Fed chief sees US growth up to 4.0 per cent in 2011

"We see the economy strengthening," Bernanke said at small-business forum in Fairfax, a Virginia suburb of Washington. "Three or four percent-type of growth seems reasonable."

In its latest projections in early November, the Fed forecast GDP growth at between 3.0 and 3.6 per cent by the end of the year.

"I think deflation risk has receded considerably," Bernanke told the business executives.

Fed officials had expressed concern a few months ago that deflation -- a pernicious downward spiral of prices and wages -- could take hold amid slack demand in an economy struggling to recover from severe recession.

The risk of deflation was a key factor in the Fed's decision to boost its support of the economy, particularly through a $600 billion asset purchases plan announced in November.

Bernanke on Friday signaled the recovery would pick up slightly this year, but warned it would not be enough to reduce persistently high unemployment, which stood at 9.4 per cent rate in December.

On Wednesday, a central bank report showed the US economy had expanded "moderately" in recent months.

The Fed's Beige Book report, which gathers information from the central bank's 12 districts, said that "economic activity continued to expand moderately from November through December."

The report will be used by the Federal Open Market Committee in the first policy-setting meeting of the year, scheduled January 25-26.

The tone of the report was more positive than in the December Beige Book report, which pointed to limited economic improvement.

The world's largest economy recently has shown new signs of life after exiting recession in July 2009.

GDP grew at a modest 2.6 per cent rate in the 2010 third quarter, snapping a downward trend in growth seen since the beginning of the year, when expansion slowed to 1.7 per cent in the second quarter from 3.7 per cent in the first.