June 19, 2015 / 5:50 PM / 4 years ago

UPDATE 1-Fed's Williams sees two interest-rate hikes this year

(Adds inflation, labor market forecasts, risks around forecasts)

By Ann Saphir

SAN FRANCISCO, June 19 (Reuters) - The Federal Reserve is on track to raise U.S. interest rates twice this year as long as inflation begins to show signs of rising back to 2 percent and the unemployment rate continues to fall, a top Fed official said on Friday.

“Definitely my own forecast would be having us raise rates two times this year, but that would depend on the data,” San Francisco Fed President John Williams told reporters at the bank’s headquarters.

Rate increases of a quarter percentage point each would be reasonable, he said, with little point in making rate increases any smaller.

Such a pace of increase would put the Fed’s target rate between 0.5 percent and 0.75 percent by year’s end.

Williams is a voter on Fed policy this year and his views are often seen as in line with those of Fed Chair Janet Yellen, whom he advised when she was chief of the San Francisco Fed before he took over the post in 2011.

Investors are keen to gauge not only when the Fed will raise rates, but also at what pace. The Fed has kept short-term borrowing costs near zero since December 2008, and after a two-day meeting that ended Wednesday, decided to keep them there for the time being.

Williams said that while the time to raise rates is “closer and closer,” there is little downside to waiting a bit longer to make sure inflation is indeed heading back toward 2 percent, as he expects it will, given progress in the labor market.

Recent data on inflation has not undermined that view, he said, but it also hasn’t been too encouraging. “Maybe I’m looking for a little stronger signal there,” he said.

Williams reiterated his staff’s research suggesting that the economy probably grew about 1.5 percent in the first quarter, rather than contracting as government data has suggested.

Williams further predicted that GDP will grow at about a 2.75 percent annual pace for the next several quarters before slowing to a more sustainable pace next year. Unemployment, he said, will likely fall to 5.2 percent by year’s end, and stronger wage growth is already evident.

“I still believe this will be the year for liftoff, and I still believe that waiting too long to raise rates poses its own risks,” Williams said in a speech earlier. “I see a safer course in starting sooner and proceeding more gradually.”

Reporting by Ann Saphir; Editing by Chizu Nomiyama

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