UPDATE 2-Fed's Stern says U.S. slowdown could be lengthy

(Adds comments from Q&A)

By Ros Krasny

THREE FORKS, Montana, Aug 14 (Reuters) - Minneapolis Federal Reserve Bank President Gary Stern said on Thursday the United States could see modest economic growth and rising joblessness for some time, while inflation should ease.

Stern, the Fed's current longest-serving district president, also offered a framework for reform of financial institutions to hold back the ever-expanding safety net for large firms.

A few weeks ago Stern was among a number of Fed speakers who seemed anxious for the central bank to start raising interest rates to head off an inflation threat.

On Thursday, though, Stern, a voting member of the policy-setting Federal Open Market Committee in 2008, seemed more at ease with the outlook for prices, and also wary that the U.S. slowdown could be prolonged.

Stern did not specifically address the interest rate outlook, but said that "a diminution of inflation, absent a resurgence in energy and other commodity prices" is likely.

Speaking to local business leaders in Three Forks, Montana, Stern said the economic slowdown in the early 1990s "remains a valuable guide," with a pattern suggesting it could be one to three years before the United States returns to robust growth.

"I'm not predicting that, but I can't rule it out," Stern said in answer to questions from the audience.

Stern's comments were seen as consistent with the view in financial markets that the FOMC will hold benchmark lending rates steady at 2 percent at least through year-end.

"Clearly, these are not the words of a man intent on hiking interest rates anytime soon," said Michael Feroli, U.S. economist at JP Morgan Economics.

Stern said the U.S. economy was in better shape on several measures when it entered the current slowdown than it was in the early 1990s.

Credit markets will "inevitably" pick up, but for now "a variety of potential borrowers are finding funding more difficult and expensive to obtain," he said.

Meanwhile, the downturn in the housing market continues and the run-up in energy and other commodity prices "has taken a toll on consumer discretionary spending," he added.

Earlier on Thursday, the government reported that U.S. consumer prices in the 12 months to July jumped at the fastest pace in 17 years, led by rises in the cost of energy and food.

Oil prices, however, have begun to decline recently, and fell further on Thursday. Prices across a range of commodities have also tumbled over the past month.