WHEN: Today, Thursday, August 22, 2019
WHERE: CNBC’s “Squawk on the Street” – Live from the Fed Summit in Jackson Hole, Wyoming
The following is the unofficial transcript of excerpts from a FIRST ON CNBC interview with Philadelphia Fed President Patrick Harker and CNBC’s Steve Liesman on CNBC’s “Squawk on the Street” (M-F 9AM –11AM) 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/philadelphia-fed-president-patrick-harker-on-the-economy-and-rates.html.
All references must be sourced to CNBC.
STEVE LIESMAN: Good Morning, Carl. Thanks very much. Here in Jackson Hole with Philadelphia Federal Reserve President Patrick Harker. Thanks for joining us, President Harker.
PATRICK HARKER: Thanks for having me, Steve.
STEVE LIESMAN: So being in the Fed, you must understand risk management. There is a risk that you may come on shortly after the President tweets about Federal Reserve policy.
PATRICK HARKER: Yes.
STEVE LIESMAN: As David just said, 22 days in August, 19 Tweets by the President. Tell me how you look at this differential between German yields and U.S. yields. Is it a competition?
PATRICK HARKER: No. I don’t think it’s a competition, number one. Two, it’s a different economy. I mean, in the U.S. obviously exports/imports are important to us, but in Germany, even much more so. So, I don’t think they are apples to apples comparisons.
STEVE LIESMAN: Do we need to set our interest rates relative to European or Japanese or anybody else’s rates?
PATRICK HARKER: No. We need to do what’s appropriate for the U.S. economy. Taking into account that there are effects, global effects on the U.S. economy. But ultimately, the decision is what is best for the U.S. economy.
STEVE LIESMAN: Is there a case to be made that by reducing their interest rates they reduce their currency and they get an advantage in trade?
PATRICK HARKER: That in theory is true, but if you look at the last cut we took, the 25-basis point cut, the dollar moved in a different direction. Right? So, right now, the U.S. Treasuries and the dollar are safe assets. And the world is looking – and in a world of volatility, they are looking for safe assets.
STEVE LIESMAN: So, when you take and you start to set where to put interest rates, you don’t say to yourself, ‘Well, I can’t go higher and I probably should go lower because of the differential between the U.S. and Europe’?
PATRICK HARKER: So, you can’t ignore what’s happening in the rest of the world. You don’t want to be so far out of sync with other economies that it would cause problems. I don’t think we are out of sync in a major way right now.
STEVE LIESMAN: But 100 and -- it’s 200 basis points out of sync.
PATRICK HARKER: Yeah. You look at where we are with respect to our inflation, plus our neutral rate. I think we are pretty much where we need to be.
STEVE LIESMAN: Let’s talk about where we are in terms of the economy. What is your outlook for the economy? What is your view of growth right now? Is it too slow?
PATRICK HARKER: No, I think it’s exactly what we had anticipated a year ago, even two years ago. We are going back to trend growth, roughly 2% growth.
STEVE LIESMAN: Where would you say policy is relative to that trend growth?
PATRICK HARKER: So in December I was not supportive of the increase. I was supportive of the decrease somewhat reluctantly this time around to get us back to where I think policy should be. We are roughly where neutral is. It’s hard to know exactly where neutral is, but I think we are roughly where neutral is right now. And I think we should stay here for a while and see how things plays out.
STEVE LIESMAN: So, you don’t see a case for further stimulus to the economy?
PATRICK HARKER: No, not right now.
STEVE LIESMAN: Why not?
PATRICK HARKER: You look at, the labor markets are strong. Inflation is moving up slowly, with the last CPI print, it was a good print. We’ll see PCE comes in. There are negative headwinds, right, to the economy. But right now, I don’t think they call for any drastic action. I think we can take some time and see how things play out.
STEVE LIESMAN: Tell me about the headwinds. Which ones do you think are the major ones we’re facing?
PATRICK HARKER: Oh, trade. I think trade. What we hear repeatedly from companies is the trade uncertainty. It is not the cost to capital. When you talk to business leaders they are not saying, ‘I am not investing in plant and equipment because the cost of capital is too high.’ That has never factored into any conversation I have had. It’s about the policy uncertainty.
