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Fed's Williams "increasingly hopeful" on recovery

DANA POINT, California (Reuters) - A top Federal Reserve official on Friday painted an improving picture of the U.S. economy but said far-too-high unemployment, a festering crisis in Europe and the year-end expiration of stimulative tax cuts make continued easy monetary policy a must.

"Substantial risks remain that could cause the economy to perform worse than I expect," San Francisco Federal Reserve Bank President John Williams said in remarks prepared for delivery to an annual California bankers' meeting at a Ritz-Carlton resort about an hour's drive south of Los Angeles. "Under these circumstances, it's crucial that we continue our highly accommodative monetary policy."

His remarks came just hours after a U.S. government report showed employers cut back on hiring in April and the jobless rate fell, to 8.1 percent, as people gave up the hunt for work.

While "increasingly hopeful that the recovery has entered a phase of self-sustaining growth," Williams sees only small improvement in the labor market this year, forecasting the unemployment rate at around 8 percent by year's end and "a little below that" next year.

Williams, often labeled a dove because of his strong support for employment-boosting monetary policy measures, has used his vote on the Fed's policy-setting panel this year to support continued monetary easing.

The Fed now expects to keep interest rates near zero through late 2014, where they've been since December 2008.

Williams on Friday projected U.S. growth at 2.5 percent this year and 2.75 percent next year, and inflation to be around the Fed's 2-percent target this year and somewhat below that in 2013 and 2014.

And even those projections, at the low end of Fed officials' April forecasts, could be over-optimistic, he said, given Europe's failure to definitively resolve its financial problems, and the scheduled year-end expiration of tax cuts and a payroll tax holiday in the United States.

In a nod to his banker audience, Williams acknowledged that continued low interest rates create a "tough" environment for banks.

But "our mandate from Congress is to focus on the economic goals of maximum employment and price stability," he said. "Clearly, a solid economic recovery is in the best interest of the banking system as well."

(Reporting by Ann Saphir; Editing by Padraic Cassidy)

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