He said rates have been held low by three factors: an aging population, declining productivity and a “savings glut” in which cash and equivalents remain in high demand.
The conditions will lead to a “gradual raising of the fed funds rate, as we’ve been doing for the last couple years.”
The Fed has increased interest rates once this year and is expected to move two or three more times before 2018 ends. “Rich prices” in assets like stocks and real estate reflect the lower rates, Williams added.
In addition to hiking rates, the Fed is decreasing the size of its balance sheet, where it keeps the portfolio of Treasurys and mortgage-backed securities it accumulated during three rounds of economic stimulus begun during the financial crisis.
Williams said he expects the balance sheet, which peaked above $4.5 trillion, to get whittled down to about $3 trillion.