dudley transcript edited

8/8/2019 Dudley Transcript Edited

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dudley transcript edited.doc

CNBC

"BILL DUDLEY INTERVIEW"

INTERVIEW WITH BILL DUDLEY

CORRESPONDENT: STEVE LIESMAN

PRODUCER: GRALNICK

STEVE LIESMAN: WERE YOU SURPRISED BY ALL CRITICISM OF THE FED FROM THE G20

MEETING

BILL DUDLEY:

14:02:37:00 Not surprised that they're unhappy because--

their currencies are appreciating-- rapidly.

There's large capital inflows coming to the

emerging markets. And obviously, that-- that

makes their job harder, so it's-- it's not

surprising that they'd be unhappy about it. I

think that-- what we have to, as a central bank,

is explain very clearly why we're doing what

we're doing. And that-- that-- and in fact, that

what we're doing is actually in their long-term

interests. The sooner the U.S. gets out of this

period of malaise that it's been in, the sooner

that we have more rapid employment growth--

stronger economy-- the quicker we can exit from


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these-- extraordinary-- monetary policy steps.

And that'll be good for everybody.

STEVE LIESMAN:

14:03:16:00 The-- head of the international department at the

People's Bank of China said that fed policy will

undermine and increase the downside risk in the

global recovery. What-- is that accurate?

BILL DUDLEY:

14:03:26:00 I don't think so. I think that the U.S. economy

growing faster-- with stronger employment growth-

- less risk of deflation is very much in the g--

interest of the global economy.

STEVE LIESMAN:

14:03:39:00 And just to-- one more criticism from abroad, the

German finance minister says it's hypocritical of

the United States to accuse China of currency

manipulation, and then use its printing presses

to, quote, artificially lower the value of the

dollar.

BILL DUDLEY:

14:03:50:00 I think that's very off base because I think that

the goal of our policy is a very simple one, to


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ease financial conditions. We're not trying to

push the dollar to any particular level. What

we're trying to do through our large scale asset

purchase programs is to remove treasuries from

the market, and force private investors into

other assets.

14:04:11:00 But we saw it from August to-- November-- is the-

- is the expectations of ano-- another program--

went from very low to very high. Stock market

up-- long term buying yields down, financial

conditions much more accommodative. And that's

supportive to the U.S. economic growth. So the

go-- the goal of the policy is not to push the

dollar up or down.

STEVE LIESMAN:

14:04:31:00 But you have to have some sympathy for the view

that you-- looking at the United States from

abroad, that there is a concerted effort on the

part of the Federal Reserve to go for a weaker

dollar. The Federal Reserve had to know that the

result of its policy would be a weaker dollar.


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BILL DUDLEY:

14:04:44:00 I don't think we knew that the dollar was

necessarily going to weaken. I mean, if people

look at our policy as making it more likely that

the U.S. economy is going to recover, the dollar

could appreciate rather than depreciate. Now

it's true that usually when one country uses

monetary policy relative to other countries, and

reduces their level of interest rates for the

other countries, the currency can weaken, but

that's true for any monetary policy using--

nothing special about a large scale asset

purchase program.

STEVE LIESMAN:

14:05:09:00 Well, except for the fact that it's only the

second time you've ever done it. It's pretty

special.

BILL DUDLEY:

14:05:13:00 Well, it's special because we're at the zero

bound in terms of short term interest rates. The

reason why we're moving to this policy is because

we can't lower short term interest rates any


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further. But-- if you think about this

conceptually, it really does the same thing as

lowering short term interest rates.

14:05:29:00 When U.S. lowers short term interest rates, it

affects long term bond yields-- which makes

financial conditions more accommodative. When we

purchase large-- when we do a large scale asset

purchase by removing duration from the private

market, we reduce long term bond yields so we

have the same-- consequence.

STEVE LIESMAN:

14:05:45:00 You've talked publicly about an equivalent

between-- purchase of assets and-- a federal

reserve basis point interest rate cut. The rest

of the world doesn't see it that way. Are they

not listening, or can you understand why they

would see it as a slightly different sort of aim-

- or goal here?

BILL DUDLEY:

14:06:00:00 Well, I think the-- the problem we have is really

the fact that we don't have an international


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financial system that allows currencies to adjust

smoothly around the world in sort of equivalent--

amounts in different countries. In some

countries, their currencies are very flexible.

14:06:16:00 In other countries, the currencies are not

flexible at all. And so the pressure builds up

on those countries with the very flexible

currencies. And so that increases their problem.

