Fed's Williams says sees 'smidgen' slower rate hikes

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By Ann Saphir

SAN FRANCISCO, Jan 29 (Reuters) - The Federal Reserve probably needs to keep U.S (Other OTC: UBGXF - news) . interest rates lower for longer given headwinds from weak global economic growth, a stronger dollar and an unexpectedly sustained drop in oil prices, a top Fed official suggested on Friday.

San Francisco Federal Reserve Bank President John Williams told reporters he now sees slightly slower growth, slightly higher unemployment, and about a tenth of a percent lower inflation this year than he had expected in December, when the Fed raised rates for the first time in nearly a decade.

At the time, officials at the Fed, the U.S. central bank, had as a group expected about four further rate hikes this year, and Williams had said that was in line with his own expectation.

That view appears to have changed, after investor worries about a global slowdown and weakness in China sent equities and oil prices plunging through most of January. Meanwhile the dollar has strengthened, pushing down on U.S. inflation, which is running well below the Fed's 2-percent target.

"Standard (Other OTC: SNDH - news) monetary policy strategy says a little less inflation, maybe a little less growth ... argue for just a smidgen slower process of normalizing rates," Williams said.

"We got a little stronger dollar, some mixed data on the economy, some weakness in (fourth-quarter U.S. GDP growth), all of those coming together kind of tell me that we probably need a little bit more monetary accommodation this year than I was thinking in the middle of December."

Earlier this week Williams was in Washington, where he and other Fed policymakers decided to leave benchmark rates unchanged and to acknowledge that they were closely watching global financial markets.

Williams said that over the past several months nothing had fundamentally changed in his view of China's growth path, and that even the Bank of Japan's surprise move to negative interest rates on Friday had not changed his baseline forecast for the U.S. economy.

Further, his scenario of what's most likely for the U.S. economy, his "modal" forecast, remains fundamentally unchanged for 2016 and 2017, he said.

He has previously forecast the U.S. economy will grow at about 2 percent to 2.25 percent, inflation will begin to return to the Fed's 2-percent target over the next couple of years, and the unemployment rate, now at 5 percent, will also fall.

"The thing that has changed is that commodity prices keep coming down," he said. (Reporting by Ann Saphir; Editing by James Dalgleish)