US Federal Reserve should start reducing balance sheet 'soon': Brainard

The Federal Reserve should begin reducing its $4.2 trillion holdings of government bonds and other securities soon as long as economic data on U.S. jobs and growth holds up, Fed Governor Lael Brainard said on Tuesday.

"I believe it would be appropriate soon to commence the gradual and predictable process of allowing the balance sheet to run off," Brainard, a cautious voice on rate increases, said at a central banking conference in New York.

The Fed has been buoyed by strong U.S. employment and continued economic growth, and has raised interest rates twice this year compared to once annually the previous two years.

With monetary policy normalizing, it has turned its attention to reducing its portfolio of Treasury bonds and mortgage-backed securities mostly purchased following the 2007-2009 financial crisis and recession.

A clear outline of its plan was released at the central bank's last policy meeting in June, but no date has been announced for when the process will begin.

Minutes from the meeting released last week showed a split among policymakers on when to begin the runoff.

Brainard's comments, along with Fed Chair Janet Yellen's pronouncement that the process could begin "relatively soon" supports the view that a decision could be announced at the September policy meeting.

Most economists expect the Fed to begin shrinking its balance sheet at its September meeting before raising rates again in December.

Brainard did note that once a balance sheet runoff begins she would want to assess progress on inflation before supporting another rate hike.

"I will want to monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target," Brainard said.

A shortfall in inflation has vexed policymakers, although Yellen has said the retreat in price pressures is likely temporary.

The Fed's next policy meeting is on July 25-26.