So the problem isn't the Fed's monetary policy,

the problem is the fact that we don't have--

international currency system that allows

equivalent flexibility-- of currencies across the

different countries.

STEVE LIESMAN:

14:06:35:00 You said that-- a weaker dollar was not the aim

of policy. Are-- do you think a weaker dollar

would be something that would be good for the

U.S. economy?

BILL DUDLEY:

14:06:46:00 I don't think-- we don't have a view about where

the-- where the dollar should go. We-- what we


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have a view about is what's the appropriate

monetary policy for the U.S. so that we can

achieve-- best achieve our dual mandate of-- full

employment and price stability.

14:07:00:00 So the dollar's really not part of that equation.

Now obviously, if the dollar goes up or the

dollar goes down, we factor that in, in terms of

our outlook, in terms of what that's going to do

to growth and then-- and employment and

inflation. But the dollar's not really the

objective of policy.

STEVE LIESMAN:

14:07:14:00 But as an economist of some renown before you

joined the Federal Reserve, and now as a-- the

new Fed president, you have to look at the 700 or

so billion dollar U.S. trade deficit and say, you

know what, this argues for weaker currency, that

a market based system would say that the currency

should be weaker, also given the-- com--

competitive-- advantages or disadvantages when it

comes to where-- where we are right now with the


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currency.

BILL DUDLEY:

14:07:38:00 I don't think you can draw that-- analogy from

the trade deficit to how that translates for the

currency 'cause we've actually had pretty

sizeable trade deficits for many years. And the

dollar's esse-- essentially, already reflects

that. In fact, the trade deficit now is quite a

bit-- smaller than it was a few years ago.

STEVE LIESMAN:

14:07:54:00 Has the Fed effectively communicated its policy?

Why, except for a single op ed in the Washington

Post, didn't the Federal Reserve come out and

talk about what it was trying to do, and what

impact it would have?

BILL DUDLEY:

14:08:05:00 Well, I think that we certainly explained-- in

the run-up to the policy decision why we were

contemplating the-- the-- the possibility of

doing large scale asset purchases. I think

probably we haven't communicated it as

effectively as we'd like to in terms of why we're


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doing this, and why we can do this safely.

14:08:23:00 You know, I think there's sorta two sort of

critiques of the large scale asset purchase

program. One, it won't be effective. It doesn't

do that much. And-- and we agree with that, that

we don't think that this large scale asset

purchase program's going to have a huge, powerful

effect on-- on the U.S. economy.

14:08:37:00 And two, I think there's a lotta concern about

exit. Once-- when the time comes and the U.S.

economy finally does pick up speed and inflation

starts to rise, will we-- will we be-- will--

will-- will we be able to exit from this program

smoothly without a long term inflation problem?

And I think the answer to that second question is

really critical. And our answer to that question

is very much yes. We have the ability to exit

smoothly because we have the ability to pay

interest on excess reserves. We have the ability

to drain excess banking res-- reserves from the


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system. So we are very confident of our ability

to exit when the time comes, in terms of the

tools.

14:09:07:00 We also are very confident of our will to exit.

So the second thing I think that's-- that worries

people is will the Fed do the right thing when

the time comes. And I think everybody on the

FOMC-- I think everybody on the Federal open

market committee is completely committed to

keeping inflation-- low over the long term.

STEVE LIESMAN:

14:09:26:00 Just today-- 600 economists published a-- letter,

open letter saying that the-- Fed's plan to-- to

do large triage-- purchase (?), quote, risk

currency debasement and inflation. Does it make

you think twice that maybe you have the economics

wrong here if 600 economists, many of them fairly

renowned in their own right are on the other side

here?

BILL DUDLEY:

14:09:45:00 I think the issue is-- I think people do not


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understand clearly-- and that-- and this is

partly on us to communicate clearly our ability

to manage-- this when we actually acess-- we can

have an enlarged balance sheet and not have an--

a long term inflation problem.

14:10:00:00 And the reason for that is we have the ability to

pay interest on excess reserves, which allows us

to raise the cost of credit in a way to moderate

credit demand when the time comes. That tool we

did not have prior to the fall of 2008. So if

you're reading the old money and banking

textbooks, yes, you would be very concerned that

the increase in the size of the Fed's balance

sheet is going to ultimately lead to a long term

inflation problem.

14:10:23:00 Except the world today is different than the

world prior to 2008 because we have new tools in

place. If we didn't have that tool, we wouldn't-

- we'd be doing what we're doing. That tool

gives us the ability to exit smoothly when the


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time comes.

