The U.S. economy is recovering but growth will only pick up gradually and inflation is not a threat in this subdued environment, a top Federal Reserve official said on Wednesday.

At this time I'm not overly worried about inflation prospects, Federal Reserve Bank of Atlanta President Dennis Lockhart told a panel discussion hosted by Emory University.

Neither expectations nor the key indices tell me at this time that I need to be overly concerned about inflation, said Lockhart, a voting member of the U.S. central bank's policy-setting committee this year, and who is seen as being on the Fed's more dovish pro-growth wing.

Lockhart said that because economic activity remained fragile, businesses had little pricing power in an environment in which consumers remained wary of spending.

Asked about where he saw the U.S. economy one year hence, he said that it would still be healing with unemployment stuck at a frustratingly high level, although he declined to say if this meant it would be in double-digit territory.

U.S. unemployment was 9.4 percent in July but is expected to peak at 10 percent later this year and remain around this level into 2010. August data will be released on Friday and the unemployment rate is forecast to creep up to 9.5 percent.

The Fed -- the U.S. central bank -- has cut benchmark interest rates to almost zero and flooded money into credit markets since the failure of investment bank Lehman Brothers last September sparked a global financial panic.

This aggressive monetary expansion to offset the worst recession since the Great Depression of the 1930s has doubled the Fed's balance sheet to around $2 trillion, which some fear could spark inflation as the economy picks up pace.

The Fed says it can exit from this unprecedented policy action when the time is right, but has also assured markets and investors that it will keep interest rates exceptionally low for an extended period.

The crisis was caused in large part by the collapse of the U.S. housing market, which triggered massive losses among banks and other investors, who had placed huge leveraged bets that home prices would continue to rise.

Lockhart declined to speak to the timing of the Fed's exit strategy, but he did note it would not be able to remain agnostic in the face of future asset bubbles.

I am sympathetic to the view that policy-makers should consider intervention in certain circumstances. That may simply be by speaking against the practices ... as opposed to taking action with interest rates, he said in reply to a question.

There are a range of things that policy-makers could do to in effect step on the brakes a little bit and keep the economy more stable, Lockhart said.

(Editing by James Dalgleish)

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