NEW YORK, July 9 (Reuters) - Federal Reserve Bank of New York President John Williams said Thursday that despite the renewal of war in the Middle East, he was not looking for a sustained rise in energy prices over the remainder of the year.

"The markets still expect oil prices to come down over the next six to 12 months. I think that's a pretty reasonable baseline," Williams said at a conference at his bank. "I still feel kind of the fundamentals are that energy prices are likely to be around their peak and then to come down over time."

Williams was asked about how the Fed could respond to recent events at the Federal Open Market Committee meeting now scheduled for July 28-29 with a potential rate hike and said "we haven't even started the process of doing an analysis," adding "we meet every six weeks. This isn't like we're making decisions forever." 

The New York Fed leader spoke a day after the release of meeting minutes for the central bank's mid-June monetary policy meeting at which officials held their interest rate target range steady at between 3.5% and 3.75%.

While forecasts released at the gathering indicated officials had penciled in rate increases this year amid persistently above-target inflation, Chairman Kevin Warsh, leading his first FOMC meeting, refused to provide guidance about the outlook and was even mum in explaining how incoming data might shape his monetary policy views.

Williams said in a television interview on Tuesday that he had grown more optimistic that overall high levels of inflation will ease due to falling energy prices tied to a seeming resolution of the Middle East war, as he reiterated monetary policy is in the right position given the risks facing the economy.

But that outlook was swiftly challenged by the restart of hostilities that once again threatens to crimp the flow of energy and other goods. With President Donald Trump claiming that the agreement that ended the hot phase of the conflict was now void, the risks of higher energy prices and inflation over the remainder of the year have gone up and have increased the chances the Fed may have to raise interest rates to tamp down price pressures.

Williams weighed in as Warsh is considering changes in the way the Fed manages its interest rate toolkit, with an eye toward further reducing the size of the central bank balance sheet.

Leading proposals are focused on allowing financial institutions to hold less emergency cash on hand, though many worry that could leave these firms more vulnerable to financial shocks and potentially more reliant on borrowing from the Fed in times of trouble.

Some in the Fed have challenged the idea the balance sheet needs to be reduced, arguing that the central bank's paramount goal of managing short-term rates and market liquidity has worked well, and that the size of Fed holdings, now at around $6.7 trillion, is not a critical issue.

Any change should prioritize maintaining the safety and stability of the banking system , Williams said. "I don't think the driver of this should be" focused on the amount of Fed balance sheet reduction that can be achieved and "It really should be how do we improve and make and strengthen our financial system."