STEVE LIESMAN:

14:10:34:00 What's happening to this-- these-- this money you

put out there. Does it create money? I mean,

people say the Fed is just printing money. Is

that an accurate description of what you guys are

doing?

BILL DUDLEY:

14:10:42:00 Well, I wouldn't say we're quite printing money.

What we're doing is b-- when we buy treasury

securities, we are increasing the amount of

reserves in the banking system. For those

reserves to actually create money, the banks

actually have to lend those reserves out.

14:10:55:00 The problem we have in the U.S. economy today is

not that there's too much lending. No, the f--

the problem we have in the economy today is

there's insufficient lending. Up until very,

very recently, total loans, outstanding were

declined, they'd been declining for the last

several years.


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14:11:07:00 So there's plenty of reserves in the banking

system right now. If we increase the amount of

reserves in the banking system, it's not going to

have any big consequence for lending. How the

large scale asset purchase program works is not

through its effects on bank reserves, but its

effects on financial asset prices.

14:11:23:00 By easing financial market conditions, it makes

households-- by lowering long term rates, it

makes housing more affordable. It re-- reduces

the costs for businesses to invest. This higher

stock market increases household wealth. And so

all these things have-- they're not-- they're not

powerful in terms of their effects.

14:11:39:00 But even a little bit of nudge to the economy

today I think is very, very important because if

the economy can grow a little bit faster, that

gives you a much better prospect about being in a

virtuous (?) circle, little bit stronger growth


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leads to a little bit more demand. Little bit

more demand leads to more employment growth,

higher income, rising confidence, a virtuous

circle. And what the Federal Reserve wants to do

is make sure that we're in that side of-- of

things, rather than on the other side of things

where we've seen Japan over the last 15 or 20

years.

STEVE LIESMAN:

14:12:09:00 I just want to come back to thing. So-- so

you're saying effectively that people who say the

Fed is printing money are essentially wrong.

It's not that you disagree with Milton Friedman's

(PH) idea, it's just that you don't think we're

at a place where Milton Friedman's ideas apply

directly right now?

BILL DUDLEY:

14:12:26:00 For the-- for money-- for-- for the money supply

to go up, the banks have to take those reserves

and lend them out. What's actually happening

right now is they're not lending them out. If

they were lending them out, then we'd have more


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demand. We'd have faster employment growth.

14:12:39:00 That would be actually a good thing. So the

reserve creation at this point is not causing any

problems. Now eventually, if the economy picks

up speed and people become more confident about

the outlook, the banks will presumably be more

willing to lend those reserves out. At that

point, we're going to have to be able to manage

that exit problem.

14:12:57:00 The-- the way we do that is we can raise the rate

that we pay-- pay banks on the excess reserves

that they hold with us. By raising that rate, we

can induce the banks to hold the reserves with us

rather than lend them out. But that's not the

problem we have today, that's the problem in the

future.

STEVE LIESMAN:

14:13:11:00 But it is an issue of how quickly you can apply

the brakes, right? I mean-- in the first

instance, you guys do a series of quarterly


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surveys on lending. How well do you think your--

how good is your ability to gauge-- lending and

the use of these excess reserves such that you

can get in front of a process whereby the banks

are really creating money?

BILL DUDLEY:

14:13:28:00 I don't think, Steve, this is really any

different than the problem that we face-- during

any-- transition from recession to expansion. At

some point in this business cycle, the Fed has to

go from an easing mode to a tightening mode.

This is really no different. The only difference

this time is we'll be doing it within-- with a

much bigger balance sheet.

STEVE LIESMAN:

14:13:45:00 Can-- can you explain the amount of QE (PH), or

quantitative easing that you arrived at and the

duration? Why 600 billion for eight months? Why

not 500 billion for seven, or 700 billion for

nine?

BILL DUDLEY:

14:13:59:00 I mean, I wouldn't get too precise about this.


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You know-- you know, it's-- it's not like if we

do 50 billion more or 50 billion less it's going

to have effects. You know, what we did is we--

we-- we did an amount that we thought was

significant enough to have an impact.

14:14:15:00 We-- we think that the 600 billion of large scale

asset purchase programs is roughly equivalent to

a 75 basis points reduction in the federal funds

rate. Now, we stretched it over eight months

because we don't want to buy so much treasuries

at any given time that we just start to distort

the markets. So-- the time period was more tied

to how much could we-- how fast could we do that

600 billion without distorted market prices

unduly.

STEVE LIESMAN:

14:14:38:00 The Fed chairman how-- said in his speech in

Jackson Hole that the Federal Reserve cannot do

it alone, and practically asked Congress to do

something. How much of-- of-- of the amount that

you've done is the result of what you could call


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congressional action? In your opinion, is fiscal

policy too tight?

