look at all four of the metrics together, I would judge that right now, financial stability risk to the U.S. are moderate. Obviously, we can point to different measures of equity valuations.

Those tend to be sensitive about what you use in terms of the level of interest rates. And so, we have a world where equity valuations are what they are. But we’re also in a world of structurally low equilibrium interest rates.

We’ve got negative rates in Europe. So, you have to factor that into the equation. For example, corporate borrowing costs are low but so are the underlying risk rates. So, corporate spreads are certainly not unusual right now. So, I think the overall picture, Steve, is that financial stability risks are moderate. But we are closely monitoring the financial system as we should.

STEVE LIESMAN: Do you worry that what the Fed has done in terms of inserting a lot of liquidity into the market through the purchases of treasuries and the repo operations you’ve done have created the recent boom in the stock market?

RICHARD HARRIS CLARIDA: Let’s talk a little bit about these operations. We’ve had them in place really since September to deal with the very specific issue, which was the disruption in the repo market, as you know, the market for securitized lending against treasuries. We had been providing liquidity, both through repo operations and expanding our balance sheet. The intent of these programs is really just to get liquidity levels in the repo market to levels consistent with our ample reserves goal. We have announced that we are going be planning to scale back the T-bill purchases in June and the reliance on repurchase operations as well will recede. So, certainly, we view this as really a technical adjustment to a technical problem.

STEVE LIESMAN: It’s about the connection between the stock market and the repo operations.

RICHARD HARRIS CLARIDA: I guess I will leave that for others to judge. But certainly, the intent of the program is really focused on that repo issue right now. And we think that the program that we put in place in October has been successful, and we are planning to wind that down, as we indicated at our January meeting.

STEVE LIESMAN: Vice Chairman thank you for joining us this morning.

RICHARD HARRIS CLARIDA: Well, thank you, Steve.

STEVE LIESMAN: Okay, great. Back to you guys at the Nasdaq, from the Federal Reserve.