Cleveland Federal Reserve Bank President Loretta Mester speaks in London, Britain, July 2, 2019.
Cleveland Federal Reserve Bank President Loretta Mester speaks in London, Britain, July 2, 2019. Reuters / Marc Jones

The Federal Reserve will need to move more aggressively to remove accommodation than it did following the Great Recession by raising interest rates at a faster pace and shrinking its balance sheet more quickly, Cleveland Fed President Loretta Mester said on Thursday.

"Barring a material change in the economy, I anticipate that it will be appropriate to move the funds rate up at a faster pace this time and to begin reducing the size of the balance sheet soon and more quickly than last time," Mester said during a virtual event organized by the New York University Stern Center for Global Economy and Business.

Policymakers are expected to start raising interest rates from near zero levels when they meet next month and to begin reducing the Fed's nearly $9 trillion portfolio soon after. Officials are debating how quickly to raise interest rates to combat the highest inflation seen in decades.

St. Louis Fed President Jim Bullard is calling on the Fed to raise rates by a full percentage point by July, while others favor a smaller increase to start. Mester said she would support removing accommodation at a faster pace in the second half of the year if inflation does not abate by mid-year, and at a slower rate if inflation comes down faster than expected.

The policymaker said she sees inflation remaining above 2% this year and in 2023, with the risks tilted to the upside.

Mester also said she supports selling some of the Fed's mortgage holdings at some point to accelerate the move to a portfolio that invests primarily in Treasury securities. She is among the officials who view asset sales as a backup plan for the central bank as it shrinks a balance sheet that doubled in size during the pandemic.

Fed officials also need to move away from providing explicit forward guidance as they reduce support, Mester said. "Instead, we will need to convey the overall trajectory of policy and give the rationale for our policy decisions," she said.