Fed's Williams: inflation set to rise, rate hike on the table

NEW YORK (Reuters) - With the U.S. economy likely to reach full employment before year's end and inflation on track to rise to the Federal Reserve's target, the U.S. central bank could raise interest rates as early as its June meeting, a top Fed official said on Tuesday.

"I recognize that not everyone shares my rosy view, or even thinks that 2015 is a good year to take action," San Francisco Fed President John Williams, a voting member this year on Fed policy, told a New York audience. "The exact timing will be driven by the data...Every (Fed) meeting is on the table."

Williams stopped short of calling for a rate hike in June, saying the Fed will need to discuss the nearly two months' worth of data since its last meeting in April.

But he did suggest, as he has before, that he is increasingly worried about allowing the economy to overheat if interest rates are held near zero for too long.

"I see a safer course in a gradual increase, and that calls for starting a bit earlier," said Williams, whose centrist views make him something of a bellwether for the consensus among Fed policy-makers.

Williams reiterated his expectation that stronger economic growth for the rest of the year will help push the unemployment rate down to 5 percent or even below by the end of 2015.

And he downplayed concern over low inflation, saying that the dampening effects of a stronger dollar and cheaper oil should have only a transitory impact on domestic prices. Troubles in foreign economies, he said, "do not control America's fate."

"As things continue to get better, I see the strengthening domestic economy driving inflation gradually back to 2 percent," he said.

Even after the Fed starts raising rates, he said, the increases are likely to be gradual, and the U.S. economy will still be receiving loads of stimulus from the Fed's massive balance sheet.

"We're not pulling the rug out from underneath the economy," he said.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)