WHEN: Today, Friday, January 3, 2020
WHERE: CNBC’s “
The following is the unofficial transcript of a FIRST ON CNBC interview with Chicago Fed President Charles Evans and CNBC’s Steve Liesman on CNBC’s “Squawk on the Street” (M-F 9AM – 11AM) 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.
CONTESSA BREWER: Let’s get over to Steve Liesman now at the American Economic Association Conference, sitting down with a special guest. Hi, Steve.
STEVE LIESMAN: Good morning, Contessa. Live here from San Diego with Charlie Evans, Chicago Fed President. Charlie, good morning. Thanks for joining us.
CHARLES EVANS: Good morning, Steve.
STEVE LIESMAN: I know these are overnight developments and you haven’t had a chance to think too much about them. But it’s a time this morning of rising global uncertainty, higher oil price. Tell me, how do you process all of that?
CHARLES EVANS: Well, I think it’s very early. I mean, obviously these events just happened last night, and so, I haven’t had a chance to look at the market data. I guess oil prices are up. There must be more uncertainty. And I think we’re just going have to, you know, see how this works its way out. I mean, at the moment, I think the fundamentals for the U.S. economy are good. The labor market is strong. So, I think we’re in a pretty good position there.
STEVE LIESMAN: And this becomes a matter how long the uncertainty continues, how long the oil prices remain high, depending upon the economic effect it will have.
CHARLES EVANS: That’s right.
STEVE LIESMAN: Let’s talk about the outlook for 2020. These are early days of the year. 2% has been the number that you’ve been talking about. Is it still the number that you are expecting?
CHARLES EVANS: What are we talking? GDP or inflation?
STEVE LIESMAN: Well, you tell me.
CHARLES EVANS: See? I mean, both are sort of relevant there. You know, like I said, I think the economic fundamentals are good. Labor market is strong. Unemployment is at 3.5%. Trend growth, I think, is 1 3/4 percent. I’m looking for 2 3/4 percent growth in 2020. So, I think again, above trend growth, maybe we’ll get lucky and maybe the uncertainties will hurt us a bit there, too. So, I think growth is good. I’m expecting labor markets to stay strong, the consumer. So, I think it is an environment where inflation should be rising up to 2%. I think with the unemployment rate at 3.5%, a very long and successful recovery, we really ought to be getting inflation above 2% to show it is symmetric objective. And if it goes up to 2.25% or 2.5%, that would be all right with me.
STEVE LIESMAN: Back in November you talked about being more aggressive in terms of hitting the inflation target. Do you still believe that?
CHARLES EVANS: Well, I think that we’ve been underrunning our 2% objective for a long time. And we’ve said for quite some time we have a 2% objective. It is symmetric. And I think after a while people have to start wondering, are you going to hit the 2% objective? Now there are a number of reasons why, you know, headwinds have been in the way. But, golly, the unemployment rate has been down to 3.5%. The economy is doing well. The way we would normally think about what should lead to inflation, we should have seen inflation. So, there must be so much more at work that maybe we need more accommodative monetary policy. I think our current setting is accommodative. I think the FOMC has positioned us well for 2020. We’ve got some risk management positioning in the current setting. And I think it is one where inflation can go up above 2%. That’s without, you know, any oil price uncertainties which obviously put another story into play.
STEVE LIESMAN: Let’s say we get to June and we’re still not there yet, would you be considering additional accommodation?
CHARLES EVANS: I think that’s a fair question. I think I’d need to see exactly how the data are playing out. I think staying at where we are is a very good thing. I think a lot of people might kind of wonder, ‘Can you stay at 1.5% to 1.75% if the unemployment rate stays where we are?’ But without inflationary pressures, I think this is a very good setting.
STEVE LIESMAN: Charlie, this is a fascinating time where essentially you guys are feeling your way to knowing what the unemployment — how low unemployment can go. Are you willing to just let it ride down if — keeping policy where it is? Is 3% or below 3% unemployment rate something you would be willing to test?
CHARLES EVANS: I think it is a great question. The way you pose it, feeling our way down, I think that we certainly have seen the unemployment rate fall from very high levels, and as we have gotten to certain points along the way, many of us have kind of gone, ‘Oh, geez, we must be close to the natural rate.’ And then we keep going lower oh, it actually must be lower. Oh, there’s no inflation.
STEVE LIESMAN: Right.
