U.S. Federal Reserve officials on Thursday said inflation is not an imminent threat and downplayed the consequences of the falling U.S. dollar.

Philadelphia Federal Reserve Bank President Charles Plosser and Dallas Federal Reserve Bank President Richard Fisher both said the U.S. recovery was underway but noted risks to growth remain.

It's not going to be zippy, Fisher said of the recovery, adding he is concerned growth will fall short of 3 percent next year and unemployment will remain high for a long time.

With firms increasing neither hiring nor investing, inflation is obviously not an issue, he said in an interview with Market News. There is so much excess capacity out there.

The U.S. central bank slashed interest rates to near zero last December and has kept them there since to foster a recovery from the deepest recession since the 1930s.

After their last meeting on November 3-4, Fed policymakers reiterated a pledge to keep rates extraordinarily low for an extended period.

Plosser, one of the Fed's biggest anti-inflation hawks, said after a speech in Singapore the ailing commercial real estate market remains a problem as falling prices threaten small and medium-sized U.S. banks.

While inflation is not a threat for now, the United States will have to look very hard at reversing course on rates as the economy strengthens, he said.

Fisher and Plosser are not currently voters on the Fed's policy-setting Federal Open Market Committee and will not rotate into voting slots until 2011.

With overnight rates near zero, the Fed this year turned to efforts to drive down other borrowing costs and jump-start growth by buying $300 billion in longer-term U.S. government debt, $175 billion in housing agency debt and $1.25 trillion in mortgage-backed securities.

Fisher said the Fed has to get back to conducting monetary policy in its traditional way as soon as possible.

The fact is we undertook this action (of buying MBS) with a purpose and we have to be purposeful in unwinding these actions, he said. However, he said the Fed would have to do this with the least disruption to the market, MNSI reported.

The Fed has said it will slow its MBS purchases and aims to complete them by the end of March 2010.

FALLING DOLLAR NOT A WORRY

Concerns have been raised in Asia and Europe that ultra-low U.S. interest rates and the falling U.S. dollar are fueling dangerous asset bubbles. The dollar hit a 15-month low this week.

Fed Chairman Ben Bernanke on Monday surprised investors by commenting directly on the dollar's value. He said the focus on the Fed's dual mandate of price stability and jobs growth will help the dollar to be strong. [ID:nN16514940]

Asked about the dollar, Fisher reiterated that while he paid attention to it, he did not expect it to have much inflationary impact unless its decline became disorderly.

The dollar has fallen 7 percent so far this year and likely has become a funding vehicle for bets on higher-yielding currencies in growing emerging markets.

Plosser told reporters in Singapore he was also not worried about dollar weakness.

There's no particular reason you wouldn't expect the dollar to go back to where it was before the panic set in -- that is essentially all it has done at this point. I don't view that as anything particularly of concern, he said.

Expectations of a protracted period of lower U.S. rates has sent waves of capital overseas in search of higher returns.

Asia, which was last in and first out of the financial crisis, has absorbed a lot of this investment, giving rise to asset bubble fears and worries policymakers will tighten capital controls.

So far, Brazil and Taiwan have taken action to curb capital inflows. But Plosser downplayed the threat of asset bubbles in Asia.

For the most part, the flows are not such that I consider them to be threatening or inconsistent with fundamentals, Plosser said. The prospects for economic growth are stronger in Asia than in the U.S., and you would expect some of those flows.

(Additional reporting by Nopporn Wong-Anan in SINGAPORE; Writing by Kevin Plumberg and Kristina Cooke; Editing by Andrew Hay)

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