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First On CNBC: CNBC Transcript: Dallas Fed President Robert Kaplan Speaks with CNBC’s Steve Liesman from Fed Summit in Jackson Hole, WY Today

WHEN: Today, Thursday, August 22, 2019

WHERE: CNBC’s “Closing Bell” – Live from the Fed Summit in Jackson Hole, Wyoming

The following is the unofficial transcript of excerpts from a FIRST ON CNBC interview with Dallas Fed President Robert Kaplan and CNBC’s Steve Liesman on CNBC’s “Closing Bell” (M-F 3PM –5PM) today, Thursday, August 22nd, live from the Fed Summit in Jackson Hole, Wyoming. The following is a link to the interview on CNBC.com: https://www.cnbc.com/video/2019/08/22/dallas-feds-kaplan-would-like-to-avoid-further-action-on-rates.html.

All references must be sourced to CNBC.

SARA EISEN: Central bankers meeting at the annual gathering in Jackson Hole, Wyoming. Our own Steve Liesman joins us now, along with Dallas Fed President Robert Kaplan. Steve, take it away.

STEVE LIESMAN: Yeah. Thanks very much. Here at Jackson Hole with Robert Kaplan, the Dallas Fed President. Mr. Kaplan. Thank you for joining us.

ROBERT KAPLAN: Good to see you, Steve.

STEVE LIESMAN: Just a few things to be talking about, huh?

ROBERT KAPLAN: Yeah, a few.

STEVE LIESMAN: Let’s start with the outlook for the economy here. How is the economy performing relative to where you thought we would be at this time?

ROBERT KAPLAN: It’s -- our expectations for growth are about 2% for this year. If you asked me in April, I would have said 2.5%. And right now, I’d say the risk to our 2% forecast to the downside. And the reason for that is even though the consumer’s very strong and is a key underlining of the economy, manufacturing sector is weak and probably weakening and global growth decelerating is probably fighting its way to seep into the U.S. economy. So, I would say we’re still expecting 2% growth for the year. But I think the risks are a little bit more to the downside.

STEVE LIESMAN: Can you put numbers on the downside risk? Is 1% growth possible? Is a recession possible?

ROBERT KAPLAN: As long as the consumer stays strong, we are going to have solid growth. The thing I’m watching for is does this manufacturing weakness and global growth weakness seep into other sectors where eventually you start getting one or two negative job reports and then consumers start to be less robust. I think we can avoid that. But I think it’ll help if we have some policy stability. It will help. And I think the Fed may well have a role to play in helping to engineer that.

STEVE LIESMAN: What kind of role would that be to play? Would that mean further rate cuts ahead?

ROBERT KAPLAN: I was in favor of the rate cut in July. I felt it was appropriate to make an adjustment. You know, part of this job is to be forward looking and there’s a risk management part of the job. And I want to take all the time between now and September to assess how the economy’s acting. And I’d like to avoid having to take further action. But I think I’m going to have an open mind about taking action over the, at least the next number of months if we need to. And for me, the global -- the global yields but particularly the U.S. global yield – I’m less obsessed with whether -- the 2 to the 10 and the movements back and forth. I’m more focused on the fact the whole curve has moved down over the last three and a half months. And the Fed funds rate at 2 to 2.25 is now above every rate along the curve, which to me is a little bit of a reality check that says it’s possible our monetary policy today is a little tighter than I would have thought three or four months ago.

STEVE LIESMAN: When you look at global rates, do you see that maybe you have to bring the Fed rate more in line with global rates?

ROBERT KAPLAN: I don’t think we need to do that. I think the reason that global rates -- rates outside the U.S. are low, they’ve got some specific reasons. One of them is, to the extent you have the trade uncertainty, it can effect the U.S. but it has a much bigger effect of countries outside the U.S. with a much bigger percentage of GDP. So, that doesn’t surprise me. Also, the quantitative easing and the number of activities by the ECB and other Central Banks have been far more aggressive in terms of buying severance and corporate debt. So, I want to be careful not to follow other Central Banks in a race lower. But I do watch what it says about prospects for future growth.

STEVE LIESMAN: Robert, the odds that you come on CNBC to talk on a day when the President hasn’t Tweeted about the Federal Reserve are very low. So, here you are on another day where the President has said that German interest rates are negative and that the Fed is behind the curve. And do you see that American interest rates ought to be competitive with foreign interest rates?

