Fed's Mester says she favors slower balance sheet trimming

By Jason Lange

NEWARK, Del. (Reuters) - Cleveland Federal Reserve President Loretta Mester on Tuesday said she favored slowing down the U.S. central bank's unwinding of its bond holdings this year although she thinks the economy might need higher interest rates.

Mester, who has long favored higher rates, said the Fed has time to assess how the economy is doing before tightening borrowing conditions.

But she said the time was nearing when the Fed should slow down the pace at which the Fed reduces its bond holdings.

"If I were making the decision on my own, I would need slowing," she said while speaking on a panel at an event at the University of Delaware.

The Fed's balance sheet ballooned to over $4 trillion in the wake of the 2007-09 recession but policymakers began trimming its bond holdings in the final months of 2017.

Fed Governor Lael Brainard said earlier this month she supported ending the unwinding process this year.

Mester does not have a vote on the Fed's policy-setting committee this year although she participates in the central bank's deliberations. She said she would prefer the Fed only hold Treasury securities, and would favor a portfolio weighted toward shorter-term maturities.

Mester has supported the Fed's recent shift to a wait-and-see stance on rate policy. The Fed, in its policy statement last month, removed guidance on whether its next move was likely to be raising or lowering rates.

"Monetary policy does not appear to be far behind or far ahead of the curve," Mester said in a speech at the event. "This environment gives us the opportunity to continue to gather information on the economy."

Mester said the dropping of the guidance was part of the Fed's shift to what she called more "normal" policy and made clear she still thinks the Fed's next more is likely to be a tightening of borrowing conditions.

Mester said economic growth was likely to continue in 2019 albeit at a slower pace than last year and that job growth would also slow. She said inflation was likely to stay near the Fed's 2 percent target.

"The fed funds rate may need to move a bit higher than current levels," Mester said, adding that there were also risks to the outlook such as slower economic growth in Europe and China as well as ongoing trade negotiations between the United States and China.

(Reporting by Jason Lange; Editing by Chizu Nomiyama)