MNI INTERVIEW: Ex-Fed Gagnon Sees Pause After October Rate Cut

--Fed's Treasury Bill Purchase Plan 'Reasonable'

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve is "moderately" likely to cut its

policy rate at its Oct. 29-30 meeting, and then pause to review incoming data

before further action, former Fed Board economist Joseph Gagnon told MNI.

     "My interpretation of the last meeting is that there's one more cut, even

without any surprising data," Gagnon said in an interview, in which he also said

that the Fed's decision to buy $60 billion of Treasury bills a month for six

months should help secure market calm.

     While Inflation has "been holding up pretty well lately" and the September

non-farm payroll report was overall "quite strong," Gagnon noted other data has

been mixed.

     "Given that mixed signal and given that they seem to be inclined to do one

more cut last time, I think they will. Then it'll really depend on the data.

They're really going to have to wait and see. I don't think there's any further

cuts unless we get really bad, further bad news."

     Fed Chair Jerome Powell last week at a NABE conference repeated his

oft-used line that the Fed "will act as appropriate to support continued

growth."

     Powell added "Looking ahead, policy is not on a preset course."

     -- TREASURY BILL PURCHASES ARE 'REASONABLE'

     The Fed announced Oct. 11 it would buy $60 billion of Treasury bills per

month for at least six months to expand its balance sheet and inject cash into

financial markets. The Fed aims to maintain a stable supply of excess reserves

in the financial system and avoid any recurrence of mid-September's spike in

repo rates.

     "I think it is reasonable for the program to last six months, totaling $360

billion," Gagnon said in a follow-up email. "Brian Sack, [former manager of the

Federal Reserve's System Open Market Account,] and I had recommended buying

about $250 billion for a start, but I see no problem with buying even more. It

should raise the level of bank reserves to a point where banks feel comfortable

to lend them out on a regular basis, thus calming the markets."

     "After that I expect they will continue to make purchases of around $10-20

billion per month to enable the balance sheet to grow in proportion to the

economy."

     "There are roughly $2.5 trillion T-bills outstanding, and the federal

deficit is quite large, which means more are issued every year. They should not

have a problem buying this many."

     -- PUSHING FOR A STANDING REPO FACILITY

     Gagnon, who, together with Sack, has argued in favour of a standing repo

facility since 2014, said that this "is still a good idea" to ensure ample

reserves and as a guardrail against unexpected market developments.

     Such a facility would mean episodes such as the recent repo turbulence

"wouldn't happen anymore because if they did make a mistake and they wanted more

reserves and they didn't supply them the standing facility would put them out

automatically. So I see no harm to doing it," Gagnon said.

     The Fed has suggested a standing repo facility could help mitigate

potential shortages around month ends and quarter ends even in an ample reserve

system.

     The Fed has been moving at a "glacial pace," but "continuously in our

direction and it continues to be moving in our direction," Gagnon said.

     The new environment requires a new system, Gagnon said, noting that some

want to "go back to the old system when reserves were almost non-existent and we

had to manage a multi-trillion dollar payment system on $30 billion of reserves

which is like trying to do the Charleston on a pinhead."

     "This is such a conservative institution and people are really very

cautious about what they say, and changes need to be vetted a million ways,"

Gagnon said. "It has benefits. It means they don't rush into crazy things, but

they've had 10 years to deal with this system. I don't think it's rushing."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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