BILL DUDLEY:

14:14:58:00 I wouldn't make a judgment about what Congress

should or shouldn't do on fiscal policy. But I

think the chairman was absolutely right. It-- it

can't all be about the Fed on monetary policy.

What we can do is pull the levers that we think

will generate better outcomes in terms of

employment and inflation over the medium to long

term, and that's what we're doing.

14:15:17:00 What Congress can do, I think, is provide more

clarity on the fiscal outlook. I mean, one of

the problems today is not just that we-- not just

what the fiscal trajectory is, but its

uncertainty about that fiscal traject-- tra--

trajectory that's probably causing people to

hold-- hold back.

STEVE LIESMAN:

14:15:31:00 One of the concerns that people have is that the-

- the recent run in with deflation we had in


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2003, they-- they argue the Fed had it wrong,

that while the Fed was busy fighting deflation at

an output gap, in fact, there was inflation

brewing, and the Fed was forced to revort--

reverse course fairly rapidly. What assurances

do you have, can you give us now that this is not

a repeat of '03, given also that the economy

looks like they'd been at a little better footing

in the last month or two.

BILL DUDLEY:

14:15:59:00 Well, if you-- if you remember back to 2003-- we

didn't have-- an inflation problem in 2004, or

2005, or 2006. In fact, you know, the problem

in-- in the 2003-- expansion was not what was

happening to price inflation, but what was

happening to housing prices. So I think what--

what that cycle tells us is that we have to watch

other things than just prices of goods and

services, but financial asset prices. So--

STEVE LIESMAN:

14:16:25:00 But inflation did rise into the sort of four

percent level.


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BILL DUDLEY:

14:16:27:00 It was-- it was-- it was pretty moderate. I

mean, at the-- at the end of the day, I-- I-- I

think it's not fair to say that we had an

inflation problem during the last cycle. Look,

obviously, we're going to have to look at all the

panoply of economic indicators very carefully to

know when the time is right to exit.

14:16:43:00 Now, you know, I think-- you know, it's-- I think

it's remarkable though that we're spending so

much time talking about exit when you think about

the fact that we have a 9.6 percent unemployment

rate, and an economy that's growing only about

two and two-- two to two and a half percent at an

annual rate. We're not even generating

sufficient jobs yet to-- actually bring the

unemployment rate down. So you know, this exit

could be several years away.

STEVE LIESMAN:

14:17:06:00 Do-- do you think the people who-- (COUGHING)

pardon me-- who argue for the Fed not to be doing


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anything now-- are those people promoting the

idea of a recession right now?

BILL DUDLEY:

14:17:21:00 I don't think they're promoting. I think the-- I

think they're making-- I think it's reasonable

people can differ about the benefits versus the

costs of another large scale asset purchase

program. I mean, reasonable people can differ.

So I-- I certainly understand why some people

think that this is not a good idea because

they're-- they're-- in their assessment

(COUGHING) the benefits aren't that great, and

the costs are-- are-- are ho-- are relative high

because they're worried about the exit problem.

14:17:44:00 I think where we-- where-- where the majority of

people on the federal market committee (?) come

out-- is very much on the side that the benefits

do outweigh the costs. The benefits outweigh the

costs because we saw the effect on financial

conditions as we went from no expectation of a

large scale asset purchase program to a much


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great expectation of a large scale asset purchase

program. Stock market went up, bond yields fell.

14:18:05:00 And the second thing-- and I think this is the

thing that's really important, is I think that--

that most members of the federal-- market

committee are-- are very confident that we have

the tools to exit smoothly when the time comes,

and all members of the FMOC have the will to exit

smoothly when the time comes.

STEVE LIESMAN:

14:18:22:00 Some of those people who disagree with the policy

are the guys you are rubbin' shoulders with, or

rubbing elbows with the FMOC meeting. How bitter

is the debate right now? How strong is the

divide among members of the FMOC when it comes to

this issue?

BILL DUDLEY:

14:18:41:00 I think reasonable people can differ about costs

and benefits. And I think it's not surprising as

the Fed gets to unusual, unconventional policy

tools that there can be disagreement about


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whether the benefits-- outweigh the costs. But

you know, if you look at the last Federal open

market committee meeting, you know, the vote was

ten to one in favor of this policy. So I think

that tells you that there's a pretty strong

consensus on the committee that the benefits do

outweigh the costs.

