A top Federal Reserve official warned Monday that the central bank is at risk of delaying raising interest rates for too long and recommended that it begin shrinking its $4.5 trillion balance sheet.
Eric Rosengren, the president of the Federal Reserve Bank of Boston, said Monday in an interview with Reuters that the Fed is “already running the economy hot,” citing December’s 4.7 percent unemployment rate as evidence.
If unemployment drops much further, the central banker warned, inflation could rise above the Fed’s target and force the central bank into a hasty, unpredictable response.
Rosengren has long been viewed as one of the Fed’s “doves,” meaning that he is relatively more concerned about lowering unemployment than keeping inflation stable. In recent months, however, he has warned of the possibility that the Fed may have to tighten monetary policy faster than investors appear to expect.
Rosengren voted at December’s Fed meeting for a 0.25 percent increase in the Fed’s target rate. He will rotate out of a voting role at the central bank this month.
On Monday, he recommend that the Fed allow its balance sheet to shrink in addition to raising interest rates. The Fed is maintaining its $4.5 trillion portfolio, swollen by purchases of Treasury and mortgage-backed securities, reinvesting when assets mature, as a form of stimulus. Chairwoman Janet Yellen has indicated that the plan for the balance sheet is to begin to allow securities to mature and the portfolio to shrink after some unspecified number of rate hikes.
