Janet Yellen said Thursday that the U.S. economy has regained ground lost to Great Recession but still needs the Federal Reserve's support because unemployment remains too high at 7.3 per cent.

Yellen made those comments in testimony to the Senate Banking Committee, which is considering her nomination to be the next chairman of the Federal Reserve.

Her remarks suggest she plans to stand by the Fed's extraordinary low interest rate policies begun under current Chairman Ben Bernanke until the economy shows further improvement.

The Fed's support of the recovery is the "surest path to returning to a more normal approach to monetary policy," said Yellen.

Economy performing below its potential

She noted that the economy is still performing far below its potential. And she points out that inflation is running below the Fed's two per cent target.

The Fed's policies, which include three rounds of bond purchases, are credited with helping boost economic growth and lower unemployment. But they have also driven up stock prices and stoked worries about a greater risk of inflation and asset bubbles.

Even with some Republican resistance, Yellen's backing by the committee and confirmation by the full Senate is viewed as all but assured. But approval won't come before critics air their grievances about the Fed's response to the financial crisis and the Great Recession.

Sign Fed won't move to taper

Some economists saw Yellen's comments, which were released a day ahead of the hearing, as a sign that the Fed won't move at its next meeting in December to reduce its bond purchases — a process often called "tapering." Rather, the Fed could delay any tapering beyond March, when many have predicted it would begin.

"This is a strong signal that the Fed is not going to reduce its support for the economy any time soon," said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.

During the hearing, Yellen was pressed by Republicans to specify when the central bank might begin scaling back its $85 billion-per-month in bond purchases.

Yellen didn't bite. She said Fed policymakers assess the risks and benefits of the bond purchase program each time they meet.

"The committee is looking for ... signs of growth that are strong enough to promote continued progress" in the labour market. She said "there is no set time that we will decide to reduce the pace of our purchases."

Republican concern over bond purchases

Various Republicans expressed their concerns that the Fed's massive bond purchases, which have pushed the central bank's balance sheet to a record level of $3.8 trillion, have inflated stock prices and real estate.

"I think the economy has gotten used to the sugar you have put out there and I just worry that we are on a sugar high. That is a very dangerous thing," said Sen. Mike Johanns, R-Neb.

Yellen sought to assure the committee that the Fed is aware of those potential threats. But she said the benefits of the program currently outweigh the risks.

She also noted that the economy is still performing far below its potential.

"If we want to get back to business as usual and a normal monetary policy, we need to do that by getting the economy back to normal and that is what I hope (the Fed's) policy will accomplish," Yellen said.

Next Fed meeting in December

Many economists believe the Fed will keep the purchase level unchanged at its upcoming meeting in December. Many say the Fed may not begin to scale back the program until its March meeting. That would allow the Fed more time to see if the solid job gains reported in the past three months continue.

Yellen's remarks seemed to confirm those forecasts.

"This is a strong signal that the Fed is not going to reduce its support for the economy any time soon," said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.