By Michael S. Derby

NEW YORK (Reuters) - Top Federal Reserve officials are showing no appetite for slowing the pace of the central bank's balance sheet reduction, pushing back on outside observers' assertions that money market conditions will bring an early end to the program.

Fed Chair Jerome Powell and New York Fed President John Williams - whose bank manages the program - this week both said they saw no reason for them to throttle back from allowing about $95 billion a month of Treasuries and mortgage-backed securities to mature to shrink its $8.6 trillion asset portfolio.

The program is part of a broader effort to tighten financial conditions to help arrest the highest level of inflation seen in four decades. The main thrust of that campaign relies on ongoing increases in the Fed’s short-term rate target, with the balance sheet contracting steadily in the background.

Fed officials have not said how far they would like to shrink their holdings or how long the process may take. But some analysts see bank reserve levels falling next year to where the Fed will be forced to slow or even stop the drawdown.

Right now, the banking system is flush with $3 trillion in reserves, down about a $1 trillion from a year ago. And as long as reserve levels are robust, it will allow the Fed’s rate-control toolkit to keep the federal funds target rate range, now at between 3.75% and 4%, at the levels set by the central bank.

But when reserves grow scarce, that can roil short-term rate...

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