STEVE LIESMAN: Could you give me one specific example of a conversation you had where an executive has said, ‘I am holding back on investment because of the trade uncertainty’?
PATRICK HARKER: Yeah, so one of our contacts was looking at the China situation saying, ‘I may need to move my supply chain to other countries.’ One of those countries at the time he was considering was Mexico. And then of course, because, Mexico is a NAFTA country. What could go wrong? Well, then, we are talking about putting tariffs in Mexico. So, you think about that individual and their board. How can they make a decision in this environment?
STEVE LIESMAN: Let’s talk about the yield curve itself, which has been flat, negative for a bit. What kind of signal do you get from the yield curve?
PATRICK HARKER: So, I think it is a signal, an important signal, but it’s one of many. Again, you have to look at the labor markets. Very strong. You have to look at growth. Although we think that 2 plus percent growth is weak, it’s not. It’s exactly what we expected.
STEVE LIESMAN: When you look at the risks, global economies are weak and some are even in recession. Some have printed negative growth. How much of a risk is that to the U.S.?
PATRICK HARKER: Well, I think it is a risk. But again, a lot of that depends on the country. Right? Very specific to each country. But again, this policy uncertainty is not only a U.S. phenomenon, it’s a global phenomenon right now.
STEVE LIESMAN: You can’t do anything about the trade uncertainty that’s out there.
PATRICK HARKER: Correct.
STEVE LIESMAN: You have to deal with the hand –
PATRICK HARKER: Yep.
STEVE LIESMAN: --That’s dealt to you in terms of the effects on the economy. Given that it has been persistent, given that the trend of it has been to worsen over time, isn’t there an argument taking an insurance cutout for the kind of potential negative effects?
PATRICK HARKER: I have heard that argument, but I am not very sympathetic to the argument. Right now, given the volatility even of the policy itself, I think we don’t need to make that move right now. Nothing is moving dramatically in a negative direction. There is potential for it to do. And I think we need to keep our powder dry so when that happens we have the policy space to move.
STEVE LIESMAN: When you say that -- so, you are not seeing it show up in the economic data, the effects of trade?
PATRICK HARKER: Oh, yeah, on business investment for sure. But the consumer is the hero of the American economy. They keep spending. So, it really does vary. You have to look at where that effect is happening. Now, if the tariffs kick in and really hit the consumer, then I am more worried.
STEVE LIESMAN: You guys, Philadelphia Fed is known for great research obviously but also the Philly Fed index.
PATRICK HARKER: Right.
STEVE LIESMAN: It’s a key manufacturing index followed by the market.
PATRICK HARKER: Right.
STEVE LIESMAN: It strengthened recently. Tell us about the business activity in your district.
PATRICK HARKER: So, the Philly district, the third district, never has the highs of the economy or lows of the economy. We are sort of right in the middle. That’s why it’s a good predictor overall. And so The Manufacturing Business Outlook Survey has been bouncing around a little bit, it has been volatile, but all the while it’s been positive. So, while there are these uncertainties, manufacturers in the district still say that business is pretty good.
STEVE LIESMAN: If we have these headwinds and the economy is still running at 2%, do you think there is a potential upside to economic growth if the trade uncertainty were to go away?
PATRICK HARKER: Oh, I think so. I think policy uncertainty more generally, not just around trade, were able to be resolved, we could see a significant increase in growth for a period of time. We have started to see hints of it with the productivity number. And so, I think that is hinting towards higher growth. Because unless we move one of two needles, that is productivity and the labor force, we are not going to get that higher trend--
STEVE LIESMAN: How much upside do you think there is to the economy?
PATRICK HARKER: Not a lot. I mean, I think we could get slightly higher productivity. We could run for a while a little under three. But that’s not our forecast right now, just given the current situation.
STEVE LIESMAN: People probably don’t know this but one of the things you have been doing at the Philly Fed is orienting towards this issue of workforce development.
PATRICK HARKER: Yes.
STEVE LIESMAN: With this big issue out there -- this major macro issue, people can’t find workers.
PATRICK HARKER: Right.
STEVE LIESMAN: How much does the shortage of labor limit the potential growth of the economy?
