WASHINGTON — Federal Reserve Chairman Ben Bernanke said Tuesday that the U.S. economy still needs the Fed's stimulus, and warned that looming steep budget cuts could further slow growth.

Stressing that high unemployment remains the key challenge to the economy, Bernanke told a Senate panel that the central bank's extraordinary $85 billion a month bond-purchase program, aimed at holding down long-term interest rates and encouraging investment, was still merited.

The risks of the program -- igniting inflation, and spurring a new round of dangerously risky behavior in the financial industry -- were being monitored closely and were not significant enough yet to curtail stimulus, he said.

"Highly accommodative monetary policy also has several potential costs and risks," he said in prepared remarks.

But the Federal Open Market Committee, the Fed policy board, "remains confident that it has the tools necessary to tighten monetary policy when the time comes to do so."

Bernanke said the $85 billion a month quantitative-easing program, known as QE3, was "providing important support to the recovery" while keeping inflation at bay.

The program has boosted the housing market and the production and sales of automobiles and other durable goods, and stimulated the jobs market, he argued.