"Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the demand in economic recovery," Bernanke told the House of Representatives Budget Committee.
While Bernanke said the economy had made an "important transition" where it was in less need of government support, his emphasis on the struggles of the US jobs market suggested the central bank was in no rush to raise interest rates.
The Fed slashed short term interest rates to near zero and pumped more than $1 trillion into the financial system to pull the economy through its worst recession since the 1930s. It has promised to hold borrowing costs exceptionally low for an extended period and most analysts do not expect rate rises until 2011.
"Concern No. 1 — and it far outstrips everything else — is the labor market" Abby Joseph Cohen, president of Goldman Sachs' Global Market Institute, said at the Reuters Investment Outlook Summit in New York.
Bernanke told the lawmakers weak housing and commercial property markets, and budget cutting by states, were among the "significant restraints" holding back the recovery, and he said the unemployment rate would only decline slowly.
"A significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009," he said. "In this environment, inflation is likely to remain subdued."
Employers added 431,000 jobs in May but only 41,000 of those positions came from the private sector. The unemployment rate dropped but to a still-high 9.7 percent.
Bernanke said the Fed is keeping a close watch on the European debt crisis for any spillover to the US economy. Actions taken by European leaders show a firm commitment to calming strains and restoring stability, he said.
"If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest," he said.
Another drag on the US recovery is the housing market, which has faltered with the expiry of federal tax credits for purchases, Bernanke said. Weekly mortgage loan data released on Wednesday showed mortgage applications slumping in the most recent week to a fresh 13-year low.
Bernanke renewed his warning that as the US population ages, government pension and health care obligations to retirees put the US budget on an unsustainable path.
"We should be planning now on how we meet these looming budgetary challenges," he said. However, he said now was not the time to tighten the US budget, because the economy was still in need of support.
He also said the Fed would press US banks to reform pay practices to curb the types of risky activities officials believe helped lay the ground work for the financial crisis.
