The Federal Reserve should begin plotting the shrinking of its $4.5tn balance sheet after its next rate increase, Boston Fed president Eric Rosengren said on Wednesday, as he warned again over the risks of the economy overheating.

Once the central bank’s target rate exceeds 1 per cent — something that Wall Street expects to come after the mid-June Fed meeting — policymakers should “consider beginning a very gradual normalisation of the Federal Reserve’s balance sheet”, Mr Rosengren said according to prepared remarks from a speech in Burlington, Vermont.

“I believe the Fed should do so gradually, so that the reduction in the balance sheet is not disruptive, and so that it can occur largely in the background,” he said.

Mr Rosengren’s remarks come after he said last month that the Fed should begin shrinking the balance sheet “relatively soon”.

The central banker added in his speech on Wednesday that monetary policy “remains quite accommodative,” even following the trio of rate increases that have taken place thus far following the financial crisis.

“Monetary policymakers should certainly continue on the path of gradual normalisation, and continue to explore its pace,” he said.

When the Fed met in March, it raised rates and forecast two additional increases this year. But Mr Rosengren, who does not get a vote on the Fed’s policy-setting board this year, said on Wednesday that it “would still be reasonable to have three rate increases over the remainder of this year”.

The Boston Fed head’s hawkish stance comes amid concerns that the US jobless rate, which fell to 4.4 per cent last month, is now below his, and many other’s, estimates for the natural level in a normally functioning economy — something that might cause overshoots down the line. At the same time, while growth disappointed in the first quarter, Mr Rosengren said he expects it to pick up as the year progresses.

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