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Fed's Rosengren: Favors rate increase only after full employment, 2% inflation achieved

Eric Rosengren, Boston Federal Reserve president
Wendy Maeda | Boston Globe | Getty Images
Eric Rosengren, Boston Federal Reserve president

The U.S. Federal Reserve, headed toward an eventual tighter policy stance, could help smooth the process by letting its massive portfolio of assets shrink in a predictable and transparent fashion, a top Fed official said on Monday.

Boston Fed President Eric Rosengren stressed the U.S. central bank needed to be aware of financial risks like future housing-market bubbles as it plots how to raise interest rates and reduce its balance sheet, which stands at $4.3 trillion and counting.

In addition, Rosengren said he favors a rate increase only after full employment and 2 percent inflation target are achieved.

Read MoreMacroeconomy inching back to normal: Fed's Bullard

The Fed is expected to shelve a stimulative bond-buying program later this year and to raise interest rates around mid-2015, depending on the economy. Less clear is when and how the central bank will stop reinvesting proceeds from maturing assets and let the portfolio shrink from its unprecedented size.

"While the optimal program for reducing the Fed's balance sheet will need to be dependent on the state of the economy, the recent tapering experience suggests to me that a predictable, transparent reduction in the balance sheet could be done in ways that may minimize the risk of financial disruption," said Rosengren, a dovish official who does not have a vote on policy this year.

Without backing it outright, he floated a "seamless continuation" of he regular $10-billion reductions to the Fed's monthly purchases of Treasurys and mortgage bonds. Once the buying ends, he said, the Fed could specify the percentage of bonds it would let mature and run off naturally, and even raise that percentage depending on economic progress.

Read MoreRate hike depends on 'tight' economy: Fed's Powell

"History shows that monetary policy 'exits' can be unsettled," Rosengren said in prepared remarks to the Central Bank of Guatemala.

The Fed has kept its key federal funds rate near zero for five-and-a-half years and bought more than $3 trillion in assets to help stimulate hiring and growth in the world's largest economy.

--By Reuters. CNBC.com contributed to this report.

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