Fed aide: US monetary easing may start at $500 bln

* St. Louis Fed aide – discussion of $500 bln easing start

* Fed aide Waller – debate over size, pace of easing

* Plosser sees different views on approach to asset buying

* Plosser sees no need for more purchases by Fed now

By Mark Felsenthal and Kristina Cooke

ST. LOUIS/PHILADELPHIA, Oct 22 (BestGrowthStock) – Federal Reserve
officials are considering easing that could start with $500
billion and progress in increments as high as $250 billion, but
worry how such a move would be perceived, a top adviser for the
St. Louis Federal Reserve said on Friday.

“There’s a lot of momentum and support to do something,”
Christopher Waller, director of research at the St. Louis Fed,
told Reuters in an interview.

“It’s just how huge, and is it going to be time-dependent
or state-dependent. … The likelihood we do something is
probably pretty high,” he said.

The Fed, which cut rates to near zero and bought $1.7
trillion in securities, is widely expected to renew an easing
program at its Nov. 2-3 meeting. Fed Chairman Ben Bernanke said
last week that high unemployment and low inflation appear to
meet requirements for further Fed action.

Waller’s comments, in a rare on-the-record interview with
an aide who is present at discussions of the U.S. central
bank’s policy-setting Federal Open Market Committee, suggest a
lively debate in the Fed on the scope of easing, with
discussion encompassing options as extensive as $1.5 trillion
over a year — tempered by worry a too-aggressive strategy
could backfire if investors believed the U.S. central bank was
monetizing the national debt.

Many market participants had been expecting easing of about
$500 billion.

An important principal in the debate, Philadelphia Fed
President Charles Plosser, said separately on Friday there are
different views within the Fed about whether a small step or a
big bang approach would be more effective.

Plosser, who repeated that he himself did not see the need
for the Fed to buy more assets at this time, said the views
depend on how policymakers see the purchases working and what
they are trying to achieve — be it nudging up inflation or
lowering the unemployment rate.

“It depends what your objective function is and what your
estimates for the effects are. I think it’s a lot of guesswork.
We don’t really know. So that makes the policy decision
extremely difficult,” Plosser told reporters in Philadelphia.

Plosser has a reputation for being among those most
concerned about holding inflation at bay at all costs.

St. Louis Fed President James Bullard, viewed as a centrist
between inflation-focused hawks and full
employment-prioritizing doves, said on Thursday that if the Fed
decides to ease monetary conditions, he would favor incremental
purchases of about $100 billion of Treasury securities, without
setting an outer limit on the total bought.

Waller said the St. Louis Fed vastly prefers incremental
purchases to maintain flexibility as the economy evolves, and
that an approach under discussion is to buy as much as $250
billion from one meeting to the next, roughly the equivalent of
a quarter point move in short-term interest rates.

Policy-makers take as a rough estimate that $100 billion in
Treasury purchases would reduce the yield on the benchmark
10-year Treasury note by about one-tenth of a percentage point,
Waller said.

“There’s a lot of credibility to it that if we were going
to (move) the fed funds rate 25 basis points meeting to meeting
… that’s kind of like a $250 billion purchase intermeeting,”
Waller said. “The only thing that’s tempering that number back
for us is we’re worried about the optics of that in terms of
monetizing the deficit.”

One possibility would be to launch the Fed’s first move
with a larger purchase and scale back the increments after
that, he said.

“You could make the argument for the first meeting you may
want to go bigger than that, which would be the equivalent of a
50 basis point cut, that would be $500 billion,” Waller said.
“And then after that, you do smaller increments.”

However, Fed officials worry that with purchases that could
range in the neighborhood of $1.5 trillion over the next year,
it would look like the central bank is printing money to pay
for the U.S. budget deficit.

“That scares people,” Waller said.
(Reporting by Mark Felsenthal and Kristina Cooke, Editing by
Chizu Nomiyama, Gary Hill)

Fed aide: US monetary easing may start at $500 bln