San Francisco Fed's Williams Sees Rate Rises In 'Near Future'

SAN FRANCISCO (Reuters) -- Despite strong headwinds from overseas that are holding down U.S. inflation, the Federal Reserve should soon begin to raise interest rates to slow down economic growth before it becomes unsustainable, a top Fed official said on Monday.

"I do see the time to start raising rates in the near future, from my perspective," San Francisco Fed President John Williams said in an interview on Bloomberg TV.

The U.S. economy will probably grow about 2 percent or 2.25 percent next year, he forecast, fast enough to push the unemployment rate "well below" 5 percent and begin to push inflation back up toward the Fed's 2-percent goal.

Although rate rises should be gradual so as to continue to pull more sidelined workers back into the labor force and push up lackluster wage growth, he said, "we don't want to run a high-pressure economy forever, because we've seen in the '90s and 2000s, that when you get an unsustainable economy, that eventually things go wrong, so we want to avoid that."

Investors worldwide have expressed frustration over the mixed messages from the U.S. central bank in recent weeks. Fed Chair Janet Yellen and other officials have said they expect a rate hike will be needed by the end of this year, but two Fed governors last week urged caution. The Fed has kept interest rates near zero for nearly seven years.

Asked if Yellen has a mutiny on her hands over the rate hike decision, Williams said "absolutely not." The decision, he said, will be based on the economic data, which has lately been "all over the map." With good arguments both for and against raising rates, he said, the decision has been, and remains, a "close call."

Williams declined to say when he personally would like to see the Fed begin to normalize policy, although he did appear more cautious than supportive about keeping rates low for much longer.

"As the economy gets stronger, has gotten stronger, we don’t really need all that accommodation going forward, and I think that there are some costs to having very low interest rates," he said.

Williams, who is a voter on the Fed's policy-setting panel through the end of the year, refused to rule out next week's meeting for a rate hike, saying he would listen to his colleagues' views when they meet in Washington next Tuesday and Wednesday.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)