The president of the Federal Reserve Bank of San Francisco warned Monday of signs of financial market bubbles in the U.S., saying that the central bank would risk financial instability by keeping rates at zero for too long.
“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,” John Williams said at a speech in Los Angeles, according to text from his office.
Williams mentioned the possibility of the Fed inflating asset prices while discussing the risks of failing to tighten monetary policy at the right time.
Although he did not vote to raise short-term interest rates from zero at the Fed’s September meeting, Williams said Monday that he thought it would be “appropriate” to begin raising interest rates this year.
The house price-to-rent ratio is where it was in 2003 and house prices are rising, Williams noted, indicating the possibility of prices departing from fundamentals the way they did before the financial crisis.
By the time the Fed recognized the danger posed by the housing bubble, Williams said, it was too late to contain the damage. In the same way, he is worried now about loose monetary policy creating problems, he said, even though he is “not talking about fighting the last war.”
“I don’t think we’re at a tipping point yet — but I am looking at the path we’re on and looking out for potential potholes,” he explained.
Williams followed Federal Reserve Chairwoman Janet Yellen as the head of the San Francisco regional bank, having previously worked under her there.
In suggesting that rate increases would be appropriate this year, he has echoed Yellen, who made similar comments last week.
Williams said he thought the economy would reach full employment by the end of this year or early next year. He said that his estimate of the unemployment rate consistent with a healthy economy is 5 percent, just slightly below the 5.1 percent unemployment rate for the country in August.
