HALF MOON BAY, California (Reuters) - The Federal Reserve will need to continue with its bond-buying programme for most of the rest of this year as it tries to push down both borrowing costs and a still-elevated unemployment rate, a top Fed official said on Monday.
"We are facing difficult situations -- I wish growth was faster, I wish unemployment would come down faster as well -- but I think we've got the policy position right," John Williams, president of the San Francisco Federal Reserve Bank, told reporters on the sidelines of the SEMI 2013 Industry Strategy Symposium. "I anticipate that continued purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of 2013."
Last month, the Fed ramped up asset purchases aimed at spurring growth, and it is now buying $85 billion in mortgage-backed securities and long-term Treasuries each month.
It also pledged to keep interest rates near zero until the unemployment rate drops to 6.5 percent, as long as inflation expectations do not climb above 2.5 percent.
Williams -- who used his vote last year on the Fed's policy-setting panel to support those decisions -- said he sees the U.S. economy growing 2.5 percent this year and a little under 3.5 percent next year.
Unemployment, which registered 7.8 percent in December, will likely end 2014 at 7 percent and will not hit 6.5 percent until the second half of 2015, he said. And with labor costs low, Williams said he sees inflation likely to come in at 1.5 percent this year and stay below the Fed's 2 percent goal for the next few years.
Williams' forecast shows that he sees the Fed keeping rates near zero into at least mid-2015, in line with the U.S. central bank's own guidance on low rates. As the jobless rate improves, he said, long-term rates will probably rise, well in advance of any Fed move on short-term interest rates.
His view is squarely on message with that from the Fed's policy-setting panel, which next meets on January 29-30. Williams does not have a vote on policy this year, but he is one of just 19 top Fed officials who help shape monetary policy under Chairman Ben Bernanke.
Top of the agenda this year for the Fed will be how long to stay with its current third round of quantitative easing, known as QE3. The Fed has said it will need to see substantial improvement in the labor market outlook before halting those purchases.
The Fed will be looking at "a range of other economic indicators" as well, Williams said, noting that he sees a "significant risk" that his forecast is too optimistic, given uncertainty over the federal budget weighing on growth.
"We make up our little short list, what are the biggest things that keep us up at night," he said. "Generally, Europe and Asia have been two, three, four, somewhere along those lines; right now it's the fiscal cliff."
Williams said the effectiveness of the Fed's easy monetary policies has been crimped because credit is too tight for some borrowers and because of various unexpected shocks that have hit the economy.
Even after the Fed stops its asset-buying program, it plans to keep rates low to make sure the recovery truly takes hold, raising rates only if inflation threatens to top 2.5 percent.
Fed officials who are critics of the policy, such as Esther George, the Kansas City Fed chief, who is an inflation hawk and a voter on the policy-setting committee this year, say they worry that inflation could get out of control.
But Williams, who considers himself a policy centrist, said the Fed will keep inflation in check. While the threshold on inflation gives the Fed the flexibility to allow inflation to rise temporarily above the 2 percent goal as it focuses on boosting employment, it also makes clear that the Fed will respond if inflation rises too much.
"We're also determined to keep a lid on inflation expectations," he said. "We will not allow hard-won confidence in the Fed's commitment to price stability to melt away."
Reporting by Ann Saphir; Editing by Leslie Adler