PATRICK HARKER: Oh, I think in two ways. One, on the plus side, firms are now being much more creative about investing in capital. Capital deepening because they can’t find the workers. And that will have a positive effect on productivity. But, n the flip side, I talked to a major home builder, he said I can’t even find -- not people to carry bricks and sticks. Forget plumbers and electricians. I can’t find people, laborers on the site to build a home. That is limiting growth for sure.
STEVE LIESMAN: Wow. Has there been any progress--? We have brought down some of the employment rates in certain sectors--
PATRICK HARKER: Yes.
STEVE LIESMAN: --for certain cohorts of the labor force.
PATRICK HARKER: Yeah, I think we have been surprised how many people are coming into the workforce. And that is a very good thing for them and for the country. How much more there is of that, I’m not sure.
STEVE LIESMAN: One thing people talk about is the possibility that the U.S. rates could go to zero. Do you see that on the horizon? Is there a possibility of negative interest rates in the United States?
PATRICK HARKER: I never, ever say never. Because that comes back to bite you. So, I don’t think that right now, it’s a high hurdle for me to think about having negative rates. There are a lot of implications in the U.S. economy if we did that. But I’d never say never.
STEVE LIESMAN: What about the banking channel and the idea that a reason for the Fed to act, and that could be in a variety of ways, is to actually target the yield curve. Have you thought about this idea of restoring positive slope to the yield curve, either by working on the long end or working on the short end to increase the profitability to banks to lend?
PATRICK HARKER: So that is one of the conversations we are having among many with the Fed Listens effort that Vice-Chair Clarida is leading. Right? In terms of looking at our monetary policy framework. No decision has been made about this. It’s a complicated issue because given that the U.S. Treasuries are the safe harbor around the world, just because we would take action doesn’t mean the world is going to go along.
STEVE LIESMAN: You can’t build a hill because the world is going to keep knocking it down.
PATRICK HARKER: Potentially, yeah.
STEVE LIESMAN: So, any efforts that you make to restore positive slopes to the curve – they get flattened by the run to safe assets in the United States?
PATRICK HARKER: Yes. Absolutely.
STEVE LIESMAN: How much concern do you if rates remain too low for too long for the financial stability side of things?
PATRICK HARKER: Yeah, that is the other factor that I have to weigh. I didn’t think the cut was appropriate necessarily, but I went along to get back to neutral. But, I’m on hold right now. My forecast is just to hold where we are for -- one of the reasons is that. I think we run the risk of creating too much leverage in the economy.
STEVE LIESMAN: Do you worry though? – I just look at the Fed’s fund futures. They’re just priced for two more cuts this year at least and a 40% probability of a third cut. Now, it’s come down a little bit, but do you worry about where the market is priced?
PATRICK HARKER: A little bit. Again, that doesn’t -- it doesn’t really factor into my decision-making. I have to look at the real economy and look at what’s really going on in the economy to come up with my policy stance.
STEVE LIESMAN: Is there a communications problem if the market gets so out of sync with where the Fed is?
PATRICK HARKER: Oh, yeah. Absolutely. It’s macro 101. The market does the work. We don’t. So, the market needs to move. And I do think there is a communications challenge we face in explaining where our stance of policy is.
STEVE LIESMAN: Patrick, we began the discussion talking about the Tweet from the President. How do you feel about these constant Tweets? The Federal Reserve being called clueless.
PATRICK HARKER: Yeah. So, my wife thinks I am clueless in almost everything except monetary policy. So, she’ll give me that one. No, we’re not clueless. I think the Fed has been the stalwart of the U.S. economy for a long time, particularly through this period of the Great Recession and its aftermath.
STEVE LIESMAN: So, I’m told the yield curve, the 210 just inverted again in my ear here. Is that a signal that worries you?
PATRICK HARKER: Again, it’s one signal of several that I take into account. But it’s just one.
STEVE LIESMAN: Patrick Harker, thanks for joining us.
PATRICK HARKER: Thanks, Steve.
STEVE LIESMAN: Sara, back to you. Philadelphia Federal Reserve President Patrick Harker here from Jackson Hole, Wyoming.
For more information contact: