In a much anticipated speech in Jackson Hole, Wyoming, Bernanke described the current economic situation as "far from satisfactory". He said that high rates of unemployment threatened to "wreak structural damage on our economy that could last for many years".
Bernanke's speech cheered US investors. The Dow Jones had soared over 127 points before noon.
The speech to the annual central bank symposium comes in the run-up to September's meeting of the Federal Reserve's open markets committee (FOMC), which sets US economic policy. Recently-released minutes from its last meeting show the committee has become increasingly concerned about the US recovery and is weighing further action.
However, since the last FOMC meeting, some more positive economic news has emerged on jobs and housing. Next week the closely-watched non-farm payroll survey of monthly employment trends will be released. After a sharp pick up over the winter, jobs growth slowed in the spring but appears to be picking up again.
Bernanke's speech highlighted the problems that remain. He said high levels of unemployment are a "grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for years."
Any action by the Fed is likely to trigger a furious response from elements within the Republican party who have criticised his past actions and warned against new ones. "The truth is the Federal Reserve cannot rescue Americans from the consequences of failed economic and regulatory policies passed by Congress and signed by the president," the House financial services committee chairman, Spencer Bachus, told Bernanke last month at a congressional hearing.
Bernanke offered a strong defense of his actions at Jackson Hole. "A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks," he said.
Gus Faucher, senior economist at PNC Financial Services, said: "It sure sounds to me like he is getting ready to act." He said the FOMC would now be waiting for the non-farm payroll figures. In July the US added 163,000 new jobs, more than many economists had expected. Faucher is predicting 130,000 new jobs were added in August while other analysts are expecting about 100,000.
"If it comes in below 100,000, I think the Fed will act," he said. "That would be four out of five months below 100,000. That's not good enough."
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