Fed's Williams says two or three U.S. rate hikes 'reasonable'

By Ann Saphir

SAN FRANCISCO (Reuters) - The Federal Reserve could reasonably raise interest rates two or three times this year, a top Fed official said on Tuesday, adding that he does not expect much market turmoil when it does.

"I definitely see two or three rate hikes ... as being reasonable" this year, based on projections provided by Fed officials in March and the fact that economic data has not delivered any surprises since then, San Francisco Fed President John Williams told reporters after a speech here.

"In a way it doesn't matter so much whether we were to raise rates in April, or June, or...July," he added. "What matters is the path of interest rates and kind of the normalization process... As long as, I think, we stay on this kind of basic path of raising interest rates gradually over the next couple of years, that's kind of what's important for financial conditions."

The Fed lifted rates from near zero in December, but deferred any further moves at meetings in January and March, citing the uncertainty over the impact of weak global growth on what's shaping up to be a moderate U.S. economic recovery. In March, Fed policymakers expected two rate hikes this year, though traders of contracts tied to the Fed's key rate have been pricing in one at most, and sometimes not even that.

Economic data has in recent months come in generally as expected, Williams said Tuesday, with inflation on "the right trajectory" towards the Fed's goal of 2 percent by the end of next year, he said, and unemployment looks likely to fall to 4.75 percent this year.

That decline is actually slower than he had earlier thought because, in a sign of labour market strength, more Americans are returning to the workforce. Unemployment ticked up to 5 percent in March, from 4.9 percent the prior month, because of the increase in labour force participation.

When the Fed does raise rates, Williams said, "I don't really expect a lot of turmoil" in financial markets because the central bank will have telegraphed its intentions clearly.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)