Mester favors steps this year to reduce Fed’s balance sheet

Cleveland Fed President Loretta Mester takes part in a panel convened to speak about the health of the U.S. economy in New York

By Lindsay Dunsmuir

RICHMOND, Va. (Reuters) – Federal Reserve Bank of Cleveland President Loretta Mester said on Tuesday that if the economic data holds up she supports the U.S. central bank taking steps that would begin to reduce its $4.5 trillion balance sheet.

“In my view, if economic conditions evolve as I anticipate, I would be comfortable changing our reinvestment policy this year,” Mester said in prepared remarks at an event in Richmond, Virginia.

The Fed built its portfolio over years of bond-buying in an effort to stimulate hiring and investment when interest rates were already at rock-bottom in the wake of the financial crisis.

Mester, who last year twice dissented against decisions to hold rates steady in favor of hikes, added that such a move would be consistent with the Fed’s oft-repeated phrase that it would look at reducing the size of its balance sheet when normalization of interest rates was well under way.

Fed Chair Janet Yellen alluded to debate within the ranks at its last meeting in March on when to make alterations to the policy. Mester offered few further details when asked by reporters, other than to say policymakers are discussing implementation and timing.

The central bank raised interest rates last week for the second time in three months and signaled it remains on track for another two rate increases this year as part of its first tightening cycle since 2004.

Speaking to reporters, Mester said that she currently envisages more than three rate hikes, higher than the Fed’s overall median forecast.

“I actually built into my forecast more than three because I have the economy a bit stronger,” she said, adding that three or more rate increases this year would put the Fed in “good shape.”

Mester is not a voter on the Fed’s rate-setting committee this year but participates fully in deliberations.

Earlier, in her speech Mester warned against going too-slow on rate rises, saying “an upward policy path will help prolong the expansion, not curtail it.”

She also said that economic conditions were ripe for inflation to return to the Fed’s “symmetric goal” of 2 percent on a sustained basis over the next year.

The Fed holds its next policy meeting on May 2-3 but few investors expect a rate hike before June.

(Reporting by Lindsay Dunsmuir; Editing by Diane Craft)