As she prepares to retire this month, Cleveland Fed President Loretta Mester still believes the Fed needs to be open to actively selling mortgage securities.

While such action is not "imminent," Mester noted that the Fed's current goal is to return to holding only U.S. Treasuries, which means it may need to take aggressive steps to sell mortgage-backed securities (MBS) purchased in the wake of the coronavirus outbreak to restore market function and stimulate the economy.

In the interview, Mester said: "I would be open to selling MBS. I don't think we should sell MBS immediately, but eventually we may want to sell them" and need to explain to the public why that would be the case, especially considering that some of these bonds could result in losses for the Fed.

Mester discussed her thoughts on the outlook for the Fed's balance sheet. Since June 2022, the Fed has been allowing some bonds to mature without replacing them, reducing its holdings from a peak of $9 trillion to $7.3 trillion currently.

Much of the reduction in the Fed's balance sheet is attributable to the natural maturities of the Treasury securities the Fed holds. The Fed faces greater difficulty in reducing its MBS holdings as MBS take longer to mature due to weak refinancing and home purchase activity in the housing market.

The Fed has made it clear that its goal is to hold only U.S. Treasuries, but it may not be able to achieve this goal without active sales. In the two rounds of quantitative tightening, the Fed has never actively sold bonds, and the market's reaction to this is still unclear.

Mester is nearing the end of her career at the Fed, retiring this month after spending the past decade as president of the Cleveland Fed. Her departure comes as U.S. inflation is expected to cool over time, eventually allowing the Fed to cut interest rates.

Mester said that if the economy performs as expected, "then it would make sense to gradually return interest rates to a more normal level, and I would like to see a few months of more data," before being convinced that easing policy is justified, noting that monetary policy is in a good position to respond to the potential performance of the economy.

Mester's successor, Beth Hammack, is a former top Goldman Sachs banker with extensive market experience. Earlier this year, the St. Louis Fed also appointed a new leader with deep trading and investment experience, while the current Dallas Fed President Lorie Logan previously played a central role in the implementation of monetary policy at the New York Fed.

Mester was not involved in the process of selecting the new Fed chair, but she believes that "different backgrounds are very important for the Fed."

The article is forwarded from: Jinshi Data