St. Louis Fed aide Waller talks to Reuters

ST. LOUIS (BestGrowthStock) – St. Louis Federal Reserve Bank Director of Research Christopher Waller told Reuters on Friday that policymakers are debating starting monetary easing with an initial purchase of $500 billion of Treasury securities, possibly to be followed by buying in smaller increments.

Following are highlights from the interview:

ON INCREMENTAL EASING

“You never think of the Fed saying, we’ve got to shock the markets by raising the Fed funds rate 300 basis points between now and next April. That policy would never be adopted. … I think the Fed would look very foolish if in the fourth quarter things came in significantly stronger and they’re marching down this path, and everybody will be saying, ‘Why are you still going this way?'”

ON THE POTENTIAL FOR GROWTH TO PICK UP

“To sit there at the beginning of November and say … we’re going to launch into some huge program, which within two months of data you could be completely off the mark (would be a mistake). If we had been sitting there in April and we’d said we’re going to cut the balance sheet in half in the next six months, two months later you’d have been sitting there going … that’s a mistake.”

ON THE SIZE OF EASING INCREMENTS

I think (St. Louis Federal Reserve Bank President James Bullard)’s number is between $100 (billion) and $150 (billion). He’s leaning toward the lower one because he’s very concerned about it looking like we’re buying all the new issue of government debt … If you said, between meetings, it’s $150 billion, you’re talking about 15 basis points, maybe that’s a little small. … I heard somebody say $250 billion would be more like it. That’s roughly 25 basis points, that’s meeting to meeting, so on a monthly basis it’s $150 billion, something like that. … 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 for some period of time, that’s kind of like a $250 billion purchase intermeeting. The only thing that’s tempering that number back for us, is we’re just worried about the optics of that in the sense of monetizing the deficit.”

ON DEBATE OVER THE SCOPE OF EASING

“Let’s take as an upward bound that it is equivalent to a 10 basis point cut per $100 billion. … Then a claim would be you should be looking at buying $250 billion meeting to meeting, because that’s how we do interest rate cuts. Now you could make the argument for the first meeting, you may want to go bigger than that, which would be equivalent of a 50 basis point cut, that would be $500 billion, and then after that, use smaller increments.”

ON CONCERNS ABOUT MONETIZING THE DEFICIT

“If you weren’t worried about the optics of monetizing the deficit … you’d say, maybe (buy) $250 billion over the intermeeting period. I think what a lot of people are concerned about is when you start talking about doing that, you’re talking about now buying $1.5 trillion over the next year, that’s more than the entire government deficit’s going to be, you’re basically printing … money to pay for the U.S. deficit. That scares people.”

ON CONSENSUS FOR EASING

“I think there’s a lot of momentum and support to do something. It’s just how huge and is it going to be time dependent and state dependent. … The likelihood we do something is probably pretty high. I think it’s really down to these two things. Is it going to be a big thing with a time date that by March 30 or April 30 we buy a $1 trillion or is it going to be something more along the line of what (St. Louis Fed President) Jim (Bullard) has advocated.”

ON PRICE LEVEL TARGETING

“Price level targeting is actually a pretty decent way to conduct policy … this is the key thing you need to have stabilization work and work well. … You have this credibility problem though … and there’s one thing we know after 30 years, is the credibility of the central bank is one of the most important things if not the most important thing that they can have. So any policy that might put your credibility at risk is very dangerous.”

(Reporting by Mark Felsenthal; Editing by James Dalgleish)

St. Louis Fed aide Waller talks to Reuters