By Howard Schneider

WASHINGTON, (Reuters) – High inflation and a strong recovery require that the Federal Reserve raise interest rates at minimum three times per year. This will begin as early as March and should warrant a quick rundown Fed asset holdings in order to pull excess cash from the financial system. Raphael Bostic, Atlanta Fed President, stated.

Bostic stated to Reuters Monday in an interview that “there is a chance inflation will be raised for an extended time” and said, “We must respond directly and clearly to this risk.” “If conditions continue as they are now March would be reasonable,” said Bostic to Reuters. He indicated that the Fed would increase interest rates in order to counter inflation which is far higher than the Fed’s 2 percent target.

He said that he doesn’t believe the new coronavirus infection explosion will stop the recovery. However, he believes inflation will increase further in the future and will require an additional quarter-point rate hike in 2022. This would be more than if the Fed slows down and relaxes.

He spoke out to reflect the Fed’s shift towards fighting inflation. This was a change cemented at the December meeting, where officials accelerate plans to increase interest rates and start to reduce their U.S. Treasury bonds holdings and mortgage-backed security accumulated in the aftermath of the pandemic.

Bostic made detailed comments about Fed’s management of its balance sheet. He said that the Fed should also be aggressive in this area – allowing the Fed to reduce its holdings by $100 billion per month and with plans for pulling at least $1.5 trillion from financial markets that he regards as pure excess liquidity.

The Fed began to shrink its balance sheet in 2017 and 2019 years after the 2008 to 2009 recession. It paused it, capitulated it at $50 Billion per month, then decreased it by $600 Billion before the financial markets indicated that the Fed did not have sufficient cash reserves.

Bostic said, among other things that the process would be very different this time. He stated that there wasn’t any need for any “runoff” of balance sheets because markets are aware what to expect.

Bostic expressed hope that we could quickly move out of the emergency situation. The tool and motivation are well-understood.

Bostic stated that the process should be completed in a shorter time frame and “should go faster” for certain.

At the Fed’s December meeting, the debate about how the Fed should treat its asset holdings commenced in earnest with presentations by staff and the first discussion between policymakers.

Since the outbreak of the pandemic, the Fed has purchased more than $4 trillion in Treasury bonds and mortgagebacked securities. This is more than double the size of its overall balance sheet which was $4.1 trillion.

Although initially intended to stabilize financial markets, holdings may be holding low long-term interest rates. The Fed might want to raise them to reduce demand and lower prices for various goods.

Bostic does not vote on monetary strategy this year. Bostic was the first Fed official to anticipate that recovery will be faster than predicted. A year ago Bostic was the only one expecting higher interest rates in 2022, as the economy was slowing.

Now, he is concerned about whether some of those driving inflation might be around for the long-term.

Bostic stated that he is open to hearing from business leaders about their plans for resilient supply chains, which will be almost always more costly to maintain. He also said that local businesses feel that they have the pricing power and intend to make use of it.

Bostic explained, “So it really comes down to how forcefully or fulsomely we need to respond so that it remains within a bound.” “I think that we must be quite assertive.”