WASHINGTON (MarketWatch) — Federal Reserve Chairman Ben Bernanke was slightly more optimistic about the economic outlook in his first appearance before the new Congress on Friday but gave no hint he’s ready to back off of the controversial $600 billion bond-buying program.

Although still somewhat fragile at the moment, “we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold,” the top U.S. central banker told the Senate Budget Committee.

The pace of growth “seems likely to be moderately stronger in 2011 than it was in 2010,” he said.

Bernanke’s remarks were prepared before the Labor Department reported a surprise: a sharp decline in the unemployment rate in December. See related story on December employment.

Bernanke warned that improvement in the labor market would be slow, however.

Most members of the Federal Open Market Committee, the Fed’s policy-setting arm, expect the unemployment rate would be close to 8% in 2013.

“At this rate of improvement, it could take four to five more years for the job market to normalize fully,” Bernanke said.

During the question-and-answer session, Bernanke said the 103,000 increase in nonfarm payroll jobs during December, if sustained in coming months, would not be strong enough to lower the unemployment rate.

He also said deflation, a steady decline in prices and wages, remained a threat.

Deflation risks “are not gone yet,” he said.

Different path, same goal

He stressed to the Senate panel that deflation would increase debt burdens and lower living standards — concerns that led the Fed to launch the $600 billion bond-buying program in November.

Bernanke’s prepared remarks showed no sign that he’s considering adjusting down the amount of securities to be purchased, and the Fed chairman defended the controversial $600 billion bond-buying program, saying it was not unlike conventional policy.

“Although longer-term securities purchases are a different tool for conducting monetary policy than the more familiar approach of managing the overnight interest rate, the goals and transmission mechanisms of the two approaches are similar,” he said.

Bernanke also urged Congress to craft a credible program to lower the federal budget deficit, warning the government is now on an unsustainable fiscal path that might lead to broad financial turmoil if left unaddressed.

Federal Reserve chief Ben Bernanke, addressing a conference in Boston last October. Reuters

Bernanke said the deficit plan has to be “one that markets will accept as plausible.”

The first step for Congress is to adopt measures that will stabilize the ratio of debt to gross domestic product.

He also gave a commitment to fighting inflation if need be. Some critics have maintained the Fed’s quantitative-easing program will stir up inflation.

“The FOMC remains unwaveringly committed to price stability,” he said. “The Fed has all the tools it needs to be able to smoothly and effectively exit from this program at the appropriate time.”

Paul Ashworth, chief U.S. economist at Capital Economics, said Bernanke’s “unwaveringly committed” comments on inflation amounted to something of an olive branch to Congressional Republicans.

Some high-ranking House Republicans have pledged to push legislation that would force the Fed to concentrate solely on its inflation-fighting mandate and jettison its second mandate calling on the central bank to foster economic conditions that would lead to maximum employment.

Bernanke said the Fed wasn’t seeking any change in its dual mandate. He said it was up to Congress to decide the issue.

In other remarks, Bernanke said he saw “some improvement” in availability of credit to small business.

Bernanke also downplayed concerns expressed by several Senators about the potential for municipal-bond defaults by cash-strapped cities and local governments.

“While there is no question that there is a lot of stress at state and local governments, at this point the municipal market seems to be operating fairly normally,” Bernanke said.