U.S. Federal Reserve Chairman Ben Bernanke testifies before the House Financial Services Committee on the Semi-annual monetary policy, on Capitol Hill in Washington D.C., capital of the United States, Feb. 29, 2012. Bernanke said on Wednesday the nation's high unemployment rate was expected to edge down "only slowly" in 2012. (Xinhua/Zhang Jun)

The U.S. economy expanded at a quicker pace in the previous quarter than earlier estimate, and was expected to gain momentum this year, but the U.S. central bank chief cautioned that the recovery still faced a set of challenges.

The growth rate of the real gross domestic product (GDP) was the best one since the second quarter of 2010. The world's largest economy has expanded by 10 consecutive months by the end of last year.

The growth rate in the fourth quarter was also an acceleration from the 1.8 percent growth pace in the third quarter last year.

The acceleration of the economic growth in the fourth quarter primarily reflected an upturn in private inventory investment as well as accelerations in personal consumption expenditures and in residential fixed investment.

However, the 1.7 percent economic growth pace last year was far from the 3 percent registered in 2010, and was not robust enough to make a significant dent in the nation's high unemployment hovering at 8.3 percent.

Speaking in a testimony before the Committee on Financial Services of U.S. House of Representatives on Wednesday, U.S. Federal Reserve Chairman Ben Bernanke cautioned that the world's largest economy was still confronted with lingering challenges despite improvement on several fronts including the manufacturing sector and consumer spending.

"The recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards," Bernanke said in the Fed's Semiannual Monetary Policy Report to lawmakers.

Looking beyond 2012, participants of the Federal Open Market Committee (FOMC), the Fed's monetary policy making body, predicted that U.S. economic activity will expand at a tepid pace in coming quarters supported by a continuation of the highly accommodative monetary policy, but the unemployment rate would edge down "only slowly," added Bernanke.

"The fundamentals that support spending continue to be weak: Real household income and wealth were flat in 2011, and access to credit remained restricted for many potential borrowers. Consumer sentiment, which dropped sharply last summer, has since rebounded but remains relatively low," Bernanke noted.

The central bank chief stopped short of signaling the third round of bond purchases, dubbed third round of quantitative easing (QE3), to inject new liquidity into the economy to shore up the capital markets and housing sector.

U.S. stocks gave up its earlier gains buoyed by the second batch of long-term refinancing operation of the European Central Bank (ECB) to close lower Wednesday on Bernanke's cautious remarks.

Minutes of the latest FOMC meeting released earlier this month showed that Fed officials were willing to open the monetary floodgate only if the economic prospects deteriorate.

The U.S. recovery appeared to be gaining traction with stronger manufacturing and construction sectors, but it was "premature" to conclude that the troubles were over, Moody's Analytics chief economist Mark Zandi wrote in a recent blog article.

"The U.S. foreclosure crisis continues to pull house prices lower, adding pressure on stretched homeowners, on small businesses looking for credit, and on local governments struggling to fund schools and other important services," Zandi contended.

To rev up the slow economic expansion in the election year, U.S. President Barack Obama hosted a working lunch with congressional leaders Wednesday to find potential areas of cooperation including new moves to bolster economic growth and job creation, a rare case of bipartisanship.

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