STEVE LIESMAN:

14:19:05:00 I'm going to come back to the question I asked,

and-- and I'm asking this personal way (?). In

the absence of this policy that you have, do you

feel as if the economy risked recession?

BILL DUDLEY:

14:19:15:00 I don't think that-- yeah, well, I mean, I think

there was certainly a risk. I think what

happened as we went from spring to summer is we

saw the economy losing its forward momentum. The

benefits of the economy of the inventory

restocking were starting to fade, and we really

hadn't caught yet in terms of consumption,

spending, business, fixed investment picking up

in a way that was generating sizable gains in


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terms of employment.

14:19:37:00 So the economy was actually slowing down as we

were going through the year. The second half of

the year looks like it's going to distinctly

slower than the first half of the year. That's--

creates some anxiety. Second, we're seeing

inflation come down. So inflation, you know, is

just modestly below the level that most federal

officials would say is consistent with price

stability. But the trajectory is downward.

14:19:58:00 So slowing economy-- traje-- trajectory of

inflation declining, you know, get-- it's-- it's

starting to get you a little bit uncomfortably

close to the-- the-- the economy's tipping point,

not that-- so much that we thought we were going

to fall into recession, but you know, as you-- as

the economy's slowing, you're getting closer to

that tipping point, the risk are rising that

there could be some shock to the economy that

could push you over that edge. And the next


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thing you could know, you could actually be

spinning down into recession. So one way to

think about the policy that we put in place is

that we basically, by providing a little bit of

extra support to the economy, we're pushing the

economy away from that tipping point, and

therefore, s-- having a meaningful effect on the

risk of a double dip.

STEVE LIESMAN:

14:20:40:00 Are-- are you an advocate of this idea-- I don't

mean advocate, but do you-- support the idea

that-- there's a stall speed for the economy,

that-- we can't just grow below potential and

potentially have unemployment rising beneath

that, that that itself could tip the economy over

into recession?

BILL DUDLEY:

14:20:58:00 Well, I think there is-- a fair amount of--

empirical evidence that suggests that there is a

stall speed for the economy. One interesting

fact from the post war-- World War II period in

the United States is we've never had a three-


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tenths of a percent rise-- in the unemployment

rate-- without actually-- once it goes up three-

tenths of a percent, we end up having a full

blown recession.

14:21:20:00 And the next-- increase after three-tenths of a

percent, the smallest is 1.9 percentage points.

So that we've never had an increase in the

unemployment rate of just a half a percent, or

just one percent, or just one and a half percent.

So that does suggest that that-- that once you

get to a certain point, and an unemployment rate

goes up enough, that starts to weigh on

confidence, that starts to weigh on spending. If

spending is cut back, that leads to more

unemployment, and the economy cycles down into

recession.

14:21:46:00 (OFF-MIC CONVERSATION)

STEVE LIESMAN:

14:22:29:00 How much of a concern are higher commodity

prices?


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BILL DUDLEY:

14:22:34:00 I mean, I think that higher commodity prices, you

know, are not a big concern, but certainly,

they're a small concern. Obviously, to the

extent that commodity prices go up a lot-- that

would be a hit to-- real incomes in the U.S., and

therefore, would be a negative in terms of-- the

economic outlook.

14:22:51:00 I think the-- the important thing though is you

know, we don't-- you know, to the extent that

commodity prices are going up, it's hard to know

what's really driving it. Is it the large scale

asset purchase program, or is it the fact that

emerging-- growth in the emerging world is very,

very strong? Or is it the fact that in certain

parts of the world, the-- the growing season

hasn't been very good, and so-- there's been

increase in-- in-- in agricultural commodity

prices?

14:23:10:00 (OVERTALK)


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STEVE LIESMAN:

14:23:11:00 --but does it also mean that people don't believe

in the dollar anymore, and they're looking for

safe have assets like-- assets like gold or oil?

BILL DUDLEY:

14:23:19:00 Well, I think the important thing here-- you

know, when you're talking about commodity prices

is that the share of commodity prices in the U.S.

consumer basket is pretty low. So commodity

prices have to go up a lot to have a really--

significant effect on-- on real income growth in

the United States.

STEVE LIESMAN:

14:23:36:00 When you look at gold, and you see it over $1,400

an ounce, does it give you again, concern over

the credibility of Fed policy?

BILL DUDLEY:

14:23:43:00 Well, we certainly do assess over a whole variety

of indicators to get a sense of-- of what the

credibility of-- of-- of federal reserve policy

is. Gold prices, you know, would be one of

those. But the thing that we really focus on


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more are-- what's happening to inflation

expectations-- and what's happening to the

dispersion of inflation of expectations.

