The North American economy is taking slow but increasingly sure steps toward weaning itself off emergency government measures.

The central banks of Canada and the U.S. both noted for the first time that a jobs market crushed by the recession is finally beginning to turn. Improving labour trends and slowly improving economic growth show the aftershocks of the Great Recession are beginning to recede, the U.S. Federal Reserve and the Governor of the Bank of Canada both signalled Wednesday.

The U.S. Fed, while holding rates steady at rock-bottom levels and pledging to keep them there for “an extended period,” said in its policy statement that “the deterioration in the labor market is abating,” while the housing sector shows “some signs of improvement.”

Bank of Canada Governor Mark Carney, speaking in Toronto, echoed some of the same themes, highlighting “signs of stabilization” in Canada’s labour market. Policy makers even expect income growth to pick up as the economy recovers, he said.

Still, the central banks on both sides of the border painted a picture of a recovery inching slowly and painfully toward sustained growth. Both economies remain far from strong, and ultra-low interest rates are still needed to underpin growth. Both banks have committed to keeping rates at historic lows, an indication the economy is not improving quickly enough to warrant any rise in interest rates.

The Fed statement Wednesday cautioned about the factors holding the economy down, including tight credit and the lack of hiring. Many economists now believe that the U.S. Federal Reserve may keep its benchmark rate near-zero until late 2010, or even 2011.

Some of the reassuring signals from the Fed lay in a technical description of the central bank’s plans to begin unwinding its crisis measures. The world’s most powerful central bank repeated that it plans to withdraw a $1.4 trillion (U.S.) plan to purchase mortgage-backed securities and debts of government mortgage lenders Fannie Mae and Freddie Mac by the end of March. The plan was among the unprecedented life-support measures to keep the financial system functioning after the financial crisis hit last year.

And one key sign was found in what the bank didn’t say. The Fed dropped from its statement a previous pledge to “continue to employ a wide range of tools to promote economic recovery,” suggesting that such broad emergency measures are no longer seen as crucial.

U.S. Federal Reserve chief Ben Bernanke, who on Wednesday was named Time Magazine’s Person of the Year
, warned of a long march back to normalcy as the central bank voted unanimously Wednesday to keep its key interest rate near zero.

“It’s going to feel like a recession for some time, because unemployment remains very high” Mr. Bernanke told Time.

The United States has lost so many jobs in the recession that the economy would have to create new ones at a torrid pace fill the hole left by all the layoffs, combined with natural population growth. The Washington-based Economic Policy Institute estimates the U.S. must create 11 million jobs to get back to where it was before the recession.

“A Fed shift towards tighter monetary policy remains a late-2010 prospect, at the earliest,” said BMO Capital Markets economist Michael Gregory.

The Bank of Canada may be hard-pressed to move much sooner for fear that higher rates would send the loonie soaring, badly damaging key export industries. Mr. Carney has repeatedly pledged to keep the bank on hold until at least June unless inflation gets out of hand.

Speaking to a luncheon crowd, Mr. Carney warned Canadians not to borrow more than they’ll be able to handle when these super-low interest rates eventually start to rise, while emphasizing he won’t raise borrowing costs to temper spending or the housing sector unless doing so is needed to tame inflation.

Mr. Carney urged households and lenders to be “vigilant” and “fulfill their responsibilities” while the risks that rising levels of debt pose to the economy are “still manageable.”

Mr. Carney warned about rising household debt even as he said tepid demand in the U.S. for Canadian exports will make the economic recovery not only “more protracted” than usual, but also more dependent on spending at home.

“In the past there just would have been a comment like, ‘interest rates are currently extremely low,’ and the implications would have been drawn by the audience,” said Paul Ferley, assistant chief economist at Royal Bank of Canada. “Carney is giving a more complete characterization, that interest rates are going to move higher, and when they do, it could trip up borrowers and lenders if they haven’t been assessing ability to carry that debt in a higher interest-rate environment.”

The central bank projects economic growth will accelerate to 3.3 per cent in the current three-month period and will be 3 per cent for all of 2010. Last month, employers created more than 79,000 net new jobs after a string of poor job reports, but wages grew at the slowest year-over-year pace since March of 2007.

While economic conditions are improving in line with the bank’s forecasts, measures such as capacity use by factories and the unemployment rate of 8.5 per cent indicate “tremendous slack” remains in the economy, Mr. Carney said. That explains why the central bank forecasts inflation to stay under policy makers’ target until the second half of 2011.

With files from Tavia Grant in Toronto