UPDATE 1-Latest U.S. jobs report gives me pause, says Fed's Dudley
* Central banker expects 2-2.5 pct U.S. growth this year
* $85 bln in monthly bond buys appropriate for now -Dudley
* Policymaker to tour Staten Island areas hit by Sandy
NEW YORK, April 16 (Reuters) - An influential Federal Reserve official said on Tuesday the weak March jobs report made him more cautious on how far the economy has come, and underscores the need for the U.S. central bank to keep buying bonds apace.
In a breakfast address, New York Fed President William Dudley said he expects "sluggish" economic growth of 2 to 2.5 percent this year and only a modest decline in unemployment. The labor market, he said, has not yet shown the substantial improvement the Fed seeks.
A paltry 88,000 new jobs were created last month, well below expectations, while the jobless rate fell by a tenth to 7.6 percent because droves of Americans gave up the search for work.
"While I don't want to read too much into a single month's data, this underscores the need to wait and see how the economy develops before declaring victory prematurely," said Dudley, a permanent voting member of the Fed's monetary policy committee and a close ally of Fed Chairman Ben Bernanke.
"I'd note that we saw similar slowdowns in job creation in 2011 and 2012 after pickups in the job creation rate and this, along with the large amount of fiscal restraint hitting the economy now, makes me more cautious," he told the Staten Island Chamber of Commerce.
Frustrated with the slow and erratic economic recovery from the 2007-2009 recession, the Fed has kept interest rates at rock bottom and is buying $85 billion in Treasury and mortgage bonds per month to spur investment, hiring, and overall growth.
Dudley, a strong backer of the quantitative easing program, said he is closely watching the effects tighter fiscal policies will have on the economy. He said he expects "at some point" to see sufficient evidence of improved economic momentum to favor gradually dialing back the pace of asset purchases.
"Of course, any subsequent bad news could lead me to favor dialing them back up again," he added.
Dudley has repeatedly complained that the U.S. government is not helping nurture the U.S. economy, which grew at a tepid 1.7 percent last year in part due to a lackluster fourth quarter, when Superstorm Sandy hit hard Staten Island and this coastal region.
Growth is expected to have picked up in the first quarter of this year, but a large package of government spending cuts as well as higher taxes could yet dampen activity.
Dudley said he expects clarity on the effects of the fiscal tightening, "for better or worse," in coming months.
Unlike other major central banks globally, the Fed has tied its third round of quantitative easing (QE3) to a substantial improvement in labor market conditions, and it expects to keep rates near zero until unemployment drops to 6.5 percent or so.
While joblessness has fallen from 10 percent in 2009, "much of the decrease is due to a fall in the number of people actively looking for a job," said Dudley, who later on Tuesday plans to tour some areas of the New York City borough where homes and businesses were destroyed in Sandy's storm surge.
The Fed policymaker pointed, however, to consumer spending, the housing market, and investment in equipment and software as bright spots in the United States.