US monetary easing may start at $500 bn: Fed

Published on News Center, October 23, 2010.

Federal Reserve officials are considering easing that could start with USD 500 billion and progress in increments as high as USD 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.

US monetary easing may start at $500 bn: Fed

“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 USD 1.7 trillion in securities, is widely expected to renew an easing program at its November 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 US 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 USD 1.5 trillion over a year tempered by worry a too-aggressive strategy could backfire if investors believed the US central bank was monetizing the national debt.

Many market participants had been expecting easing of about USD 500 billion … //

… Policy-makers take as a rough estimate that USD 100 billion in Treasury purchases would reduce the yield on the benchmark 10-year Treasury note by about one-tenth of a%age 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 USD 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 USD 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 USD 1.5 trillion over the next year, it would look like the central bank is printing money to pay for the US budget deficit.

“That scares people,” Waller said. (full text).

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