CNBC EXCLUSIVE interview William Dudley NYFed 11-16-2010

8/7/2019 CNBC EXCLUSIVE interview William Dudley NYFed 11-16-2010

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CNBC TV EXCLUSIVE: CNBC TRANSCRIPT: CNBCS STEVE

LIESMAN SPEAKS WITH BILL DUDLEY,

PRESIDENT OF THE FEDERAL RESERVE BANK

OF NEW YORKTuesday, 16 Nov 2010 | 8:19 AM ET

WHEN: TUESDAY, NOVEMBER 16th

WHERE: CNBCS BUSINESS DAY PROGRAMMING

Following is the unofficial transcript of a CNBC TV EXCLUSIVE interview with Bill Dudley,

President of the Federal Reserve Bank of New York on Tuesday, November 16th. Excerpts

of the interview will run throughout CNBCs Business Day programming.

All references must be sourced to CNBC.

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

G20 MEETING

BILL DUDLEY: 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 these-- extraordinary-- monetary policy

steps. And that'll be good for everybody.

STEVE LIESMAN: 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: 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.
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STEVE LIESMAN: 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: I think that's very off base because I think that the goal of our policy is a

very simple one, to 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.

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: 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.

BILL DUDLEY: 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: Well, except for the fact that it's only the second time you've ever done

it. It's pretty special.

BILL DUDLEY: 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 further. But-- if you think about this conceptually, it really does

the same thing as lowering short term interest rates.


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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: 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: Well, I think the-- the problem we have is really the fact that we don't

have an international 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.

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: 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: I don't think-- we don't have a view about where the-- where the dollar

should go. We-- what we 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.

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.


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STEVE LIESMAN: 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 currency.

BILL DUDLEY: 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: 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: 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 doing this, and why we can do this safely.

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.

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 system. So we are very confident of our

ability to exit when the time comes, in terms of the tools.


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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: 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: I think the issue is-- I think people do not 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.

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 inflationproblem.

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 time comes.

STEVE LIESMAN: 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: 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.


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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.

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.

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.

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 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 seenJapan over the last 15 or 20 years.

STEVE LIESMAN: 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: 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 demand. We'd

have faster employment growth.

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


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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.

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: 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 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: 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: 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: I mean, I wouldn't get too precise about this. 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.

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.


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STEVE LIESMAN: 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

congressional action? In your opinion, is fiscal policy too tight?

BILL DUDLEY: 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.

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: One of the concerns that people have is that the-- the recent run in

with deflation we had in 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 lookslike they'd been at a little better footing in the last month or two.

BILL DUDLEY: 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: But inflation did rise into the sort of four percent level.

BILL DUDLEY: 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.


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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: Do-- do you think the people who-- who argue for the Fed not to be

doing anything now-- are those people promoting the idea of a recession right now?

BILL DUDLEY: 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 the benefits aren't that great, and the costs are-- are-- are

ho-- are relative high because they're worried about the exit problem.

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 greatexpectation of a large scale asset purchase program. Stock market went up, bond yields

fell.

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: 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?


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BILL DUDLEY: 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 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: 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: 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 terms

of employment.

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. Soinflation, you know, is just modestly below the level that most federal officials would say

is consistent with price stability. But the trajectory is downward.

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 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.


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STEVE LIESMAN: 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: 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-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.

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.

STEVE LIESMAN: How much of a concern are higher commodity prices?

BILL DUDLEY: 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.

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?

STEVE LIESMAN: --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?


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BILL DUDLEY: 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: 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: 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 more are-- what's

happening to inflation expectations-- and what's happening to the dispersion of inflation

of expectations.

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.

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 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: 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


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we don't want to do it that way, we want to promote stable prices or-- or-- or low-- lower

inflation?

BILL DUDLEY: 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 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.

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.

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

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, twopercent.

STEVE LIESMAN: So you're kinda implicitly rejecting the idea of IMF economist (Olivier)

Blanchard to aim for a higher inflation rate.

BILL DUDLEY: Absolutely. I'm not-- I'm not sort of rejecting it, I am rejecting it.

STEVE LIESMAN: 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: 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.

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.

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 that story.

STEVE LIESMAN: 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: 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.

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 actually having much

stronger employment, and much lower unemployment rate, a much healthier economy.

STEVE LIESMAN: 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: 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


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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.

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: 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 in

real regulation, and-- and a real addressing of the too big to fail issue?

BILL DUDLEY: 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.

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 some time to develop a resolution regime that works-- you know, in a

coordinative fashion around the world.


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STEVE LIESMAN: 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: 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: And-- does it mean higher capital requirements for big banks?

BILL DUDLEY: 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.

STEVE LIESMAN: 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: 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. You know, their currency has been appreciating, but at a

very modest rate.

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: 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?


17/19

BILL DUDLEY: 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, why they're putting those capital controls in place.

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: IS THERE something that you want to add to the discussion.

BILL DUDLEY: 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.

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: 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: 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 little bit more employment growth. But you know, we have a long bumpy road

to travel.

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


18/19

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.

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 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: So what are the ways that-- these large scale asset purchases can

affect the real economy?

BILL DUDLEY: 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.

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 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: But people say the Fed is playing a dangerous game by targeting the

stock market.

BILL DUDLEY: 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.

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


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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 what asset to

own at that point.

CNBC EXCLUSIVE interview William Dudley NYFed 11-16-2010

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Transcript of CNBC EXCLUSIVE interview William Dudley NYFed 11-16-2010