Fed's Williams sees rate hike this year, despite Brexit

SAN FRANCISCO (Reuters) - Britain's vote to leave the European Union presents only a modest risk to the U.S. outlook and probably will not keep the Federal Reserve from raising interest rates, a top Fed official said on Tuesday.

In back-to-back interviews with MarketWatch and Bloomberg News, San Francisco Federal Reserve President John Williams said the effect of the Brexit vote on U.S. financial markets had played out pretty much as expected. The planned UK split from the rest of Europe probably will not have as big an impact on the U.S. economy as the euro crisis in 2011-2012, or even China's unexpected slowdown last year, he said.

Indeed if the unemployment rate drops as he expects from its current rate of 4.7 percent to 4.5 percent by the end of the year, and inflation continues to rise towards the Fed's 2 percent target, the Fed should raise interest rates again this year, he said.

Neither interview made clear what prompted Williams to step back from his view, expressed as recently as May, that the Fed could reasonably raise rates two or three times this year.

A weak jobs report last month had some Fed officials doubting the strength of the U.S. labour market's recovery, but Williams indicated he thought it was largely a statistical fluke.

Asked by Market Watch if his message is that "the economy is doing well. Full stop," Williams agreed.

Pointing to high valuations of real estate and stocks, he said the economy and financial system face risks if the Fed keeps rates too low for too long.

(Reporting by Ann Saphir; Editing by Tom Brown)