WHERE: CNBC’s “Fast Money” – Live from the Fed Summit in Jackson Hole, Wyoming
WHEN: Today, Friday, August 23, 2019
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Federal Bank of England Governor Mark Carney and CNBC’s Steve Liesman on CNBC’s “Fast Money” (M-F 5PM – 6PM) today, Friday, August 23rd, live from the Fed Summit in Jackson Hole, Wyoming. The following is a link to video from the interview on CNBC.com: https://www.cnbc.com/video/2019/08/23/trader-lays-out-the-best-way-to-play-todays-dip.html.
All references must be sourced to CNBC.
STEVE LIESMAN: Thanks very much, Melissa. Here at Jackson Hole, Wyoming with Mark Carney, the Governor of the Bank of England. Mark, President Trump today escalated tariffs, China escalated tariffs, President Trump escalated. Talk about the global effects of this trade war between the U.S. and China.
MARK CARNEY: Well, obviously can’t comment on just today’s effects, but if we take a step back, what has been happening is there’s been direct effects between the U.S. and China of the actual tariffs, and you know, they’re starting to get up towards potentially, over the course of the two, tree-year period, about 1 percentage point lower for U.S. GDP, if they all remain in place. So, there’s the direct effect. But what is happening globally is a confidence effect on business, business confidence, not just in the U.S. and China but all across those supply chains and more broadly. Because it is not, as you know, just a series of measures between those jurisdictions. We’ve had issues with USMCA, we have issues around auto, we still have issues around steel, we have issues in terms of the technology complex, if I can put it that way. And those effects are at least as material as the direct trade effects. And those effects are impacting all of the economies around the world.
STEVE LIESMAN: Right.
MARK CARNEY: And that’s what is starting to happen. So, now that’s starting to play into the outlook for the global economy, and whether you are directly involved or not, it is impinging on the outlook. And for example, for the UK, it is starting to affect our outlook.
STEVE LIESMAN: I think people need to understand you as the governor of the bank of Canada and before that Goldman Sachs and played a role in the global response to the crisis. So, I’m teeing that background up for the next question, which is are global Central Banks, do they have the tools to address the fall-out from an extended trade war and how well are they positioned right now to address overall global economic weakness?
MARK CARNEY: Well, let me start with the second bit, which is that we obviously have less policy room than we did in 2008 or even than we did several years ago. You know, rates are very low, certain countries are doing quantitative easing. So, there’s less room. The major central bank with the most room is the fed because of the strength of the U.S. economy. We have less room, but we do have room and we do have an ability to use that room. The judgment has to be is when do you deploy that fire power. The question that’s beginning to emerge because of the scale of the trade effects is are a number of central banks going to ease policy for their own reasons, and then collectively will that provide an offset? The one thing that won’t happen is that changing the level of the bank rate in the UK, for example, doesn’t change materially the cost of capital for a business in the UK, and certainly not a business in the U.S. or elsewhere. You know, 25 basis points doesn’t make a difference there. What it can make a difference to though is demand in the UK and demand in other jurisdictions. And it is that effect which also provides some stimulus. So, the direct effects, not just of the tariffs but I really would emphasize the uncertainty that is being created by this series of measures that are happening and happening in a way that is -- is somewhat unpredictable.
STEVE LIESMAN: So, we have our set of problems that you say we have shipped to you. You have your set of problems, which Fed Chairman Jerome Powell mentioned today, Brexit as being an issue for The United States. I want to ask if you can be sure to keep your problems over there, but I don’t think that’s the right question. How much has it affected the UK? Is it substantially responsible for the negative second quarter outcome that you had in your growth numbers? And do you foresee that continuing?
MARK CARNEY: Okay. Well there’s two things. The short answer to the question is yes. But let me break it into two parts, which is: in the very short-term, the first quarter was a little stronger than people would have expected. Second quarter is negative. Third quarter is going to be -- we think is going to be positive. But the underlying pace of growth is relatively weak. That up and down between those various quarters, those are companies building inventories in the first quarter because they thought there might be trade disruption, running them down in the second quarter. The auto plants doing the same thing. And then – effects in the third quarter. It is noise, it is real activity, but it is noise in terms of the underlying pace of growth in the economy. Now, let me step back to the second bit, which is how is the UK economy doing? Since the referendum it has done pretty well. We’ve got unemployment at rates, you know, lowest in 45 years. Wages are growing just south of 4%. Inflation is basically at target. Business investment – and all of that has happened in a world where there’s been a lot of uncertainty because of Brexit and what shape it is going to take. It is an analogy to the trade war. This gets to what we were talking about a moment ago, in terms of well, what can monetary policy do in those circumstances? Well, what we did in the UK, was after the referendum because we thought there would be uncertainty, we brought it down, we did a variety of things and that has supported other aspects of the economy. Now, while business investment is actually running almost 25 percentage points below its previous trend, businesses in the UK have quite reasonably said, ‘Wait a minute, I’m going to wait until’ -- if they have any exposure to Europe, upstream or downstream, they decided to wait and see what are the new rules of the game going to be? So, to go back to globally, that’s part of what is happening worldwide. People are saying, okay, I have exposure to Chinese supply chain or U.S., let me see where it settles out. That’s why it is having a bigger effect.
