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UPDATE 1-Fed's Williams: don't let the economy 'party' go on too long

(Adds comments on global trends)

SALT LAKE CITY, Oct 1 (Reuters) - The U.S. economy can run at “high-pressure” for a while to help push inflation back up to the Federal Reserve’s 2-percent goal faster, a top Fed official said on Thursday.

But the Fed should begin to take away the proverbial punch bowl of easy monetary policy this year so that higher rates can start to slow the economy before it develops risky financial imbalances, San Francisco Fed President John Williams told reporters after a speech here.

“It’s okay to have the party,” Williams said “but we just don’t want it to go too far.”

The U.S. central bank last month held off on raising rates, despite near-normal unemployment of 5.1 percent, largely because of concern that the global slowdown could put further downward pressure on U.S. economic prospects and inflation.

U.S. inflation has run below the Fed’s target for years, and the dropping price of oil and a stronger dollar has weakened inflation further.

Most Fed officials, though, view the effects of the dollar and of oil on inflation to be temporary. On Thursday, Williams said the Fed would continue to look at the risks around the global outlook, but said that he personally believes the central bank will need to raise rates at either its October or the December meeting.

Williams said he expects U.S. unemployment could dip as low as 4.5 percent next year before heading back up to 5 percent in 2017.

If it were not for the global slowdown, he said, “we’d be growing way above trend.”

The Fed, he said, will eventually need to take action on rates even though it will never be completely certain about the outlook. Once it does begin raising rates, he said, the Fed can always lower them again if the economic outlook changes dramatically. (Reporting by Ann Saphir; Editing by Chizu Nomiyama)

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