ANNANDALE-ON-HUDSON, N.Y. (Reuters) - The U.S. Federal Reserve should begin shedding its bond holdings soon but do so in a very gradual way that has little effect on its planned interest rate hikes, Boston Fed President Eric Rosengren said on Wednesday.
The comments reinforced the central bank's emerging plan to begin paring some of its $4.5 trillion in assets as soon as this year, and provided some detail on how one policymaker would go about the tricky task that could rock financial markets.
Rosengren, one of the strongest Fed voices calling for rate hikes over the last 12 months, said he supports "a very gradual approach" that begins "relatively soon."
"By initially retiring only a small percentage of maturing securities, and then very gradually shrinking the volume of the securities being reinvested, the tightening of short-term interest rates should not need to be much different than it would be in the absence of shrinking the balance sheet," said Rosengren.
"Starting to shrink the balance sheet earlier ... implies very little reduction in the degree of monetary stimulus coming from the balance sheet," he told a Levy Economics Institute conference.
Rosengren supports three more rate hikes this year, which is one more than the median Fed forecast and two more than markets predict.
Now the world's largest holder of U.S. government debt, the Fed amassed the Treasury and mortgage bonds in the years after the financial crisis to stimulate investment, hiring and economic growth.
The Fed, which has hiked rates twice since December, currently tops up maturing assets. A majority of its policymakers expect to begin letting the bonds run off later this year, according to minutes of a March meeting.
Rosengren added that the U.S. labor market, where unemployment has fallen to 4.5 percent, was at an equilibrium level in which it should not yet push up inflation. He said U.S. inflation is "fluctuating" around the Fed's 2 percent goal.
Reporting by Jonathan Spicer; Editing by Meredith Mazzilli