Top Federal Reserve officials pledged on Friday to use all the tools at their disposal to spur lending and a U.S. economic recovery, but warned a rebound could be slow in coming.

Conditions are not conducive to a substantial and sustained economic rebound, and the Fed will continue to be alert to ways that monetary policy can contribute to economic recovery, Fed Vice Chairman Donald Kohn told an audience at the College of Wooster in Ohio.

Fed Chairman Ben Bernanke said the U.S. central bank will continue to use the unorthodox methods it has resorted to since the financial crisis erupted in the summer of 2007 to settle markets and set the stage for a resumption of growth. He did not, however, offer a guess on when a recovery will occur.

The Federal Reserve will make responsible use of all of its tools to stabilize financial markets and institutions, to promote the extension of credit to creditworthy borrowers, and to help build a foundation for economic recovery, Bernanke told a conference in Charlotte organized by the Richmond Federal Reserve Bank.

Relieving disruptions in credit markets and restoring the flow of credit to households and businesses are essential if we are to see, as I expect, the gradual resumption of sustainable economic growth, he said.

BALANCE SHEET CHALLENGES

The officials spoke after the government announced the U.S. unemployment rate soared to 8.5 percent last month, a 25-year high. The report, however, follows a raft of recent data that has suggested an ebbing in the pace of the economy's decline.

The Fed has cut interest rates to near zero and pumped hundreds of billions of dollars into stressed credit markets to try to spur a recovery from a recession that began in December 2007, and Bernanke noted that the Fed has pledged to keep interest rates low for an extended period.

In addition, the government has enacted a $787 billion stimulus package of tax-cut and spending measures to try to cut short a U.S. recession that next month will become the longest since the Great Depression.

As the Fed has increased its lending to help the economy, reserve balances held by banks at the Fed have increased, posing a potential challenge to policy-makers, Bernanke said. Those reserves could make it harder for the Fed to eventually raise rates, and will be carefully watched, he added.

The large volume of reserve balances outstanding must be monitored carefully, as -- if not carefully managed -- they could complicate the Fed's task of raising short-term interest rates when the economy begins to recover or if inflation expectations were to begin to move higher, Bernanke said.

FED MAKES HEADWAY

Kohn said the Fed's efforts have been somewhat successful in alleviating tight financial market conditions, but that markets are not yet out of the woods.

I expect that lower leverage and tighter lending standards and terms will be enduring features of the financial landscape. But current credit conditions are far tighter than these adjustments would seem to justify, the Fed's No. 2 official said.

Kohn said the Fed's commitment to keeping short-term interest rates low for an extended period also has helped lower longer-term, market-set rates.

A vicious cycle between a crippled financial system and weak economy has been a defining element of the current period, and Kohn said efforts by the Fed have been somewhat successful at addressing the 'tightening in financial conditions' side of the adverse feedback loop.

The Fed's aggressive actions have ballooned its balance sheet to about $2 trillion dollars, and some financial market participants worry the central bank could spark inflation if a recovery takes hold and it is unable to easily soak up the excess money it has pumped into the economy.

Bernanke, however, said the Fed had methods of unwinding its extensive lending programs. We have a number of tools we can use to reduce bank reserves or increase short-term interest rates when that becomes necessary, he said.

He outlined a number of tools the Fed could rely on to shrink its balance sheet, but not everyone was reassured.

We need rules. We need a plan. We need guide posts. We cannot afford to stumble out of this because if we do, and we mess up the withdrawal of credit, we're going to see a spike in short-term interest rates, Howard Simons, strategist at Bianco Research in Chicago, told Reuters Financial Television.

(With additional reporting by Ros Krasny in Wooster, Ohio and Daniel Burns in New York, Editing by Chizu Nomiyama)

Ben Bernanke