The U.S. central bank may need to buy more bonds to bolster a housing market whose distress is at the heart of a frustratingly slow economic recovery, a top Federal Reserve official said on Wednesday.

Looking ahead, we may still need to provide more policy accommodation if the economy loses momentum or inflation remains well below 2 percent, San Francisco Fed President John Williams said at the Bishop Ranch Forum, a business group in this San Francisco suburb. Should that occur, restarting our program of purchasing mortgage-backed securities would likely be the best way to provide a boost to the economy.

Williams, a voting member this year on the Fed's policy-setting panel, is on the dovish end of a policy spectrum, more concerned with the harm wrought by continued high unemployment than with the threat of inflation.

The Fed is increasingly pinpointing housing as the key to the nation's recovery, and Williams is the second regional Fed president inside of a week to make the case for more monetary policy accommodation through the purchase of more mortgage-backed securities.

Chicago Fed President Charles Evans last Thursday said he would be aggressive in seeking more help for the economy through the purchase of such bonds.

Further bond purchases by the Fed would amount to a third round of quantitative easing, a controversial move that drew criticism both at home and abroad the last time the Fed took that path.

The need for more easing is far from a consensus view within the Fed. Four top Fed officials have publicly noted their opposition to the central bank's most recent move to ease, signaling last month that it will keep interest rates near zero through late 2014.

The hawkish Richmond Fed President Jeffrey Lacker, the only one of the four with a vote on the Fed's policy-setting committee this year, dissented, and said he believes rates will need to rise before then to keep inflation in check.

St. Louis Fed President James Bullard, who is known as a policy centrist, said on Monday that he believes the Fed should start raising rates next year.

The U.S. central bank has already pushed far into uncharted territory to pull the economy free of the worst downturn in generations.

Last month it signaled a move Williams was careful to characterize as the Fed's best judgment given current economic conditions and not a promise.

The Fed has already kept interest rates near zero for more than three years, and has bought $2.3 trillion in Treasuries and mortgage-backed securities to push borrowing costs down further.

Chairman Ben Bernanke has said the Fed should consider doing even more for the economy, if unemployment stays high and inflation keeps falling.

Although U.S. unemployment fell last month to 8.3 percent, Williams said he projected high unemployment for years to come, with the rate staying above 8 percent until well into next year and remaining above 7 percent through the end of 2014.

With growth expected at just 2.25 percent this year and 2.75 percent next year, the U.S. economy is expanding too slowly to keep taking big bites out of unemployment, Williams said.

Inflation, which fell sharply to 0.7 percent in the last quarter of 2011, will also continue to underrun the Fed's target for years to come, Williams said.

In January, the Fed for the first time adopted an explicit 2-percent inflation goal. With both employment and inflation far below optimum levels, more action may be justified, Williams suggested.

We recognize that monetary policy cannot perform magic, Williams said. Lower interest rates alone can't fix all the economy's problems. But they do help.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)

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