(Recasts with Williams saying two to three rate hikes makes sense, adds market expectations)

By Ann Saphir

SACRAMENTO, May 13 (Reuters) - With the U.S. economic outlook "definitely looking good," the U.S. central bank is on the cusp of deciding whether to raise rates at any of its next few meetings, San Francisco Federal Reserve Bank President John Williams said on Friday.

"I view the balancing act as very similar to the balancing act that kind of led to the first rate increase. ... We have to be making the decision. Do we want to wait a little longer or act now?" Williams told reporters after a speech at the Sacramento Economic Forum.

Two to three rate increases this year "definitely still makes sense," he said.

The Fed raised rates in December for the first time in nearly a decade, but has kept them on hold since then largely because of worries over a slowdown in China and Europe.

Williams, a centrist whose views are generally in line with those of Fed Chair Janet Yellen, said he has not yet conferred with his staff economists over whether the next rate increase would be best made in June, July or September.

Such discussions typically take place the week prior to Fed meetings; the next policy-setting meeting is June 14-15.

With most gauges of the labor market suggesting the United States is at or nearly at full employment, he said, and inflation set to rise to the Fed's 2 percent target in two years, "things are definitely looking good."

Delaying rate hikes for months, he said, "would force our hands a little bit to move much more quickly in 2017."

Markets do not believe it, and traders are betting Williams and colleagues probably won't raise rates in June or, indeed, any time before December.

"Hopefully, if the markets understand our strategy, understand the data the way we do, then they won't be too surprised by what we do," Williams said. "I definitely don't think we need to go into a meeting with the markets convinced that we are going to raise rates in order for us to raise rates."

Williams said any reduction in the Fed's $4-trillion balance sheet is still "a ways" in the future.

Once it begins, the Fed would either let securities roll off whenever they happen to mature, or could trim its portfolio at a set pace, he said. Either way, "It would be kind of a passive thing that was just happening in the background," while the Fed would actively set policy only with its short-term rates.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama and Leslie Adler)