ROBERT KAPLAN: The answer is no. There should be some divergence and it makes sense based on underlying fundamentals that there is divergence.

STEVE LIESMAN: Let me push back a little bit on that. The divergence right now is more than 200 basis points. That’s a lot of divergence. Divergence with a capital D.

ROBERT KAPLAN: I understand. And so, what I’m focused on is in particular is what’s the growth potential of the U.S. economy? When I look outside the U.S., I’m trying to look at what’s going on in terms of global growth that might affect our growth potential. And I think we need to adapt rates that fit the U.S. economy. And also other countries have lowered their rates, their Central Bank rates to much lower levels. They’ve done more quantitative easing. It hasn’t helped to stimulate more growth. So the other thing I would comment on: policies that grow the workforce, trade policy, infrastructure spending, policies that improve skills are probably more the center of gravity which are going to affect U.S. economic performance. And I think it pays to keep -- to broaden the discussion to other policies away from monetary policy.

STEVE LIESMAN: Yeah, just to be clear those are not Fed policies. Those are fiscal policies.

ROBERT KAPLAN: They’re not. But our job to call it out.

STEVE LIESMAN: Sara Eisen back in Englewood Cliffs has a question for you. New York Stock Exchange – sorry.

SARA EISEN: Manhattan, yeah. Hi, President Kaplan.

ROBERT KAPLAN: Hi Sara.

SARA EISEN: So, not just a divergence among central banks but a divergence inside your central bank. Why do you think there’s such a wide opinion right now about where the economy is headed, how many rate cuts are needed, how much stimulus is needed? It’s a little confusing to the market about just how aggressive the Fed is going to be.

ROBERT KAPLAN: So, let me try to put it in context. I mentioned earlier one of the challenges of this job is you’ve got to be forward looking. What’s happened up to now is not as important as what we think will happen over the horizon. And that’s inherently uncertain. And the other thing is this is a risk management job. And so, I think some of the disagreement you may hear will be about how you weight risk management. What I’m saying is that I think that when the Fed funds rate is well above rates along the Treasury curve and we are seeing some weakness in manufacturing and global growth, I think it may make sense to take some action on the policy rate from a risk management point of view. But different people have different points of view on how they’d manage those risks. And I’m actually for one – I’m glad for the debate and for the disagreement and when I go into these meetings I listen to the opposing views. I think people listen to me and we listen to each other. And I think the debate’s a healthy thing actually.

SARA EISEN: And finally, I was just curious about how you think the tariffs are filtering through to the economy? Especially in the final round of the few hundred billion of Chinese imports that could affect the American consumer. How does that factor into the forecast?

ROBERT KAPLAN: So here’s what I’m hearing from business. And I spend an extensive amount of time talking to business leaders. If you ask me April 30 I thought we would grow at 2.5% plus. Then on May 1st we had the China issue. But I found the big event that happened over the last three and a half months was the Mexico threat, at least in talking to the businesses I talk to, in that it jarred them and made them realize even if we do have trade agreements, you could still have surprises. And since that point a lot of businesses I speak to have become more cautious on CapEx and on expansion plans. The consumer stayed strong but I think businesses now have internalized that trade uncertainty is going to be with us for some extended period of time, even if some of these bilateral trade issues get resolved. And so, I see – I think you see a much more cautious business community and that’s what I’m hearing.

STEVE LIESMAN: Robert, just one more thing. You said you want to avoid rate cuts but I heard you say you are more inclined to do them than not. Is that fair to say?

ROBERT KAPLAN: I’m saying balancing -- the reason I want to be careful of cuts rates unless we have to, cutting rates hurts savers, it pushes people to take more risk. And I’m cognizant of that. On the other hand, I’m also cognizant if we wait until we see weakness in the consumer to take action, we probably waited too long. And I’m very well aware we don’t have that much ambition. Our tools are, in the lingo, asymmetrical. So from a risk management point of view, if I see continued weakness I’m going to be open minded about making adjustment in balancing the various risks.

STEVE LIESMAN: Okay. Robert Kaplan, Dallas Fed President, thanks for joining us.

ROBERT KAPLAN: Thanks, Steve.

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