By Jonnelle Marte
(Reuters) -Inflation could ease later this year as some of the constraints on supply are resolved and the Federal Reserve removes some of the support it provided to the economy during the coronavirus pandemic, Cleveland Fed Bank President Loretta Mester said on Wednesday.
With the labor market tight and inflation running well above the Fed’s goal, it is time for the central bank to start withdrawing accommodation, Mester said. That includes raising interest rates starting in March and moving aggressively to shrink the Fed’s nearly $9 trillion portfolio, she said.
“My expectation is that inflation will moderate but remain above 2% this year and next,” Mester said during a virtual event organized by the European Economics and Financial Centre. “But this forecast is conditional on the FOMC taking appropriate action.”
Mester, who has a vote this year on monetary policy decisions, said future rate increases after March will depend on the strength of inflation and how much it moderates or persists.
On the balance sheet, Mester said the Fed needs to move faster to reduce its bond holdings than it has in the past. The Fed said last month that it wants to take a primarily passive approach to shrinking its portfolio.
But Mester said officials may have to be more active and sell some of their mortgage holdings so they can meet their goal of having a portfolio that invests mainly in Treasury securities in the longer run.
“I would support selling some of our mortgage-backed securities at some point during the reduction period to speed the conversion of our portfolio’s composition to primarily Treasuries,” Mester said.
(Reporting by Jonnelle Marte; Editing by Andrea Ricci and Chizu Nomiyama)
