UPDATE 2-Fed's Pianalto sees bumpy, gradual recovery

(Adds details, comments from Q&A)

By Kristina Cooke

NEW YORK Oct 1 (Reuters) - Cleveland Federal Reserve President Sandra Pianalto said on Thursday she expects a gradual and bumpy recovery from a brutal recession, and she is not worried that inflation will result from the extraordinary measures the Fed took to fight the crisis.

"I believe there is enough slack in the economy to keep inflation subdued for some time," Pianalto told a conference sponsored by Market News International.

"In this environment, I believe that maintaining the current accommodative policy stance helps to foster both the continued recovery of our weakened economy and the stabilization of inflation rates at levels consistent with price stability," she said.

Pianalto is not a voting member of the Federal Reserve's policy-setting Federal Open Market Committee this year.

The U.S. central bank slashed interest rates to near zero percent last year and put in place a vast array of emergency economic and financial support programs as it fought the deepest recession since the Great Depression.

Pianalto, who will be a voter on the FOMC in 2010 -- when many economists expect the Fed will raise rates -- said that the pace of interest rate hikes will depend on how the recovery unfolds. Some Fed officials, including Fed Governor Kevin Warsh, have said that the policy shift could be aggressive.

There are early signs from credit and housing markets that the economy is rebounding from the downturn, Pianalto said.

"I would not be surprised to find that when we look back a year from now, we will see that mid-summer marked the end of this recession," she said. But it is "far too early to celebrate."

Pianalto expects the jobless rate to climb higher and also said the U.S. financial system is still "far from healthy," noting that credit conditions remain tight.

Underscoring the weakened state of the economy, she said, "The improvements seen today in some critical sectors are tied to short-term stimulus programs."

Despite "tangible evidence" that inflation will remain subdued for some time, the mere existence of inflation concerns "must be taken seriously", Pianalto said, "if for no other reason than to prevent inflationary expectations from becoming a self-fulfilling prophecy."

Pianalto said she does not share the views of some economists that the Fed's balance sheet -- which more than doubled to $2 trillion as the Fed battled the crisis -- and the U.S. fiscal deficit will lead to inflation.

Pianalto said the Fed has the tools it needs to manage its balance sheet.

"When the time comes to start removing our policy accommodation, I am confident that we have the tools and the will to get the job done," she said. (Reporting by Kristina Cooke, additional writing by Mark Felsenthal, Editing by Leslie Adler)