ROHNERT PARK — San Francisco Federal Reserve President John Williams told a group of hundreds of Sonoma County business leaders Friday the central bank's efforts to push down long-term interest rates could start tapering later this year, citing his forecast for lower unemployment and other improving economic indicators.

National economic growth is expected to be relatively sluggish in the current and next quarters, he said. Yet a lower national unemployment rate -- his office projects it will be below 7.25 percent this year and 6.75 percent next year -- are among the signals that could encourage the Fed to scale back the purchase of tens of billions of dollars in investment securities in an effort to keep interest rates low and spur consumer borrowing.

[caption id="attachment_75913" align="alignright" width="300"] John Williams[/caption]

Dr. Williams quoted Fed Chairman Ben Bernanke's recent statement that the central bank could slow and even cease its $86 billion in monthly securities purchases by the middle of 2014, when unemployment is projected to be around 7 percent.

However, the Fed will continue to pursue a large role in supporting the economic recovery, including the maintaining of its near-zero rate for short-term loans to banks until unemployment drops at least below 6.5 percent.

"Of course, the economy's increased momentum has raised questions about when the Fed will cut back, and eventually end, its asset-purchase program," Dr. Williams said. "So is it time to act? My answer is that it's still too early."

Dr. Williams offered his personal forecast, along with a review of the Fed's actions to stimulate economic growth, at an event organized by the Sonoma County Economic Development Board.

In a question-and-answer session, Dr. Williams said that a recent uptick in interest rates was something of a wake-up call for lenders and markets. While many had pointed to the chairman's remarks for spurring that bump, Dr. Williams said the statements were not any different than the previously announced plans to wind down the Fed's activities as the economy improved.

"Maybe many of them thought that low interest rates would go on forever," he said.

Inflation-adjusted gross domestic product is expected to rise 2.25 percent for 2013 and 3.25 percent in 2014, he said. Per-capita GDP had yet to rise to its prerecession levels, though the recovery has been stronger than projected during the recession's onset five years ago.

Dr. Williams said that current rates of inflation were lower than the long-term 2 percent annual target announced by the Fed, creating some concern that the economy was growing too slowly. He cited a strong dollar and other short-term factors as large contributors to that trend. But he noted that it was among the observations that caused him to revise his May opinion that the Fed's large-scale asset buying could wind down by the end of this year.

Inflation, at 1.5 percent in mid-2013, was expected to be 1.75 percent in 2015, according to his forecast.

Dr. Williams acknowledged that, while the suppression of interest rates has been a boon to some borrowers, it has also created a profit squeeze seen most notably at the nation's community banks. With those conditions, the Fed and other regulators have been watching that banks don't pursue riskier practices that could fill that gap.

"Interest rates are going to come back to normal levels eventually," he said. "You should not be making decisions as if we will be in the current environment forever."

Economic growth in the current period has been driven largely by private industry, after the winding down of the $800 billion stimulus package passed in 2009 and the so-called budget sequestration earlier this year. Since the end of 2009, government spending has fallen nearly 7.5 percent, and private spending has risen more than 10.5 percent.

Calling an improving housing market a "powerful tonic for the economy," Dr. Williams said that a national increase in home prices from 10 percent to 15 percent has helped lift consumer confidence. Lifted by a rise in stock prices and other assets, Dr. Williams estimated consumer spending will rise by $90 billion.

Uncertainty has fallen across the economy in general, he said.

"My business contacts confirm that uncertainty appears to have eased this year, in part because the decibel level of congressional wrangling over taxes and spending has dropped," Dr. Williams said.