UPDATE 1-Fed's focus on boosting jobs won't spark inflation: Williams

(Adds comments on asset purchases)

SALT LAKE CITY, Nov 2 (Reuters) - The U.S. Federal Reserve has plenty of room to use monetary policy to boost jobs growth without igniting unwanted inflation, a top Fed official said on Friday.

``Unemployment is, and should be, a central focus of monetary policy right now,'' San Francisco Fed President John Williams told a group of community leaders here. ``We have substantial scope to use monetary policy to stimulate the economy without creating too much upward pressure on prices.''

The Fed in September launched a third round of quantitative easing, kicking the program off with $40 billion in monthly mortgage-backed securities purchases and vowing to keep on buying unless there is substantial improvement in the labor market.

It also said it would likely leave interest rates low even as the economy improves, until at least mid-2015.

Williams said the Fed may expand its purchases to include other assets if the job market does not show improvement.

He has previously said the Fed may start buying Treasuries, in addition to the mortgage-backed securities it is already buying, once its ongoing ``Operation Twist'' program ends in December. Under Twist, the Fed has been selling about $45 billion in short-term Treasuries each month, and buying an equal amount of long-term Treasuries.

If the Fed's new policies do not work or cause problems, he said, ``we'll adjust or end them.''

But so far, he said, the Fed's policies ``are having the desired effects,'' Williams said, helping to push 30-year mortgage rates to historically low levels that ``pep up the economy.''

A homebuilding rebound, fueled by the low cost of borrowing, should become a key driver of growth over the next few years, he said.

The average rate on 30-year fixed mortgages was 3.39 percent in the week ended Nov 1, according to Freddie Mac. It was 3.55 percent before the Fed announced its latest easing move.

The Fed's actions will help the economy gain momentum, pushing GDP growth to 2.5 percent next year from an expected 1.75 percent this year, and to 3.5 percent in 2014, Williams said.

The faster growth will help bring down unemployment, now at 7.9 percent, but only slowly, he predicted, saying he sees the jobless rate staying above 7 percent until at least the end of 2014.

And inflation, he forecast, will remain below the Fed's 2 percent target, rising to slightly below 2 percent for the next few years, from the 1.7 percent it has averaged over the past year.

Some critics, including several top policymakers inside the Fed, worry that the Fed's unprecedented steps to ease policy could spark inflation.

The U.S. central bank has kept short-term interest rates near zero since December 2008, and has tripled its holdings of long-term securities in its efforts to bolster the economy.

Those worries aren't warranted, Williams said on Friday.

``We have lots of spare economic capacity and an abnormally high number of workers who can't find jobs,'' he said. ``That keeps inflation in check by making it hard for businesses to raise prices or for workers to press for higher pay.''

And the economy still faces threats: fallout from Europe's debt crisis, fiscal austerity at home, and uncertainty over the U.S. budget and a potential worsening of the situation in Europe, he said.

While the Fed is now focused on jobs, that concentration ``in no way represents a lessening of the importance of price stability,'' he said.

Indeed, he said, inflation could fall too low if the recovery falters.

(Additional reporting by Leah Schnurr in New York; Editing by Chizu Nomiyama and Diane Craft)