MNI: Mester Backs Reducing Fed Balance Sheet 'Soon', MBS Sales

Cleveland Federal Reserve President Loretta Mester said Thursday she wants to start shrinking the central bank's USD8.9 trillion balance sheet soon, and foresaw a faster pace of rate hikes for the U.S. economy than seen in the last rate-hiking cycle started in 2015.

"Barring a material change in the economy, I anticipate that it will be appropriate to move the funds rate up at a faster pace this time and to begin reducing the size of the balance sheet soon and more quickly than last time," she said in prepared remarks. "In terms of the balance sheet, I would also support selling some of our mortgage-backed securities at some point during the reduction process, something we did not do last time."

Sales would help to speed the return of our portfolio’s composition to primarily Treasury securities, which would minimize the effect of the balance-sheet holdings on the allocation of credit across economic sectors, one of the FOMC’s principles for reducing the size of our balance sheet, she said.

Other Fed officials, including James Bullard of St. Louis and Esther George of Kansas City, have publicly shown support for asset sales off the central bank's balance sheet. The FOMC's January meeting minutes released Wednesday showed "many participants" said it might be appropriate "at some point in the future" to sell MBS. The Fed has USD2.7 trillion of MBS on its balance sheet.

The task before the Fed is to remove accommodation at the pace necessary to bring inflation under control while sustaining the expansion in economic activity and healthy labor markets, she said, noting it appropriate to move the funds rate up in March and "follow with further increases in the coming months."

The Cleveland Fed President also repeated that if inflation does not moderate as expected by mid-year then she would support more rate hikes over the second half of the year. "On the other hand, if inflation moves down faster than expected, then the pace of removal could be slower in the second half of the year than in the first half. So, the pace at which monetary policy accommodation is removed will need to be data driven and forward looking."