The U.S. central bank may yet need to buy more bonds to bolster the weak recovery, but better-than-expected jobs data makes it a close call, a top Federal Reserve official said on Wednesday.

Further Fed stimulus is not a slam dunk in the sense that if the economy really slowed or inflation came down a lot -- then, I think, the case for more stimulus is much stronger, much more obvious, San Francisco Fed President John Williams told reporters after a speech to a business group here.

Inflation is running below the Fed's 2 percent target, but the unemployment rate has fallen rapidly in recent months, hitting 8.3 percent in January.

Williams said he sees the U.S. economy growing at just over 2 percent this year -- enough to chip away at high unemployment, however slowly.

That to me is not a satisfactory outcome, he said, but given the recent strength in the labor markets, you are kind of in the close call space with my forecast. At this point, he said, you would have to weigh the costs and benefits of a third round of quantitative easing.

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.

His views appear in line with those of Chairman Ben Bernanke, who has said the Fed should consider doing even more for the economy if unemployment stays high and inflation keeps falling.

If conditions do worsen enough to merit more bond-buying, Williams said, the Fed should purchase mortgage-backed securities to bolster the distressed housing market, which is at the heart of the weak recovery.

Williams repeated his preference for a flexible schedule of bond purchases, rather than committing to a set amount of bond buys over a set period, as the Fed did in its two prior rounds of stimulus.

The Fed is increasingly pinpointing housing as the key to the nation's recovery, and Williams is the second regional Fed president in a week to make the case that any more monetary policy accommodation should come 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.

The Fed's first two rounds of quantitative easing were controversial, drawing criticism both at home and abroad, and today 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. It signaled 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 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 it will keep rates low through late 2014, a move Williams said he supported as a member of the 2014 club - the group of Fed policymakers who believe 2014 is the appropriate time for the central bank's first rate hike after years of near-zero interest rates.

He was careful to characterize the policy 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.

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 be less than the Fed's target for years, 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 and Dan Grebler)

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