By Pedro da Costa and Jonathan Spicer
NEW YORK (Reuters) - Top Federal Reserve officials said on Friday the U.S. central bank's ultra-easy monetary policy is appropriate for a sluggish economy but one policymaker said further easing would only be warranted if conditions worsen.
St. Louis Federal Reserve Bank President James Bullard told CNBC television that now was a "natural time" for the U.S. central bank to pause and await more data given the economy and labor market are looking better.
"With the better data, the super-easy policy already in place ... I think we've got a lot on the table here so this is a normal situation to sit back, get more data and try to collect our thoughts about the main things that are affecting the economy right now," Bullard said.
Many investors had been expecting the Fed to embark on a third round of bond buying this year to keep interest rates low and so spur economic growth, but a recent improvement in the outlook has dampened such speculation.
John Williams, president of the San Francisco Fed, said the recovery was still sufficiently lackluster to warrant a heavy dose of monetary stimulus.
While he stopped short of calling for additional easing, Williams hinted that he would not be averse to further stimulus from the Fed. Williams was discussing a paper on monetary policy presented at a conference sponsored by the University of Chicago Booth School of Business.
"The paper's executive summary notes that current 'headwinds ... may require a more aggressive monetary response than in normal downturns'. I agree," Williams said.
He indicated a preference for a return to buying mortgage-backed securities, which would have the added advantage of helping to support the housing market, a key sector of the economy that remains crippled.
"Purchases of mortgage-related securities appear to have reduced mortgage rates significantly, making them particularly useful given the weakness in the housing sector," Williams said.
Last month, the central bank said it would likely keep U.S. benchmark interest rates near zero until at least late 2014.
Bullard, a policy centrist who does not have a vote this year on the Fed's policy-setting panel, said a third round of 'quantitative easing', or QE3, is a "potent weapon" that the Fed can use to help spur the recovery.
"I wouldn't take QE3 off the table forever," he said.
"But we should use it only if the economy deteriorates and especially if inflation numbers come in below our (2 percent) inflation target and start to drift down to more disinflation or (into) deflation. So we're not in that situation now."
The Fed in late 2008 slashed interest rates to near zero and has since bought $2.3 trillion in long-term securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades.
Fed Chairman Ben Bernanke said this month the economy still needs plenty of support and defended the Fed's aggressive policies to ratchet down unemployment, which has fallen in recent months but is still stubbornly high at 8.3 percent.
Speaking at the same conference as Williams and Bullard, Bank of Canada President Mark Carney praised the Federal Reserve for being "appropriately and effectively radical by implementing a range of powerful unconventional tools."
He said the Fed was able to use the anchor of an explicit inflation target to employ communications as a tool for stimulus.
"We expect that the Fed's elaboration of its longer-term policy goals will enhance the stimulative effect of its announcement that the federal funds rate is likely to remain at exceptionally low levels at least through late 2014," Carney said.
Charles Plosser, the Philadelphia Fed's hawkish president, stayed away from the immediate outlook for policy but stated his strong distaste for central bank policies such as mortgage bond purchases that he said cross the line into fiscal policy.
"Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions," Plosser told the Chicago Booth conference.
New York Fed President William Dudley also waded into the fiscal policy debate, arguing the government needs a medium-term plan to reduce its high deficits and debt.
"It is essential that the United States put in place a credible program of medium-term fiscal consolidation that addresses our sizeable and growing structural deficits in a manner that is consistent with supporting ongoing economic recovery," he said.
(Editing by James Dalgleish)
(This story removes Dudley comments from last month, which were mistakenlyinserted in the story and adds Dudley comments from Friday)