14:24:02:00 Are there people that are becoming more and more

nervous that inflation's going to get away from

us on the upside? And when-- when we look at

inflation expectations, what we see over the last

six months is that as the economy's slowing, as

we went into the summer-- inflation expectations

were coming down. And they were coming down to a

point where it started to suggest that people

were actually starting to worry about a deflation

kind of outcome.

14:24:24:00 And over the last three months, as we've gone

from no-- very low probability of a large scale

asset purchase program to a much higher

probability, inflation expectations have come

back-- to where they were earlier in the year.

So-- so-- we certainly monitor that. Now, gold

prices is a tricky one because you know, when


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real rates are really low like they are today,

like five year tip yields-- were-- you know, were

negative-- the-- the carrying cost of holding

gold is really, really low. And so gold prices

are going to go up in part because-- the-- the--

the carry cost is extraordinarily low in an

environment where monetary policy is easy like it

is today.

STEVE LIESMAN:

14:24:58:00 You talked-- if I'm right about the idea of being

able to put the genie back in the bottle when it

comes to exit strategy. What about the idea of--

of Fed credibility on inflation fighting? Do you

feel like you can promote inflation for a while,

or higher levels of inflation, and then turn it

on a dime, and say, no, no, no, we-- we-- now we

don't want to do it that way, we want to promote

stable prices or-- or-- or low-- lower inflation?

BILL DUDLEY:

14:25:21:00 Look, I don't think there is any support at all

within the federal open market committee to allow

higher inflation than what's consistent with


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price stability. If you look at the federal open

market committee-- almost all the members think

that-- price stability is somewhere in the range

of one in three-quarters to two percent.

14:25:37:00 That's what we're committed to, as the chairman

had said, two percent or a bit less. There's no

desire to fool around with going above that.

It's too dangerous. We-- we saw what happened in

the '60s and '70s when-- once the central bank

tolerates a little bit more inflation. At the

end, it gets you nothing because at the end, you-

- that-- you're going to have to put that genie

back in the bottle.

14:25:58:00 And that means you're going to have to end up

having-- a tough-- difficult recession, which is

what the Federal Reserved engineered in the late

'70s and early '80s under Chairman Volcker. Very

painful to get inflation back down. So you know,

I think everybody on the federal open market

committee understands that higher inflation is a


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bad thing. It's not consistent with achieving

our-- our-- our other part of our dual mandate,

which is maximum employment. The best way to

achieve maximum employment over the long run is

to keep inflation low, around one and a half, two

percent.

STEVE LIESMAN:

14:26:26:00 So you're kinda implicitly rejecting the idea of

IMF economist (Olivier) Blanchard to aim for a

higher inflation rate.

BILL DUDLEY:

14:26:31:00 Absolutely. I'm not-- I'm not sort of rejecting

it, I am rejecting it. (LAUGHTER)

STEVE LIESMAN:

14:26:37:00 The economy of late looks like it's on a little

bit better footing. Are you at all more

optimistic than you had been, given s-- say, from

the-- from the summer, at all? You s-- what--

what kind of acceleration are you looking for in

2011, from what you talked about earlier, the

slower second half?


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BILL DUDLEY:

14:26:50:00 Well, I think the most recent set of economic

numbers have been a little bit better. We saw--

a somewhat better private-- sector employment

report. We saw a pretty good jump in hours

worked-- in-- in October-- retail sales a little

bit firmer.

14:27:06:00 But you know, the-- the-- the-- economies have a

lot of volatility in them. So I would be a

little bit hesitant to throw out too big a signal

from one month's worth of-- of data. Also it's

important to recognize that we have lots of slack

in this economy. So we need many, many months of

200,000, 300,000 pings in payroll employment. We

haven't even got to that level once yet.

14:27:28:00 So I think that, you know, it's-- it's-- it's--

it's a-- it's heartening to see a little bit of

signs of improvement. And I think-- the easing

of financial conditions that we engineered from

August to November was probably a helpful part of


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that story.

STEVE LIESMAN:

14:27:41:00 One of the criticisms of Fed policy is that there

could be potentially large losses on the Fed's

balance sheet if interest rates go the other way.

How much concern is-- essentially, the steward of

the Fed's balance sheet do you have about that?

BILL DUDLEY:

14:27:50:00 Well, I think the ad-- the-- you know, I think

it's very, very important to recognize that the

large scale asset purchase program does expose

the Federal Reserve's balance sheet to risk in

the sense that if interest rates go up a lot,

long term interest rates go up a lot-- the

Federal Reserve could have losses on some of its

securities.

