(Corrects in fourth paragraph to show U.S. manufacturing moderated to its slowest pace since December, not in a year)
CHARLESTON, South Carolina - The U.S. economy is improving but has yet to recover fully, with high unemployment and a weak housing market leaving consumers unsettled, Federal Reserve Chairman Ben Bernanke said on Monday.
This means U.S. monetary policy must remain accommodative until the economic recovery is on a sustainable path and job creation picks up, he said.
We need to make sure that monetary policy continues to provide the support the economy needs until we begin to see growth, sustained growth and particularly growth in jobs, he said in response to questions.
His remarks come as manufacturing data showed the sector's expansion moderating to its slowest pace since December, and ahead of a July employment report expected to show a second month of net job losses.
In a speech to state legislators that focused heavily on the problems faced by budget-strained state and municipal governments, Bernanke said constraints at the local level were also hindering the national rebound.
We have a considerable way to go to achieve full recovery in our economy, and many Americans are still grappling with unemployment, foreclosure and lost savings, Bernanke said.
Bernanke said consumer spending should pick up in coming quarters, as income rises and credit conditions improve.
He said that should help sustain the recovery, even as a lift from fiscal stimulus and a restocking of inventories by businesses fades.
Inflation will remain subdued over the next couple of years, Bernanke added, citing stability in measures of inflation expectations.
With regards to banks, Bernanke said loan loss rates appeared to have peaked, but many bank balance sheets remained riddled with troubled loans.
This has kept lending conditions tight, presenting another hurdle to more robust recovery.
Fears about sovereign debt burdens in Europe also have contributed to financial market strains, although the public disclosure of bank stress tests appeared to have quelled anxiety, Bernanke said.
The U.S. economy has grown for four straight quarters, but the pace of recovery slowed to a 2.4 percent annual pace in the second quarter.
The softening has sparked speculation the Fed might have to take further steps to bolster the economy.
In response to the worst financial crisis in a generation, the Fed slashed interest rates close to zero and engaged in a host of unprecedented emergency actions to help credit markets, including massive purchases of government and mortgage bonds.