Mester Supports Ending Fed's Balance-Sheet Unwind This Year

(Bloomberg) -- Federal Reserve Bank of Cleveland President Loretta Mester said she’d favor ending the run-off of assets from the central bank’s balance sheet this year, and that announcing the change in advance would remove the need to gradually slow the program to a halt.

“There’d be a trade-off between announcing early and tapering off,” Mester told reporters following a speech in Newark, Delaware, on Tuesday. “If we say what we’re doing now, there’s less need to taper as we go forward.”

Mester’s remarks on ending the run-off this year lines up with Fed Governor Lael Brainard. They also offer another hint on the state of the debate over the timetable to end a decade of using the balance sheet as a policy tool. Launched as an emergency measure to protect the economy during the financial crisis, it has declined to about $4 trillion from a peak of $4.5 trillion in 2015.

Mester said she preferred the Fed revert to a balance sheet made up primarily of Treasuries, adding that “I would skew it towards short-term Treasuries,” though how short was still an open question as officials have yet to decide their plans.

Policy makers said in January they want to continue managing short-term interest rates through a system that requires abundant bank reserves. That will force them to halt the balance-sheet runoffs before reserves become scarce. Fed officials haven’t indicated when or at what level that will stop.

Brainard said Feb. 14 she also would favor stopping the runoff before year’s end, driven by a motivation to ensure that a large enough buffer of bank reserves were maintained to prevent volatility in managing the federal funds rates.

Mester emphasized Tuesday that the Federal Open Market Committee hadn’t yet decided how to end the balance sheet trimming that began in 2017. The Fed in the aftermath of the 2008 financial crisis expanded the balance sheet five-fold via purchases of Treasuries and mortgage-backed securities as it sought to lift growth by holding down long-term borrowing costs.

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