Jan 7 (Reuters) - San Francisco Federal Reserve Bank President Mary Daly on Friday weighed into the debate at the Fed on when to begin shrinking its massive balance sheet, saying she could see doing so soon after the Fed has raised rates once or twice.
"I would prefer a flatter funds rate path and more adjustment on the balance sheet to get ourselves back to a place that's more normal on the balance sheet should we need to use it again," Daly said at the annual meeting of the American Economic Association, held virtually because of the pandemic.
The balance sheet, she said, is a powerful tool, but it's also the one the Fed has the least experience with - and therefore "I would prefer to see us adjust the policy rate gradually and move into balance sheet reduction earlier than we did in the last cycle," she said.
"If we adjust the balance sheet and we see the impact on the economy, on the housing market and on the broader economy, then we can adjust the policy rate after the fact," Daly said.
Pre-pandemic the Fed's balance sheet was about half its current $8 trillion-plus size. (Reporting by Ann Saphir)
