The US Federal Reserve Chairman Ben S. Bernanke said on Monday that the country's economy will continue its recovery next year, but warning more challenges ahead.

The flow of credit remains constrained, economic activity weak, and unemployment much too high, said the chairman at the Economic Club of New York. "Future setbacks are possible."

"We are seeing early evidence of that recovery, most forecasters anticipate another moderate gain in the fourth quarter," but "how the economy will evolve in 2010 and beyond is less certain," he added.

Constrained bank lending, weak job market

A year after the financial crisis, real gross domestic product in the United States rose an estimated 3.5 percent at an annual rate in the third quarter, following four consecutive quarters of decline. Partly as the result of these and other policy actions, many parts of the financial system have improved substantially.

"My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds -- in particular, constrained bank lending and a weak job market -- likely will prevent the expansion from being as robust as we would hope," said the chairman.

Access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, according to the Fed's Senior Loan Officers Opinion Survey.

Partly as a result of these pressures, household debt has declined in recent quarters for the first time since 1951. Many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms.

The Fed will continue to work with banks to improve the access of creditworthy borrowers to the credit they need, said Bernanke.

"We continue to encourage banks to raise additional capital to support their lending. And we continue to facilitate securitization through our Term Asset-Backed Securities Loan Facility and to support home lending through our purchases of mortgage-backed securities," he added.

Since December 2007, the US economy has lost, on net, about 8million private-sector jobs, and the unemployment rate has risen from less than 5 percent to more than 10 percent. Both the decline in jobs and the increase in the unemployment rate have been more severe than in any other recession since World War II.

"The best thing we can say about the labor market right now is that it may be getting worse more slowly," said Bernanke.

Declines in payroll employment over the past four months have averaged about 220,000 per month, compared with 560,000 per month over the first half of this year. The number of initial claims for unemployment insurance is well off its high of last spring, but claims still have not fallen to ranges consistent with rising employment.

"Overall, a number of factors suggest that employment gains maybe modest during the early stages of the expansion," said Bernanke.