By Jonnelle Marte

(Reuters) – The Federal Reserve could need to increase interest rates at least 3 times in the year, and start reducing its balance sheet to address a tight labor market as well as persistently high inflation. Loretta Mester, Cleveland Fed President said Tuesday.

Mester stated that if March’s economy looks the same as it did today, and that the outlook for the future is the same, then I support raising the funds rate at this meeting. He also suggested starting to remove some extraordinary accommodations we had earlier during the pandemic.

Mester stated that final decisions about monetary policy will be affected by the economic situation and made based on the outcome of the coronavirus pandemic. However, Fed officials could need to adjust policy immediately to deal with inflation that exceeds the U.S. central banking’s target.

Mester indicated that while she believes more workers will return to the workforce and the labor force participation rates to increase over time, policymakers can’t ignore the current tightening of the market.

Fed officials will begin discussing strategies to remove the accommodations provided by the pandemic at their next policy meeting, which is expected to be held in just two weeks. This involves increasing interest rates as well as creating a plan to reduce the central bank’s $8 trillion bond portfolio.

Mester stated that she believes the Fed will be able move faster in reducing its balance sheet than ever before because of the strength and size of the economy, as well as its larger bond holdings.

Mester stated, “I would like to… create a path towards the balance sheet.” That will decrease accommodation, and then we’ll utilize our policy tool, Fed funds rates, as our active instrument.”