By Ann Saphir
SAN FRANCISCO (Reuters) - The Federal Reserve is still on track for a potential mid-year interest-rate increase, a top Fed official said on Friday, citing strong U.S. economic momentum and a falling unemployment rate.
"There is no need to rush to raise rates; at the same time we want to make sure that we appropriately act in a way that we don't get behind the curve," San Francisco Federal Reserve Bank President John Williams told reporters at the bank's headquarters.
"If the forecast evolves the way I expect, six months from now or whatever - middle of this year - I think we'll have a better position to understand either well we need to wait longer, or maybe it's we could act now."
Fed officials are grappling with when to gradually wean the U.S. economy from more than six years of near-zero interest rates, now that unemployment has fallen and economic growth looks solidly above its long-term trend.
But inflation has been undershooting the Fed's 2-percent target, and some gauges suggest the inflation outlook is falling. That has prompted a few Fed officials to argue the Fed should defer any rate hikes until next year.
"At some point you just have to give in to the data," and respond to too-low inflation with stimulus, not tightening, Minneapolis Fed President Narayana Kocherlakota said in Golden Valley, Minnesota earlier on Friday.
St. Louis Fed President James Bullard took the opposite view in a separate appearance in Chicago, saying while inflation is low, it is not low enough to justify keeping borrowing costs at zero.
Williams, who unlike Bullard and Kocherlakota votes this year on Fed policy and whose views are seen as centrist, acknowledged that dropping inflation expectations are a "negative signal," but only about global growth prospects.
Low yields on U.S. Treasuries, often tied to expectations for slowing future domestic growth, are "not about the U.S. economy and the Federal Reserve" but mostly reflect weakness in Europe and elsewhere, he said. "I don't agree that it is sending a negative signal about the U.S. economy," he said, forecasting GDP growth of 2.5 percent to 3 percent this year.
While he does not expect inflation to be back up to 2 percent by the time the Fed raises rates, the inflation-subduing effects of falling oil prices should subside in six to 12 months, and it should begin to turn up as labor market slack declines further.
"The U.S economic underlying momentum is really very good," Williams said.
Speaking a day after the Swiss National Bank shocked markets by lifting a cap on its currency against the euro (EURCHF=EBS),Williams said the Fed's goal is "to not surprise or disrupt markets."