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WASHINGTON, Nov 3 (Reuters) - Federal Reserve Bank of Dallas President Richard Fisher said on Monday the U.S. economy would register no growth next year but is not at risk of entering a potentially very damaging deflationary trend.
"I think we might see some negative numbers in terms of headline inflation for a couple of months. That does not mean we are in a sustained deflationary trend," he told Bloomberg Television in an interview.
Fisher is a voting member of the Fed's interest rate-setting committee this year.
He had been very worried about inflation, but this concern ended in September when he stopped dissenting against monetary policy easing and voted for interest rate cuts. Fisher stressed that price pressures had greatly diminished since that time.
"I don't see any economic growth through 2009 ... Inflationary forces have just subsided. In fact, they were vaporized" (in the fall), he said.
The Fed cut interest rates by a half percentage point to 1 percent on Oct. 29 and removed inflation as a risk to the economy from its policy statement announcing the decision. It instead emphasized that downside risks to growth remained.
"We're getting close to zero bound and we've already started quantitative easing; we have all these facilities. That is what this is all about. Our balance sheet has expanded ... I wouldn't be surprised to see it at $3 trillion by year-end."
That was a reference to the wide range of emergency liquidity measures taken by the Fed to keep credit markets from freezing up. But Fisher acknowledged they were locked up and said this was blunting the impact of the Fed's rate cuts.
"You can't have capitalism without capital. So the effectiveness of our fed funds rate cuts are obviously not the same if it is not flowing as freely," he said.
Fisher said the rapid expansion of the Fed's balance sheet and powerful policy easing might be an inflation threat at some stage, but policy-makers would not allow it to take root.
"When we get to that point you know ... we'll be on it like a chicken on a June-bug. That is not the issue presently. The issue presently is to get the credit system working again." (Reporting by Alister Bull; Editing by Dan Grebler)