Fed's Williams sees big drop in assets as possible systemic risk

John Williams, president of the Federal Reserve Bank of San Francisco, speaks during an interview with Reuters in San Francisco, California December 18, 2015. REUTERS/Stephen Lam

(Reuters) - San Francisco Federal Reserve President John Williams reiterated Monday his view that the U.S. economy is ready for higher interest rates, but flagged the risk of broad-based declines in asset prices as a result.

“It makes sense for us to be moving interest rates gradually back to more a normal level over the next couple years,” Williams said. “I actually think that’s a sign of strength for the global economy.”

Speaking at a panel on systemic risk at the Milken Institute Global Conference, Williams said the biggest systemic financial risk currently is the possibility that “broad sets of assets are going to see big movements downward” as interest rates rise. “That’s an area that I think is a potential risk.”

Williams did not suggest he sees another crisis brewing, adding that U.S. regulators have made “amazing” progress in shoring up banks against potential future failure.

“What I worry a lot more about is when people forget about the financial crisis, when they forget about the terrible things that happened,” he said, suggesting that may not happen for another five or ten years.

The Fed raised interest rates for the first time in nearly a decade last December, but has held off raising them any further amid global stock volatility and worries over a decline in global growth.

Even after the Fed resumes raising rates, Williams said, it will not be able to lift them as high as it has in the past.

Most Fed officials currently think that the rate at which the economy can sustain healthy employment and steady prices has probably fallen to about 3.25 percent in the long run, a full percentage point lower than was the case before the crisis. But there are significant downside risks to that estimate, Williams said.

Reporting by Ann Saphir; Editing by Diane Craft