14:28:06:00 But m-- my own personal view is that-- if that

were to occur, it'd be occurring in an

environment where we're actually getting a strong

economic recovery. So the costs there, I think,

would be very modest, relative to the benefits of


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actually having much stronger employment, and

much lower unemployment rate, a much healthier

economy.

STEVE LIESMAN:

14:28:24:00 Interest rates, since you started QE, seem to be

going the other way, and the dollar seems to have

done the opposite of what critics contended was

the point of the policy. What do you make of

the-- of-- of the tenure now sort of up in that

280 range when you-- back in Jackson Hole, you're

in the 260 range?

BILL DUDLEY:

14:28:40:00 Well, I think that a couple things are happening.

One, the economic news is looking somewhat

better. And of course, the bond market's going

to react to that more favorable economic news.

So yeah, the problem always is-- the question is

well, what would the bond yield be without the

second large scale asset purchase program. And

we just don't know what that counter factual (?)

would be.


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14:28:56:00 I think the second thing, of course, that's

happening is-- you know, there-- there has been

some-- renewed concerns about some of the

peripheral countries in Europe. And so the Euro

has-- has-- has weakened against the dollar after

strengthening versus the dollar. And I think the

issue, of course, is that, you know, large scale

asset purchase program, people were expecting it.

And so, you know, it's probably a little bit of

the, you know, buy on the rumor, sell on the

news-- when the large scale asset purchase

actually-- program actually arrives.

STEVE LIESMAN:

14:29:22:00 So I just got back from Seoul where members of

the G20 approved Basel Three, something you

worked on, but also-- I want your comment on what

they did relative to the big systemically

important banks. Did they kick it down the road

to a place where nothing will get done, or do you

feel confident having-- knowing what's inside

that communicate, that this is beginning of a

process that in say, a year's time, will result


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in real regulation, and-- and a real addressing

of the too big to fail issue?

BILL DUDLEY:

14:29:48:00 I think the too big to fail issue is being

addressed-- both in the U.S. and elsewhere.

What's happening on the international track is

identifying-- globally-- important-- systemically

important financial institutions. So-- and

basically-- for those institutions-- it's

thinking about-- having-- rules and regulations

in place that required them to have more loss

absorbing cap-- capacity relative to smaller,

less systemically important institutions.

14:30:17:00 And of course, here in the United States-- you

know, the-- the-- the Dodd Frank Act (PH) has

established-- a new resolution regime for large

systemically important non-bank financial

institutions, so we're making progress on this.

You know, but this is not easy-- for globally

active firms that are participating and active in

many different jurisdictions-- it's going to take


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some time to develop a resolution regime that

works-- you know, in a coordinative fashion

around the world.

STEVE LIESMAN:

14:30:41:00 Do you feel like a year, you'll come back, and--

I know you're goin' to Basel a lot. Do you feel

like that-- that process is going to lead, in a

year's time, through a real global regime?

BILL DUDLEY:

14:30:50:00 Well, I think it's going to-- it may-- may take

longer than a year. I mean, I think, in fact, it

will probably take longer than a year. But I

think if-- you know, if the U.S. can make

progress on-- in implementing its resolution

regime, and other countries can make similar

progress-- then I think, you know, down the road,

we will get to a point where we actually can

resolve-- a large complex global firm.

STEVE LIESMAN:

14:31:07:00 And-- does it mean higher capital requirements

for big banks?


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BILL DUDLEY:

14:31:12:00 Well-- what-- what the-- what the G20 and the f--

financial stability board have endorsed is-- is--

is greater loss absorbing capacity-- for these

firms. Doesn't necessarily have to be a higher

common equity, but it just has to have a greater

loss absorbing capacity. So that could be a debt

that converts into equity-- or contingent

capital, or s-- something that, you know, other--

other-- other measures.

14:31:33:00 (OFF-MIC CONVERSATION)

STEVE LIESMAN:

14:31:38:00 China now seems to be battling a-- an inflation

problem, or at least taking action as if it has

one. How much of the inflation problem that

China seems to be having right now, in your

opinion, stems from its currency policy?

BILL DUDLEY:

14:31:53:00 I think the-- you know, China has-- a bit of an

inflation problem because they've been growing

very, very rapidly. You know, you look at their

growth rate, it's been very, very, very strong.


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You know, their currency has been appreciating,

but at a very modest rate.

