By Howard Schneider

PRINCETON, N.J. (Reuters) – The Federal Reserve could start trimming its steadiness sheet as quickly as its Might 3-4 assembly to handle inflation dangers which have change into “significantly acute,” New York Fed chair John Williams mentioned Saturday.

With Fed price will increase underway and anticipated to proceed, Williams, who additionally holds the title of vice chair and is a everlasting voter on financial coverage, flagged the chance the central financial institution will now start tightening monetary situations via a second channel by letting its practically $9 trillion portfolio of Treasury bonds and mortgage backed securities decline every month.

“This strategy of lowering the dimensions of the steadiness sheet can start as quickly because the Might (Federal Open Market Committee) assembly,” Williams mentioned in remarks to a symposium at Princeton College’s Griswold Middle for Financial Coverage Research.

He cited inflation operating at 6.5%, greater than triple the Fed’s 2% goal, because the central financial institution’s “biggest problem,” with inflation probably pushed increased by the warfare in Ukraine, the continued pandemic, and continued labor and provide shortages within the U.S.

“Uncertainty concerning the financial outlook stays terribly excessive, and dangers to the inflation outlook are significantly acute,” Williams mentioned.

Nonetheless, he mentioned he anticipated the mix of price will increase and steadiness sheet discount to assist ease inflation to round 4% this yr, and “near our 2 % longer-run aim in 2024” whereas protecting the financial system on observe.

“These actions ought to allow us to handle the proverbial smooth touchdown in a method that maintains a sustained robust financial system and labor market,” Williams mentioned. “Each are effectively positioned to face up to tighter financial coverage.”

The Fed elevated its short-term federal funds price in March by 1 / 4 of a proportion level, and is anticipated to proceed with price will increase at every of its six remaining conferences this yr. Some Fed officers have advocated bigger half-point will increase to additional tighten credit score and act in opposition to inflation.

Williams didn’t deal with that situation in his ready remarks, however has earlier mentioned he could be open to the thought relying on how financial information evolve.

Lowering the dimensions of the steadiness sheet, nonetheless, supplies a second methodology of tightening credit score. Because the Fed’s inventory of asset holdings decline, it places upward stress on Treasury bond and mortgage charges.