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Fed's super-easy policies pose risks, officials say

John Williams, president and chief executive of the Federal Reserve Bank of San Francisco, takes part in a panel discussion titled "U.S. Overview: Is the Recovery Sustainable" at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012. REUTERS/Danny Moloshok

DALLAS (Reuters) - The Federal Reserve's super-easy policies, if pursued for too long, could have adverse consequences in the long run, two top Fed officials said on Monday, although the biggest risk is not runaway inflation.

Instead, San Francisco Fed President John Williams told reporters after participating in a monetary policy conference at the George W. Bush Institute in Dallas, one major risk is that low rates for too long could push asset prices too high, or encourage investors to take on too much risk.

The Fed is unwinding its massive bond-buying stimulus this year and is expected to start raising interest rates next year from the near-zero levels the central bank has maintained since December 2008. As the Fed normalizes monetary policy, Williams said, it needs to be wary of any distortions it may have already sown.

"We are not seeing it (excessive risk-taking) now, but it could be that it could start manifesting itself or materializing later down the road," Williams said. "We don't want the after-effect of this recovery to be an economy that's fragile."

Dallas Fed President Richard Fisher, speaking at the same conference, agreed.

"It's very hard to see something coming down the pike," Fisher said, predicting that there will be future crises. "Markets always overshoot."

He said he worries there is too little volatility in markets, suggesting investors are too complacent about possible changes in policy and in the economy.

Williams, a policy centrist, agreed with his hawkish colleague, saying that while the bond market is struggling to determine if there is a "new normal" in historically low long-term rates, he wants to see more volatility as the economy picks up.

"I firmly believe we want to operate in the future, the new normal, or whatever, in a world where the markets are trying to figure out what we are going to do based on what happens in the economy," Williams said. "I do not want us to be locked into a certain path of interest rates or using forward guidance in the future that's telling people more about, giving people commitments about what we will do around the interest rates."

Williams said he believes the Fed should not start raising rates until the second half of 2015, and predicted rate rises after that will be gradual.

(Reporting by Ann Saphir; Editing by Meredith Mazzilli)