14:32:07:00 You know, I think if they-- you know, if they--

if they want to-- restrain inflation, they have a

number of tools to-- to do so. One tool is

raising interest rates, another tool is raising

reserve requirements, and then a third tool would

be letting their currency appreciate at a-- at a

faster pace.

STEVE LIESMAN:

14:32:23:00 One outcome from what seems to have happened in

the United States with the-- with policy has been

capital controls on some emerging market

countries. Does that give you concern?

BILL DUDLEY:

14:32:32:00 Well, I-- I certainly want-- want to-- you know,

tell emerging market countries how to cope with--

large capital in flows that they're experiencing.

I think it does create-- you know-- difficult

situations. So I think it-- I certainly

understand when they-- when-- when-- you know,


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why they're putting those capital controls in

place.

14:32:50:00 You know, they basically have three options;

capital controls-- reserve accumulation, or

letting their currencies of-- appreciate very,

very sharply. And so I-- I-- certainly-- it

certainly makes sense that you might want to use-

- more than just allowing the currency to

appreciate very, very sharply, 'cause that could

start to distort the composition of growth within

the economy.

STEVE LIESMAN:

14:33:11:00 IS THERE something that you want to add to the

discussion.

BILL DUDLEY:

14:33:23:00 Well, I think the-- the big thing that I-- I

really want to stress is-- is the fact that--

there has been a debate on the FOMC about the

large scale asset purchase program and-- you

know, that-- in my mind, that's completely

appropriate.


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14:33:34:00 Reasonable people can-- can differ about where

the benefits and costs fall. But I think the

important thing to stress is that the FOMC

membership is really, actually-- has a consensus

on a couple important issues. One, the

importance of the dual mandate-- try to achieve

maximum employment and price stability. Price

stability not just in the present, but over the

long run. Two, to use all available tool to try

to achieve that dual mandate. And three, most

importantly-- not let inflation get away for a

little while.

STEVE LIESMAN:

14:35:21:00 Bill, did you suggest earlier that you think

quantitative easing will have little effect on

the economy. Is that what you're saying?

BILL DUDLEY:

14:35:26:00 Little effect, I wouldn't agree with. Modest

effect. It's not a fantasy. It's not a magic

wand. It's going to make the economy grow a

little bit faster. It's going to generate a


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little bit more employment growth. But you know,

we have a long bumpy road to travel.

14:35:37:00 Now, that said, a little bit faster employment

growth-- is a good thing-- because it pushes the

economy farther away from-- from the tipping

point. You know, if we can get even a little bit

faster growth, there's more chance of a virtuous

circle taking hold where faster employment growth

leads to rising income, leads to more spending,

leads to rising confidence, and then the circle

continues in a p-- very positive direction.

14:36:03:00 So I think that people understate the importance

of a little bit faster growth. A little bit

faster growth can make the difference between a

very good outcome down the road and a very bad

outcome. And I don't know-- so I think that, you

know, people who focus on, well, it's only worth,

you know, X-tenths of a percent on GDP, or X-

tenths of a percent on the unemployment rate are

missing the point that the difference between


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moving a little bit faster-- and moving a little

bit slower can-- can make all the world of

difference because the economy does have a

tipping point.

STEVE LIESMAN:

14:37:04:00 So what are the ways that-- these large scale

asset purchases can affect the real economy?

BILL DUDLEY:

14:37:10:00 Well, I think that it-- works on the real economy

through the effect on financial market

conditions. So for example, as we went from

August to November, what we saw was the stock

market went up. Stock market going up boosts

households' wealth, makes people maybe a little

bit more comfortable, spending a little bit more,

saving a little bit less.

14:37:26:00 We also saw a drop in long term interest rates.

We saw-- a compaction, a compression of credit

spreads. So the cost of businesses to--

undertake new investment-- fell during that

period. And obviously, very low mortgage rates


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make housing more affordable, so that create--

increases the demand for housing, which is

particularly important in environment where--

where the housing market is very, very-- soft.

STEVE LIESMAN:

14:37:47:00 But people say the Fed is playing a dangerous

game by targeting the stock market.

BILL DUDLEY:

14:37:52:00 I don't think we're targeting the stock market,

what we're doing is we're removing treasury

securities from the private sector's hand, and

letting the private sector choose what assets

they want to replace those treasury securities

with.

14:38:04:00 So it's really the private sector making the

choice, okay, so I'm-- no longer can hold these

treasuries, 'cause I have now sold them to the

Fed. So the private sector's deciding, you know,

do they want to bid up the stock market, do they

want to buy c-- corporate bonds. So it's really

the private sector that's making the decision


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what asset to own at that point.

dudley transcript edited

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