By Ann Saphir
SAN FRANCISCO, April 4 (Reuters) - A stronger jobs market and slightly higher-than-expected inflation have lengthened the odds that the U.S. Federal Reserve will need to embark on a third round of bond buying to boost the economy, a top Fed official said on Wednesday.
The U.S. central bank will still likely need to keep benchmark interest rates near zero through late 2014 to keep the recovery on track, San Francisco Fed President John Williams told members of the San Francisco Planning and Urban Research Association. But it may not need to try to do even more to lower borrowing costs, he said.
"The arguments for doing another dose of monetary stimulus aren't nearly as strong" as they were when the Fed conducted its first and second rounds of quantitative easing, said Williams, who as recently as February said that more bond-buying could well be in the cards.
"Relative to a few months ago, I think the downside risks to the U.S. economy have lessened."
The change in tone from one of the Fed's most noted policy doves was at odds with comments last week from Fed Chairman Ben Bernanke, whose focus on high unemployment led investors to believe he might be getting ready to deliver a third round of monetary stimulus, known as quantitative easing, or QE3.
But minutes released on Tuesday from the Fed's March policy-setting meeting signaled more policymakers have cooled to the idea, given the recent pickup in the pace of economic growth. Monetary policy hawks like Dallas Fed President Richard Fisher have for months now predicted the Fed will do no more bond-buying.
Williams, a voter this year on the Fed's policy-setting panel, said part of his new optimism stems from the receding threat of a financial meltdown in Europe.
While there are still plenty of risks in years ahead as Europe tries to solve its debt problems, Williams said, steps taken by the European Central Bank to provide liquidity to banks have reduced the chance of a systemic crisis across the Atlantic that could choke recovery in the United States as well.
A few months back, Fed policymakers were also concerned about the disconnect between a falling unemployment rate and weak consumer spending, Williams said. But recent spending and production data have reduced that disparity, bolstering the case for recovery, Williams said.
The Fed, which is charged with both fighting inflation and fostering maximum employment, has kept short-term interest rates near zero since December 2008 to pull the economy from its worst downturn since the Great Depression.
The central bank has also bought $2.3 trillion in long-term securities and signaled it expects to keep rates low through late 2014 to bolster the recovery further.
Those moves have kept inflation near the Fed's 2 percent target over the last five years, Williams said. But unemployment -- at 8.3 percent in February -- is still well above the 6.5 percent that Williams estimates could result in some inflationary pressures.
As a result, while the Fed may not move to provide more stimulus, it is nowhere near close to beginning to remove it, Williams emphasized.
"Eventually, as recovery picks up, we will trim our securities holdings and raise our interest rate target," Williams said. "But that time is still well off in the future."
