Fed’s Mester says she supports reducing balance sheet as fast as feasible

FILE PHOTO: Cleveland Federal Reserve Bank President Loretta Mester speaks in London
FILE PHOTO: Cleveland Federal Reserve Bank President Loretta Mester speaks in London, Britain, July 2, 2019. REUTERS/Marc Jones/File Photo

January 12, 2022

By Jonnelle Marte

NEW YORK (Reuters) -Now that the U.S. economy is in a stronger place, Federal Reserve officials should reduce the central bank’s bond holdings as quickly as they can without disrupting financial markets, Cleveland Fed President Loretta Mester said Wednesday.

Mester said she wants the Fed to look at using higher redemption caps as it reduces its balance sheet and that she would not want to rule out the possibility of actively selling assets, but emphasized those decisions will be based on the state of the economy.

“I would like to reduce it … as fast as we can conditional on it not being disruptive to the financial markets,” Mester said during a virtual interview with the Wall Street Journal. “I think there’s a very good case that we can go faster than we did the last time.”

Fed officials, when they meet again in two weeks, are set to debate strategies for removing the support offered to the U.S. economy during the pandemic. This would include reducing the balance sheet and raising interest rates. Mester repeated a view shared on Tuesday that she would support raising interest rates at the Fed’s March policy meeting if the economy looks similar to the way it does today, with the labor market recovering strongly and inflation running above the Fed’s 2% target.

U.S. consumer prices surged https://www.reuters.com/world/us/us-consumer-prices-increase-strongly-december-2022-01-12 by 7.0% in the 12 months through December, the largest annual increase in nearly 40 years, according to a report released Wednesday by the Labor Department.

Mester said she expects inflation measures to come down if the U.S. economy can move beyond the pandemic, but that would require the Fed to remove the extraordinary accommodation provided during the crisis.

“It’s not like you can think about what happens to inflation independent of what happens with monetary policy,” she said.

(Reporting by Jonnelle MarteEditing by Chizu Nomiyama)