Fed's Williams sees first U.S. rate hike in mid-2015

LAS VEGAS (Reuters) - A top Federal Reserve official seen as closely aligned with Fed Chair Janet Yellen said Thursday that he expects the U.S. central bank to starting lifting interest rates from their current near-zero level in the middle of next year.

"Based on my current forecast for economic growth, employment, and inflation, it would be appropriate to start raising the fed funds rate sometime in the middle of 2015," San Francisco Fed President John Williams told a group of business leaders in Las Vegas. Once the Fed begins raising rates, it will do so "relatively gradually," he said.

Exactly when the Fed will raise rates will depend on the strength of economic data, he said, with an earlier liftoff if the economy and inflation are stronger than expected, and a later liftoff if progress on those fronts is slow.

The comments suggest a consensus is building at the core of the Fed for rates to start rising slowly in mid-2015, so long as the unemployment rate continues to fall and inflation rises back toward the Fed's 2-percent target.

Earlier on Thursday Fed Vice Chair Stanley Fischer also flagged mid-2015 as a likely start date for gradual rate increases, as did New York Fed President William Dudley earlier in the week.

The Fed has kept rates near zero since December 2008, and has nearly quadrupled its balance sheet to over $4 trillion in an effort to push borrowing costs down further and stimulate growth.

With unemployment now down to 5.9 percent from its recession high of 10 percent, Williams said, the time is right to end the Fed's bond-buying stimulus. But still, he said, "there are compelling reasons to remain on the current accommodative path of monetary policy," including pockets of housing market weakness and high unemployment in many areas of the country.

And he noted that wages are growing too slowly. A jump from wage growth of 2 percent to the 3 percent to 3.5 percent pace that would reflect a "fully functioning" economy is "what we've been waiting for," he said.

"If we were to withdraw accommodation too soon, progress toward our goals could slow or even stall," he warned.

Williams projected the U.S. economy to grow at a 3 percent pace in the second half of 2014 and 2015, bringing unemployment down to 5.2 percent, his view of a sustainable long-term rate, by late 2015.

Inflation, which has been running well below the Fed's 2-percent target, will take a couple of years to return to that goal.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)