Fed V.C. Richard Clarida: “Tt’s been a very gradual cycle”

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CNBC Exclusive: CNBC Transcript: U.S. Federal Reserve Vice Chairman Richard Clarida Speaks with CNBC’s Steve Liesman Today

WHEN: Today, Friday, November 16, 2018

WHERE: CNBC’s “Squawk Box

The following is the unofficial transcript of a CNBC EXCLUSIVE interview with U.S. Federal Reserve Vice Chairman Richard Clarida Speaks and CNBC’s Steve Liesman on CNBC’s “Squawk Box,” (M-F 6AM – 9AM) today, Friday, November 16th. The following is a link to video of the interview on CNBC.com:

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Watch CNBC's full interview with Fed vice chairman Richard Clarida


JOE KERNEN: Federal Reserve Vice-Chairman Richard Clarida is joining Steve Liesman live from Washington this morning. Take it away, Steve. We’re looking forward to it.

STEVE LIESMAN: Joe, thanks very much. I am here live from the Federal Reserve with newly installed Vice-Chairman Richard Clarida. He took office in mid-September. Thanks for joining us Mr. Chairman.


LIESMAN: I think the place to start is what’s going on in markets these days. It seems like it’s been down a lot. Maybe 4%, 5% off the highs. What kind of signal do you get economically from these gyrations in the market?

CLARIDA: You know, so far, Steve, I don’t think there’s any clear signal. You know, it’s hard even after the fact sometimes to attribute any given move in markets. You know, year to date, the stock market is up and there’s some volatility. So I think right now there’s no clear signal that I would take from it.

LIESMAN: We have several people who are coming on our air these days saying that the – this is the result of the market thinking the fed the going too far too fast.

CLARIDA: Well first of all, Steve, the Fed began hiking rates three years ago. And so it’s been a very gradual cycle. You know, the economy is growing north of 3%. Unemployment’s at a 50-year low almost. And so I think also right now, you think at the policy rate we set, the federal funds rate is now just barely above the rate of inflation for the first time in a decade. SO i wouldn’t agree with that.

LIESMAN: Do you see any signs that the economy is slowing? You’ve been raising interest rates for three years. Is it having an effect in slowing the economy?

CLARIDA: The economy this year as I said is going to be growing at a pace we haven’t seen in a decade. Going forward, you have to look at a lot of trends including the global economy, I think, is something they have to pay attention to. Some evidence that it’s slowing. So I don’t see that now. But I think broadly we’re going to set a policy that we think will help us achieve the mandate given to us by congress. We’ve got a strong labor market. We want to keep that. And we want to keep inflation around 2%.

LIESMAN: November is right around the time you start thinking about forecasts for next year. Could you give us your outlook next year, both when it comes to interest rates and when it comes to growth?

CLARIDA: Thank you, Steve. You know, the Fed, we’ll be going through our forecasting round at the December meeting. I don’t want to front run that either –

LIESMAN: It’s okay – you can’t do that -- it’s fine.

CLARIDA: Of course. But in terms of rates, I think it’s important to note As I said that this process has been gradual. I think that served the fed well. If you look at the S.E.P. projections that we released in September, they show a range for continued projection next year some officials seeing two or three hikes. What I want to emphasize, Steve, to you and your viewers is at least from my perspective: we’re at a point now we really need to be especially data dependent. The economy’s doing well. We’re looking for signals from the labor market, from inflation, to get a sense of both the pace and the destination for policy. So this is very much in data dependent mode right now.

LIESMAN: Is that a shift from where we were? Were we at a place where it was kind of like we needed to get rates up?

CLARIDA: Exactly.

LIESMAN: And have we now reached the point where we could -- I guess the best thing is sort of come through the woods and then sort of take a look around now?

CLARIDA: I think you said that very well. You know, I wasn’t here three years ago, but three years ago under Chair Yellen’s leadership, the Fed decided that it was time to get away from zero. And I have to imagine that everyone around that table agreed that ultimately rates needed to be above zero. Those are emergency interest rates. And so, I think in that point data dependence was perhaps a little bit less relevant because there was full agreement to get the policy rate up towards a more normal level. As you move into the range of policy that, by some estimates is close to neutral, then with the economy doing well, it is appropriate to sort of shift the emphasis towards being more data dependent. I think Chair Powell the other day made the analogy in Dallas, you know, about if you’re in a darkroom, especially without your shoes on, you want to go slow so you don’t stub your toe. So I think data dependence makes sense right here.

LIESMAN: You said move into the range. Are we at neutral now? Are we -- how far from neutral are we?

CLARIDA: Well, as you know as a student of the Fed, we plot our long-run policy rate projections four times a year. And as of September, the long run neutral policy by members of the committee was in a range of somewhere between 2.5% and 3.5%. So currently the policy rate is below that range. But as you can tell, it’s getting closer towards the vicinity of that range.

LIESMAN: You believe we need to at least get to that neutral rate.

CLARIDA: I do. I think certainly where the economy is today and my projection for -- and the fed’s projection of where it’s going, I think being at neutral would make sense.

