Fed's Waller: probability of easing pretty high

The U.S. Federal Reserve Building is pictured in Washington, January 26, 2010.

ST. LOUIS (Reuters) - The probability that the Federal Reserve will provide monetary easing at its November meeting is quite high, 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."

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 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 U.S. central bank's policy-setting Federal Open Market Committee, amplify signals from top officials that further easing is on the way.

St. Louis Fed President James Bullard said separately on Thursday that if the Fed decides to ease monetary conditions, he would favor incremental purchases of around $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, Editing by Chizu Nomiyama)