Federal Reserve Bank of Cleveland President Loretta Mester said the central bank should shrink its balance sheet as fast as it can without disrupting financial markets and repeated her backing to a March interest-rate increase.
“The case is very compelling that we remove accommodation,” Mester, who votes on the rate-setting Federal Open Market Committee this year, said during a Wall Street Journal Live event streamed on Twitter Wednesday. “We’ll also be considering what we can do with our balance sheet, to bring the level of assets on our balance sheet down.”
Amid the hottest inflation in almost four decades, investors expect Fed officials to raise interest rates at their meeting in March and signal a shift toward shrinking its $8.8 trillion balance sheet later in 2022. The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982,according to Labor Department data released earlier on Wednesday.
“The economy’s in a much stronger place than it was when we started doing the reductions last time.” said Mester, answering a question on how quickly she favored shrinking the balance sheet. “Frankly I would like to reduce it as fast as we can conditional on it not being disruptive to the functioning of the financial markets.”
Mester is among the more hawkish members at the U.S. central bank, though other officials have been making similar arguments in recent weeks as inflation has surged.
Chair Jerome Powell told U.S. lawmakers Tuesday that the U.S. central bank would do what’s needed to keep price pressures contained, without giving specific guidance on when officials would act.
All members of the rate-setting Federal Open Market Committee saw rate hikes this year, from the near-zero levels to which they were slashed at the outset of the pandemic in March 2020. The median estimate was for three quarter-point moves and Mester confirmed that she was in that camp. The pivot, compared to estimates in September in which nine of the 18 officials saw no rate move in 2022, heralded determination to price pressures back under control.
“I do think that as some of the supply constraints move off, and if we can get beyond the pandemic and get conditions a bit more normal in the labor market, we’ll see inflation measures move back down,” Mester said. “But that’s incumbent upon the Fed doing what it needs to do in terms of moving off of the extraordinary accommodation that we needed to put in during the pandemic.”
