WHEN: Today, Friday, January 3, 2020
WHERE: CNBC’s “
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Dallas Fed President Robert Kaplan and CNBC’s Steve Liesman on CNBC’s “The Exchange” (M-F 1PM – 2PM) today, January 3rd, live from San Diego, California. The following is a link to video of the interview on CNBC.com:
ALL REFERENCES MUST BE SOURCED TO CNBC.
DOMINIC CHU: Well, the next Fed meeting is scheduled for the end of this month and the question is whether or not rising geopolitical tensions could become a factor in the Fed’s decision-making process on interest rates. For that, let’s go live to San Diego, California, where Steve Liesman is sitting by and standing by with Dallas Fed President Robert Kaplan. Steve, over to you.
STEVE LIESMAN: Thanks very much. President Kaplan, thanks very much for joining us today.
ROBERT KAPLAN: Pleasure to be here, Steve.
STEVE LIESMAN: Interesting day for you to be here. One of your specialties, one of the areas of expertise at the Dallas Fed is our oil prices. What do you make of the muted reaction or the reaction to the oil market to what’s happened with Iran and in Iraq?
ROBERT KAPLAN: I mean, it’s — it’s notable. I think you would have gotten a different reaction ten years ago, certainly, 20 years ago. And I think it’s indicative of united states now producing 12 million barrels a day, where we rival Russia and Saudi Arabia in terms of energy production. We’re much more energy self-sufficient. So, because of that, you’ll see these events in the Middle East, they’ll have an effect but it’s going to be more muted than we might have seen historically.
STEVE LIESMAN: What kind of reaction do you see in the oil market to get some kind of reaction overall economic growth in the United States?
ROBERT KAPLAN: How would — how will it –
STEVE LIESMAN: How big a reaction? In other words, a couple bucks isn’t going to move the GDP–
ROBERT KAPLAN: And it’s interesting, again, this is different than 10 or 20 years ago. We have done a lot of work on this. 10 or 20 years ago, if oil prices went up, it hurt the consumer. We were a net importer. So, it was negative net — net negative for GDP. Now, because we produce so much of our own oil, it helps producers, it still hurts consumers. We’re also a more energy-efficient economy. We’re less energy sensitive. And so, we think that the effect, even if you had five or ten dollars up, is going to be more balanced. It’s not going to be material in the way it might’ve been historically. And it’s a little bit more uncertain whether it’s actually positive or negative. It’s more balanced.
STEVE LIESMAN: Beyond the impact on oil, there’s just an uncertainty factor that comes along with what’s going on in the Middle East right now. How does that fold into your economic outlook along with the other uncertainties that are out there?
ROBERT KAPLAN: So, we know global growth going into this year has been weak. We know manufacturing’s been week. And we know trade uncertainty’s been an issue. And business fixed investment we think mainly due to uncertainty has been sluggish. So, to the extent you’ve got global uncertainty, we still think it weighs somewhat on business fixed investment and manufacturing. But still, because the consumer’s strong and we still expect some stabilization, we still think we can grow 2, 2 and a quarter percent in 2020.
STEVE LIESMAN: Is it your expectation the consumer rye mains strong through 2020?
ROBERT KAPLAN: Yeah, it is still. And I think you’d have to see more severe weakness in global growth, manufacturing, business fixed investment, weaker than what we’ve seen and what we expect to spread to other parts of the economy. I don’t see that. I think we’ll have a year of solid growth.
STEVE LIESMAN: Let’s leap from that to your views on the overall outlook for 2020, along with what you think policy ought to do.
ROBERT KAPLAN: Well, on the Fed funds rate, as you and I have discussed, I don’t think we should be making any moves at this point on the Fed funds rate. Obviously, we’ll keep revisiting that as the year goes on. For me, the issue will be now that we’ve gotten through yearend in terms of the repo market, I’m sure we’ll have some significant debates in the early part of this year about the size and trajectory of the Fed balance sheet.
STEVE LIESMAN: Let me follow up on that. September, you began to reverse course. You had been cutting – reducing the size of the balance sheet. Then you started growing it. Should you continue to grow it the way it’s been growing along with the economy? Or is it time to reduce the balance sheet?
ROBERT KAPLAN: There have been two parts to the growth. One is buying 60 billion of treasury bills a month. And we’ve said we’ll do that until the spring. The second part of the balance sheet growth has been these daily and term repo operations. Those will, hopefully, run off. And the debate I’m suggesting we need to have is as we wind up these planned 60 billion a month of treasury purchases, what do we do next? And what do I mean by that? Should we have a standing repo facility which might, in fact, let us slow down or curtail the treasury bill purchases?
STEVE LIESMAN: What’s your take on that?
ROBERT KAPLAN: I think we need to debate it. I haven’t come to a conclusion. But I — I want to – my objective for policy should be that we — we have the smallest possible balance sheet in an ample reserves regime. Which means I’m sensitive to growth in the balance sheet. I think we needed to do this in light of the repo volatility. And we’ve done the right thing heading through year-end. But now that we’ve gotten past year-end, I want to find ways to grow the balance sheet more slowly. That would be my objective. I’m sure there will be disagreement about that. But that’s what I’d be advocating.
STEVE LIESMAN: I just want to do one more question here. You’re going to be a voter this year. You can’t stay on hold forever. You’re going to go one way or the other. If you had to guess now, which direction would be the next move?
ROBERT KAPLAN: Too early to guess. On the one hand, I told you, I expect solid growth this year. 2, 2 and a quarter percent. On the other hand, we’ve got still trade uncertainty. We’ve got weak manufacturing, as we saw today. And so, I think it’s just too soon for me to say. And I’ll have a more refined answer to that question maybe as we get two or three months into the year. But at the moment, I’d stay agnostic.
STEVE LIESMAN: What about inflation? Some of your colleagues are more worked up about the issue of not hitting your inflation target. Do you think it’s something that ought to prompt the Fed to act if you continue this year to not make your 2% target?
ROBERT KAPLAN: I am also, as you say, worked up about not hitting our inflation target. But there are other factors that I also want to consider. And so, I’d be — I’d be supportive of maybe a longer averaging period or other things we can do to make it more oomph to meeting our target. Having said that, I’m also worried about excesses in balances building into the economy. And I also think it’s critical that Fed policy is forward looking, not backward looking. So even if we extend the averaging period, which I’m supportive of, that’s an analytic. It doesn’t mean when we get to making decisions, that I won’t want to take into account other factors that are forward looking. But I would be willing to let inflation run for a time above our 2% target. I’d be supportive of that. But it’s subject to what’s going on with other factors, including financial stability and excesses in balances.
STEVE LIESMAN: Robert Kaplan, Dallas Fed President. Thanks for joining us.
ROBERT KAPLAN: Good to see you Steve.
STEVE LIESMAN: Back to you guys.
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