Williams: Fed Must Keep Policy Throttle 'Wide Open'

He joined the majority of his fellow policymakers in last month's decision signaling interest rates will stay near zero through late 2014, a year and a half longer than the Fed had previously projected.

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The San Francisco Fed chief is known as a monetary policy "dove" who is more concerned with the threat of high joblessness than high inflation.

On Monday, he said conditions could merit further policy easing through a third round of quantitative easing, nicknamed

QE3.

"In terms of whether we do QE3, this would depend completely on where the U.S. economy is going," he said. "If inflation continues to stay very low, and unemployment very high, I think a pretty strong case could be made, based on the logic I gave, to try to boost the economy a little bit more."

With 10-year Treasury yields below 2 percent, there is a limit to how much further the Fed can push down long-term borrowing costs, he said. And even with rates near record lows, a weak housing sector is robbing Fed policy of some of its effectiveness.

"If you look at our financial system today, it is still cowering," he said, with lenders so cautious that many homeowners are unable to take advantage of low rates by refinancing their mortgages.

Still, he noted, Japan has pushed long-term rates towards 1 percent, suggesting there is still room for the Fed to do still more.

The Fed has kept interest rates near zero for more than three years, and it has pushed down borrowing costs further by buying $2.3 trillion in long-term securities.

After the Fed last month signaled rates would stay low for nearly three more years, Fed Chairman Ben Bernanke said the central bank stood ready to do still more for the economy, if unemployment remained high and inflation low.