WASHINGTON (Bloomberg) — Federal Reserve chairman Ben Bernanke said the US economy is in a "nascent" recovery that still requires low interest rates to encourage demand by consumers and businesses once federal stimulus expires.

"A sustained recovery will depend on continued growth in private-sector final demand for goods and services," Bernanke told the House Financial Services Committee yesterday in Washington at the start of his two days of semi-annual testimony before Congress. "Private final demand does seem to be growing at a moderate pace."

The 56-year-old Fed chairman, who began his second four-year term this month, said slack labour markets and low inflation will allow the Federal Open Market Committee to keep the benchmark lending rate, which has been in a range of zero to 0.25 percent for more than a year, low "for an extended period". He said the Fed will need to start tightening policy "at some point".

"The FOMC continues to anticipate that economic conditions — including low rates of resource utilisation, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the federal funds rate for an extended period," he said.

The Standard & Poor's 500 Index rose one percent to 1,105.05 at 10:50 a.m. in New York. The yield on the benchmark 10-year note fell two basis points, or 0.02 percentage point, to 3.66 percent in New York, according to BGCantor Market Data.

Bernanke's testimony follows the Federal Reserve Board's decision last week to raise the cost of direct loans to banks by a quarter-point to 0.75 percent. The Fed portrayed the move as a "normalisation" of bank lending and said it didn't change the outlook for the economy or monetary policy, a message the Fed chairman reiterated yesterday.

Bernanke cited "tentative" signs of stabilisation in labour markets such as fewer job losses, a rise in manufacturing employment, and stronger demand for temporary help.

"Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce," Bernanke said. He said the 40 percent of the unemployed who have been without work for six months or more are a "particular concern."

Policy makers are trying to ensure a durable expansion that will start generating enough jobs to bring down an unemployment rate they forecast to end the year at 9.7 percent, above their estimate of full employment of around five percent. At the same time, they want to convince investors that they can start withdrawing $1.1 trillion in excess cash from the banking system in time to keep inflation at bay.

"As the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures," the Fed chairman said. "Notwithstanding the substantial increase in the size of its balance sheet associated with its purchases of Treasury and agency securities, we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time," he said.