LIESMAN: We had Mark Zandi on our air the other day.

CLARIDA: Right. Mark’s a good fellow.

LIESMAN: I hope you still think that after I say this. He said: the Federal Reserve has never engineered a soft landing for the economy once we’ve gone below the neutral rate of unemployment or the natural rate of unemployment. Is that -- it possible – is there any history on your side that you could engineer this soft landing through?

CLARIDA: Yeah, and Steve, I would argue that there is if you go back to the rate hike cycle that began in 1994, very aggressive, I mean the funds rate went up 300 basis points in about 12 months. And the economy continued to expand for another five-plus years. So that’s an example of a cycle where you had a normalization of policy and the economy continued to expand for a number of years. I would point out another thing we’ve never seen, which we’ve never seen an expansion that lasts as long as this one likely will if it continues through next summer. So history’s useful, but you can’t be handcuffed to it.

LIESMAN: You talked earlier about global weakness. How much of a threat does that represent to the U.S. expansion?

CLARIDA: Well I think, Steve, it’s important for your viewers to understand that although our mandate is full employment and price to building in the U.S., to achieve that we have to understand and factor in the global economy. And there is some evidence of global slowing. I think it’s early days. You know, the IMF has marked down its global outlook a bit. But certainly, at least speaking for myself, that’s something that is going to be relevant as I think about the outlook for the U.S. economy. You know, because it impacts big parts of the economy through trade and through capital markets and the like.

LIESMAN: Two other issues that are out there: Taxes and trade, or tariffs. How are you factoring in what the tax cut will do the U.S. economy? Will it create, do you think, a permanent change in potential growth?

CLARIDA: Well, I believe that we have seen the bottom in productivity growth raise. I think we’ve had some pickup in productivity. It’s hard right now, Steve, to see how much of this is going to be sustained, but sort of put me in the camp of being an optimist on this. I think the legislation is one piece of that by lowering the cost of capital. I think there’s innovation in the economy that’s beginning to be adopted. And so, you know, productivity is important, but it’s very notoriously difficult to make forecast about inflection points. But put me in the optimistic camp on that.

LIESMAN: So do you have another number for potential growth that’s above the 2% that everybody else has?

CLARIDA: I’m in the camp that thinks that we have seen a rebound of productivity growth. Again, I’m going to look at the evidence to see how I revise up my forecast. Also near term, another important factor is growth in our labor force and employment. And we’ve had a pickup in labor force participation which is also at least now boosting the supply side of the economy.

LIESMAN: Are there going to be enough workers though to fuel higher potential growth in the economy?

CLARIDA: I think for several years there certainly could be. Because participation rates among prime age adults are still a point or two below where they were 15 years ago. So eventually demographic factors are going to kick in and eventually labor force growth is going to fall to about 0.5% a year. This year, for example, Steve, labor force growth – or at least I should say ours worked. And the business sector is up 2%. So I think there’s still room to run the labor market.

LIESMAN: I want to read you something you wrote in a speech earlier. Maybe you can help me understand it. “As I look ahead, if strong growth and robust employment gains were to continue in 2019 and be accompanied by a material rise in actual and expected inflation, that circumstance would indicate to me that additional policy normalization might well be required.” So what is it you expect when it comes to a policy and what would cause you to do more, what would cause you to do less? -- It’s a little hard without some of the numbers here.

CLARIDA: Understood. Well, I don’t want to specifically get into my individual dot on the dot plot. But what I was trying to do in that speech and in talking to you and others is to give a sense about my own individual reaction function, how I would react to surprising data on either side. I don’t expect right now for there to be a big pickup in inflation next year or certainly inflation expectations. But were that to happen, that would incline me to think about a need to adjust policy some more. It goes was the other way, too – if we get a slowdown, which I don’t expect, I’d have to calibrate the other way.

LIESMAN: So you’re not among those who see the need for the Fed right now to go above neutral?

CLARIDA: Well, we’re certainly not at neutral yet. And I -- again, my view is in this range of the uncertainty of neutral, I don’t think it’s particularly for my individual perspective to think so much about overshooting something that I’m trying to estimate right now.

LIESMAN: Apologies to the producers. I have one more question I need to ask you before you go.

CLARIDA: Sure. Yes, please.

LIESMAN: It’s an unusual situation now. In the years I’ve been -- not having an economist in the chairman position. And you’re a kind of pretty well known monetary policy expert. How does that dynamic work with the Chairman and you being the guy who sort of knows all the equations and the aggressions and the R-Star stuff and the formulas?

CLARIDA: Thank you for asking that. Chair Powell and I an excellent working relationship. You know, monetary policy is really about the practice. My work was in economic theory. That’s one input. You know, Chair Powell’s background as a policy maker, also has been a Fed Governor since 2012 -- has a lot more experience than I do. So we work very well together. I have things I bring to the discussion. You know, Governors Quarles and Brainard and the Reserve Bank Presidents. It’s a wonderful group of colleagues to work with and we all bring things to the discussion.

LIESMAN: Richard Clarida, thanks for joining us.

CLARIDA: Thank you.


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