Hello, thank you for reaching out to Microsoft Q&A.
If you're going to boot, a FAT32 boot partition format is required.
If you are using it just to store the recovery image (Non-bootable), it can be in exFAT format.
So, as per your description, it appears that you are trying to create a bootable USB that contains both a Recovery Image and use it for Recovery purposes. So, the drive needs to be formatted as FAT32 - the exFAT or NTFS won't work for booting.
You can use the Rufus tool to format the USB drive and create the recovery drive.
Let me know if you still need more help.