U.S. Federal Reserve Chairman Ben Bernanke said Tuesday that the government's ability to stabilize financial markets is "critical" to an economic recovery.

"The effectiveness of the policy actions taken by the Federal Reserve, the Treasury Department and other government entities in restoring a reasonable degree of financial stability will be critical determinants of the timing and strength of the recovery," Bernanke said in testimony prepared for the Senate Budget Committee.

"If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the beneficial effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit," he said.

The Fed chief also said that the 787-billion-dollar economic stimulus plan recently passed by Congress "should provide a boost to demand and production over the next two years" and "mitigate the overall loss of employment and income that would otherwise occur."


U.S. Federal Reserve Chairman Ben Bernanke testifies before the Senate Budget Committee on Capitol Hill in Washington March 3, 2009. (Xinhua/Reuters Photo)
The plan, which is a package of increased federal spending and tax cuts, is aimed at strengthening near-term economic activity, he said.

However, the timing and magnitude of the impact of the stimulus package is subject to "considerable uncertainty, reflecting both the state of economic knowledge and the unusual economic circumstances that we face," Bernanke warned.

"Our economy and financial markets face extraordinary challenges, and a failure by policymakers to address these challenges in a timely way would likely be more costly in the end," he said.

The government has made some progress on the financial front since last fall, but more needs to be done, he said.

Source:Xinhua