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BOISE, Idaho (Reuters) - The U.S. Federal Reserve will reduce its massive bond-buying program gradually as the economy continues to improve, following no fixed schedule but responding to progress on jobs and inflation, a top Fed official said on Thursday.
"The first step will be to slow the pace of asset purchases over time, eventually ending them altogether," John Williams, president of the San Francisco Federal Reserve Bank, said in remarks prepared for delivery to a group of business leaders and politicians at Boise State University. "This won't be a slamming on the brakes, it will be an easing off the gas."
The Fed has kept short-term interest rates near zero since December 2008 and is buying $85 billion in Treasuries and housing-backed securities each month to push down longer-term borrowing costs in order to encourage investment and hiring.
Investors had expected the U.S. central bank to pare QE3 - as the Fed's third round of quantitative easing is known - when policymakers met last month, but they held off, citing less-than-adequate improvement in the labor market and more broadly in the economy.
Unemployment in August, the most recent month for which data is available, stood at 7.3 percent, well above the 5.5 percent that many economists see as normal for the U.S. economy.
On Thursday, Williams said the economy is being held back by a number of factors, including tight credit and the government's fiscal austerity.
Still, Williams expects economic growth to pick up next year, helped by easy monetary policy. He said he sees continued steady gains in jobs that will lead to a gradual decline in the unemployment rate.
Inflation, which is running well below the Fed's 2 percent target, will gradually rise back toward that goal over the next few years as the economy improves, he said.
Williams's call for a gradual reduction in bond-buying is in line with the blueprint that Fed Chairman Ben Bernanke laid out in June. Bernanke at the time said the Fed would likely begin to reduce the program later this year and end it in mid-2014, as long as the economy improves as forecast.
Williams on Thursday suggested the Fed should not stick to a particular schedule in paring its bond-buying program.
"It will not be a fixed date on the calendar," he said. "Instead it will be in response to economic developments and the progress we have made towards our dual goals of maximum employment and price stability."
When they met last month, most of the Fed's 17 policymakers believed that reducing bond-buying later this year was appropriate, according to minutes of the meeting released on Wednesday.
Reporting by Ann Saphir; Editing by Leslie Adler