CHARLES EVANS: We kept expecting we would see inflation. You know, 6% at one point might have been ‘Are we going to improve upon that?’ You know, Narayana Kocherlakota said that we ought to be targeting 5.5. That was how long ago? And we are still below this. And so, I think that we need to keep our eyes on inflation, defending, promoting the symmetric 2% inflation objective, showing that we can get there. And I think the unemployment rate is a wonderful thing. I think more people are engaged in the workforce.
STEVE LIESMAN: Right.
CHARLES EVANS: Gaining skills, improving their relationship with the labor market, people who previously didn’t have those opportunities as much. So, I think structurally it is a good thing, too. But we really need to keep our eye on inflation. And unless inflation starts going up to something that is inconsistent with our 2% symmetric inflation objective, I think we’re pretty well set for policy.
STEVE LIESMAN: But Charlie, is it riskless to run this experiment? Are there concerns that you have that, hey, we can just keep interest rates low, we can see how low unemployment goes, and if it gets too low we can reverse course. Is it a riskless experiment?
CHARLES EVANS: There’s always risks. There’s an easy answer to a question like that, there’s risks on both sides. I don’t see us running an experiment where we’re trying to get the unemployment rate lower, lower, lower. I think, at the moment, I think that setting in monetary policy with the things that we’re facing. You know, 3.5% unemployment is likely to continue. It might go up a little bit, it might go down a little bit. But I think it is much more likely to be stable given the growth rates of GDP that we are kind of expecting. So, I don’t see a big risk there. Now, you know, you do hear many comments about the financial instability risk and with lower for longer rates, does that add a little effervescent in places we don’t need it? We are monitoring that very carefully. I think that the Board of Governors in Washington has been re-evaluating the stance of supervisory regulatory policies and making judgments that, you know, we can be in a good position. We have got good capital, more and better capital. Let’s, you know, let the economy continue to expand.
STEVE LIESMAN: Charlie, I’ve got two more areas I want to get to really quickly. First of all, the ISM number came out again showing contracture in the manufacturing sector. Your district, heavy in manufacturing. What are you hearing and seeing there?
CHARLES EVANS: Well, I think we have seen a lot of uncertainty associated with tariff policies, not knowing exactly where supply chains can be positioned, whether or not they have to be moved. I think that the agricultural setting, not being able to export as many soybeans and pork as they would like. So, I think the manufacturing sector has definitely been hit. I mean the agriculture effects heavy equipment manufacturers. You know, farmers don’t need to buy the combines and all of that.
STEVE LIESMAN: You’ve got both factors in your district.
CHARLES EVANS: Right. Exactly. So, I think, you know we definitely have seen those factors play out. I think what we’re kind of finding is that the economy can continue to expand with a modest contraction in the manufacturing sector at the moment. The consumer is playing a strong role. Business investment has not been strong at all. But the consumer has been strong enough. As long as that stays in place, I think we can continue to see growth at 2%, 2.25%. But of course, you know, we can’t withstand everything. But I think we’re well positioned.
STEVE LIESMAN: Charlie, one more thing. Talking about being well position, everybody was worried about overnight lending market over the turn — over the first of the year.
CHARLES EVANS: Right.
STEVE LIESMAN: It seemed like that rate was well-controlled.
CHARLES EVANS: Right.
STEVE LIESMAN: Does the Federal Reserve have to have or should it have what they call a standing repo facility? You have been doing temporary stuff. Should it become a standing repo facility so that it is there for good?
CHARLES EVANS: I see. We could talk for quite some time about that.
STEVE LIESMAN: But let’s not – let’s — for our views.
CHARLES EVANS: Sure. So, I think — a standing facility is something that many Central Banks have, the ECB and others.
STEVE LIESMAN: Right.
CHARLES EVANS: It is something that the Fed has contemplated. We could decide to make a judgment to put a standing facility in place. I think there are a number of parameters at what the interest rate is offered at, that could be important. Another alternative would just be to have a larger balance sheet so you always have enough reserves in the system. I think, at the moment, we sort of tried to reposition our Reserves so they’re more ample, back to the September of last year levels. There are some Treasury events, tax events coming up in the Spring, and we want to make sure we have the right amount of reserves in place. But if you go after a more efficient level of reserves that’s somewhat lower than we’ve been experiencing for sure and, you know, you might imagine having a standing repo facility could help out in the moments where dealer/brokers need access to those kinds of funds.
STEVE LIESMAN: Charlie, thanks for joining us this morning.
CHARLES EVANS: Thanks, Steve.
STEVE LIESMAN: Charles Evans, Chicago Fed President. Back to you guys from the AEA Conference, where, by the way, 13,000 economistic and students here in San Diego for this conference.
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