STEVE LIESMAN: I have to ask you a direct question here. You only have 75 basis points of ammunition left in your primary tool, your interest rate. It looks like you have been stubbornly holding on to that. Is that ammunition you are holding on to in case there’s a hard Brexit?
MARK CARNEY: No. Well, there’s two things. There’s a couple of paths the UK economy can take. There’s at least three. One is there’s a deal and there’s a deal and some degree of the deep economic relationship is retained. Now, in that world we are starting from basically full employment, inflation at target, businesses with a lot of fire power on their own balance sheets, good financial condition, and we’re likely to see some of the catchup of that investment in the economy pick up. That’s a world, I know it doesn’t sit with the theme of the day, but that’s a world where actually we probably would be raising interest rates at a limited -- you know, limited pace, gradual extent. But you get the point. Now, in a world where there’s no deal and there’s no transition, the other extreme, which is a possibility -- not a given, but a possibility. Then in that world, you know, we would expect that we would lose demand from Europe in the short term. There probably would be an adjustment domestically as well of consumer spending, so demand goes down. We will have to make a judgment in that world because the supply capacity of the economy will also go down. This is an economy well-integrated to Europe. It is going to take a while for businesses that are very flexible, labor market is flexible, but you have to redeploy that. That takes some time. So, it is the balance of those two effects. On balance, I have said this before, my personal view which we probably would ease into that world, that scenario. But it is not a given and it depends on how it shakes out.
STEVE LIESMAN: So, changing gears. Last issue, Governor Carney – I really appreciate your time and thoughts on this -- you dropped a bombshell in the luncheon there. That’s the way I would describe it. It is almost like a mic shot you are exiting this job, almost like a mic drop. And you said we need to go to a global virtual currency. It is a 23-page speech. It is very heavy. Give us the thumbnail. Why can’t –
MARK CARNEY: I want to know, did you just read the conclusion of the speech? Or did you read--
STEVE LIESMAN: No, I read 14 pages and then I jumped to the conclusion.
MARK CARNEY: Okay. So, what is the point?
STEVE LIESMAN: Give us the thumbnail. Why can’t the dollar be the global currency?
MARK CARNEY: The dollar is the global currency, we know that. The challenge is that the U.S. share of the global economy has been reducing. The dollar share of payments -- not just financial assets but payments, a lot of payments of countries that have nothing to do with the U.S. make payments in dollars. And what happens in situations like we’re in tonight, where the U.S. to its credit is relatively strong, doing better. The fed has been doing the right thing. They have adjusted policy, they have tightened policy as it was strengthening. Now they’re making – they’re doing the right thing, but they adjusted and it is relatively strong. That means the rest of the world policy is tighter than it needs to be, and that feeds back on the U.S. economy in a way that ultimately slows this economy. And it leads to a substandard outcome. And in a world where you only have limited policy space, it is a dangerous to be. So, the trade issues we’re talking about are reinforced by the structure of the monetary system. Now, you asked a big question. So just give me a second.
STEVE LIESMAN: I have. All right.
MARK CARNEY: Now, the issue is you don’t just jump to something new overnight. And the -- what we want in a multi polar world, I think we would agree we have European engine, we’ve got the Chinese engine, we’ve got the U.S. engine of this economy, a multi polar world, you need a multi polar currency. The question is how you get there? And I laid out ideas of how you would get there.
STEVE LIESMAN: The bottom line is all of the pressure on the difference in growth around the world would not fall on the dollar exchange rate.
MARK CARNEY: Yes.
STEVE LIESMAN: It would be spread out if it was a global basket of currency is what you are saying.
MARK CARNEY: It would be spread out as a global basket of currencies. It is better for the system as a whole. It raises that equilibrium level of interest rates.
STEVE LIESMAN: Right.
MARK CARNEY: It gives central banks more -- it gives people who are watching greater returns on their savings.
STEVE LIESMAN: Certainly we are thinking about it. Governor carney, thanks for joining us.
MARK CARNEY: Thank you for having me.
STEVE LIESMAN: Good luck through the Brexit process, the trade wars and the growth issues out there.
MARK CARNEY: Thanks, Steve.