Two top U.S. Federal Reserve officials warned about the risks to the economy from asset bubbles on Wednesday, and one suggested raising interest rates to halt risky behavior that could trigger another bust.

Still, Fed Chairman Ben Bernanke offered a relatively downbeat view of the economy during a speech in Dallas, suggesting he was in no rush to tighten monetary policy.

Thomas Hoenig, president of the Kansas City Fed, reiterated his concern that the Fed's ultra-low interest rate policies could have unintended consequences.

I am confident that holding rates down at artificially low levels over extended periods encourages bubbles, because it encourages debt over equity and consumption over savings, Kansas City Federal Reserve Bank President Thomas Hoenig told a business group.

While we may not know where the bubble will emerge, these conditions left unchanged will invite a credit boom and, inevitably, a bust, he said.

Hoenig is a voter on the Fed's policy setting panel this year and has dissented against the U.S. central bank's promise to hold rates exceptionally low for an extended period, arguing it is no longer necessary for the Fed to tie its hands while the economy recovers.

Bernanke, for his part, said the U.S. economy still faces significant headwinds, including a housing sector that has yet to recover convincingly and an ailing employment market.

We are far from being out of the woods, Bernanke said in a speech to the Dallas Regional Chamber of Commerce. Many Americans are still grappling with unemployment or foreclosure, or both.

PUT THE MARKET ON NOTICE

Hoenig said on Wednesday the Fed could raise rates to around 1.0 percent, which would keep borrowing costs at historically low levels while sending a signal that easy money policies put in place during the global financial crisis of 2008 are steadily being pulled back.

The time is right to put the market on notice that it must again manage its risk, be accountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy, Hoenig said.

Most Fed officials hold the view that with unemployment just under 10 percent, and the economic recovery still weak, there is no need to rush to raise interest rates. Minutes of the Fed's most recent policy meeting on March 16 showed policy-makers worried about the possibilities of setbacks to the recovery and of inflation falling from low levels.

However, asset price bubbles are difficult to identify, but they occur fairly frequently and policymakers need to be more aggressive than in the past in confronting them, New York Federal Reserve Bank President William Dudley said on Wednesday.

The challenge of identifying bubbles as they occur cannot be an excuse for inaction, Dudley said during a speech to the Economic Club of New York.

Recent experience strongly suggests that asset bubbles exist and their collapse can be very damaging to financial markets and the broader economy.

The bursting of the U.S. real estate bubble, which began to deflate rapidly in 2007 when house prices started falling, triggered a credit crisis that grew into the worst financial downturn since the 1930s.

FED CRITICIZED

The Fed has faced sharp criticism for not anticipating or preventing the crisis, and former Fed Chairman Alan Greenspan faced a harsh assessment on Wednesday from a bipartisan panel studying the crisis.

The Fed utterly failed to prevent the financial crisis, said commission member Brooksley Born at a hearing in which Greenspan testified.

In reply to Born and other commission members, Greenspan, who is 84 and who retired as Fed chairman in 2006, said:

Did we make mistakes? Of course we made mistakes ...

Managers of financial institutions, along with regulators, including but not limited to the Federal Reserve, failed to comprehend the underlying size, length and potential impact of market risks that contributed to the 2007-2009 crisis, he said..

However, the New York Fed's Dudley was reluctant to endorse using monetary policy to keep inflating asset price bubbles in check on Wednesday.

Instead, he urged instead relying more heavily on regulation and verbal warnings -- leaning against the wind of conventional wisdom by speaking out against the dangers associated with the incipient bubble.

Dudley differed from Kansas City's Hoenig, saying interest rates, currently at a record low near zero, need to remain exceptionally low to support a still fragile economy and create more jobs.

We are not getting the job gains we would like to see, Dudley said. What that tells us is monetary policy has to remain on an easy setting, he said.

(Additional reporting by Steven C. Johnson and Edward Krudy in New York, Kevin Drawbaugh, Glenn Sommerville and Pedro Nicolaci da Costa in Washington, and Ed Stoddard in Dallas(Reporting by Mark Felsenthal, Editing by Chizu Nomiyama)

Ben Bernanke