Federal Reserve Bank of Cleveland President Loretta Mester called for the U.S. central bank to continue with gradual interest-rate increases and begin shrinking its $4.5 trillion balance sheet this year if the economy continues to improve.
"If economic conditions evolve as I anticipate, I would be comfortable changing our reinvestment policy this year," Mester said, according to the text of a speech she delivered Tuesday in Richmond, Va. "Ending reinvestments is a first step toward reducing the size of the balance sheet and returning its composition to primarily Treasury securities over time."
Mester, who expects the economy to expand at "somewhat above" the 2 percent pace of trend growth over the next year, said her forecast would justify continued rate increases in 2017, but not one at every meeting of the Federal Open Market Committee, which gathers eight times a year.
Mester's remarks come a week after the FOMC raised the target range for Fed's benchmark lending rate by a quarter percentage point to 0.75% to 1%, reflecting steady if unspectacular progress this year in a broad range of gauges of economic activity.
In a press conference on March 15, Chair Janet Yellen, while declaring confidence in the "robustness" and "resilience" of the economy, nonetheless made clear the rate hike, in her view, didn't reflect a change in the committee's outlook for the economy or the likely path of monetary policy.
Mester largely agreed. She played down early signs that growth may be weak in the first quarter and indications of slightly higher inflation.
"Tracking estimates suggest that growth in the current quarter may come in on the weak side," she said, adding: "I am not taking much of a signal from this, as it likely reflects some transitory factors."
On inflation, she said the Fed should "look through transitory movements in the numbers, both those above and those below our goal."
While the Fed's preferred gauge of inflation has jumped recently, reaching 1.9% in the 12 months through January, the measure that excludes food and energy components has remained at 1.6% to 1.7% for more than a year.
Fed officials discussed how and when they should reduce the balance sheet at their March meeting, without taking any decisions. Policy makers have said in the past they intend to reduce its size by ceasing the reinvestment of principle repayments as bonds mature, but have not said when that might begin.
Mester has been one of the FOMC's more hawkish members over the past year. She held a voting seat in 2016 and dissented against majority decisions to keep rates on hold in September and November.
