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Fed's Williams, citing signs of imbalances, wants 2015 rate hike

LOS ANGELES (Reuters) - A top U.S. central banker on Monday renewed his call for an interest-rate hike “sometime later this year,” citing near-full employment and rapidly rising house prices that may be a sign of excessive economic optimism.

The Federal Reserve building in Washington September 1, 2015. REUTERS/Kevin Lamarque

“I don’t think we are at a tipping point yet - but I am looking at the path we’re on and looking out for potential potholes,” John Williams, president of the San Francisco Federal Reserve Bank, said in remarks prepared for delivery to the UCLA Anderson School of Management. “I am starting to see signs of imbalances emerge in the form of high asset prices, especially in real estate, and that trips the alert system.”

The Fed earlier this month decided to delay a long-anticipated liftoff from near-zero interest rates, citing worries over global growth and continued low inflation. Still, most Fed officials, including Fed Chair Janet Yellen, expect to be able to begin raising rates this year.

Though he supported the decision to wait, Williams signaled on Monday that he is getting nervous about waiting much longer. The Fed meets twice more this year - in October and in December.

“When you have a high-pressure economy, with unsustainably high levels of economic activity for a long period of time, people may make decisions based on excessive optimism, rather than sound economic basics,” Williams warned. “One lesson I have taken from past episodes is that once the imbalances have grown large, the options to deal with them are limited.”

The Fed has kept interest rates near zero for almost eight years, and it last raised rates in 2006.

Williams forecast the economy to grow at a 2.25 percent annual pace in the second half of this year, and a little above a 2 percent pace next year.

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Unemployment, he said, will fall below its sustainable level of 5 percent later this year, and will stay there through 2016.

While a strong dollar and cheap oil have kept inflation below the Fed’s 2 percent target, those factors will dissipate and inflation should rise back to the Fed’s goal over the next two years, he predicted.

“Given the progress we’ve made and continue to make on our goals, I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year,” Williams said.

(In 7th paragraph, corrects forecast for growth in 2015 2nd half to 2.25 percent, not 2.5 percent)

Reporting by Ann Saphir; Editing by Leslie Adler

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