Fed's Williams sees mid-year rate hike still in play

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 despite weakness abroad. "I think that sometime around the middle of the year we are going to be closer to a decision, at least I would think we would be closer to it being an appropriate timing to raise rates," San Francisco Fed President John Williams said at a meeting of the Bay Area Economic Institute. Williams said he expects U.S. gross domestic product growth of about 2.5 to 3 percent to push unemployment down to a 'normal' 5.2 percent by the end of 2015 or early 2016, and for inflation to eventually turn back up toward 2 percent. The drop in oil prices, he said, will encourage consumer spending and boost growth, and though lower energy prices and weakness abroad are pushing down on U.S. inflation now, the longer-term outlook is for a return to normal price increases. Williams is a voter this year on the Fed's policy-setting panel and is seen as a centrist with views in line with those of Fed Chair Janet Yellen. The Fed, the U.S. central bank, is expected to raise rates this year but a plunge in oil prices that has worsened dangerously low inflation in Europe, and stubbornly weak growth in much of the world, have raised questions about that prognosis. To Williams, given the momentum in the U.S. domestic economy, a rate rise in the world's biggest economy is in the cards for 2015, but the real drama in central banking will be played out internationally. While the U.S. economy is in a "good place" it is "imperative" that the Europeans find a way to stimulate the euro zone economies, he said. "It's going to be a very interesting year in terms of global events, so I'm going to watch the data, and decisions will be based on what actually happens, not just on what our forecasts are," Williams said. (Reporting by Ann Saphir; Editing by James Dalgleish)