Yes, a new UI interaction. The interviewer is clearly inquiring about a system, not about a scope. He is aware that Bethesda is making changes to Fallout, yet he observes that Bethesda is doing nothing different with dialogue, but is going for something "very traditional" instead. Pete's answer addresses that question.
By "unlimited monkeys," Pete obviously has in mind something that places demands on the same guys responsible for designing, programming, and balancing VATS. He cannot be thinking of the writing or of the quality of the writing. The VATS effort doesn't impact the quality of the dialogue. It is evident that Fallout 3's dialogue system is capable of delivering proper Fallout dialogue (as evidenced by New Vegas if not by Fallout 3). The ones responsible for putting that system into place got their job done. All that remained for the system to yield the proper results is writers (quest designers and level designers) with a better grasp of Fallout's application of writing. The ones responsible for for supplying that dialogue had no conflicting responsibilities. There is no clash of priorities, no reason to interpret "unlimited monkeys" as meaning that resources were not seriously allocated to making dialogue right.