Ben Bernanke, the chairman of the Federal Reserve, said yesterday that the US central bank was prepared to take further action to support the economy but left markets guessing about specific measures.
In a keenly anticipated speech, Mr Bernanke said the Fed had marked down its outlook for US growth and that cutting unemployment was vital.
"In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus," he said. "It is clear the recovery from the crisis has been much less robust than we had hoped."
Mr Bernanke's comments brought initial disappointment to those who had hoped he would use his keynote speech at the Fed's annual meeting at Jackson Hole, Wyoming, to announce further measures to support growth. In last year's speech, he unveiled $600bn of bond purchases – or quantitative easing (QE) – to pump money into the stuttering US economy.
However, he said the Fed's policy meeting next month would last two days instead of one to allow a full discussion of the Fed's options, raising hopes that new measures could be announced then.
Mr Bernanke has less scope for action than a year ago. He faces pressure from critics in Congress and within the Fed who argue his actions risk undermining the dollar and triggering inflation. Earlier this month, Mr Bernanke pushed through a pledge to hold interest rates close to zero for the next two years against three dissenters in the most divided Fed policy meeting since the early 1990s.
Philip Shaw, an economist at Investec in London, said: "He was very careful to keep his options open and that is not surprising. He has got to have the support of the majority of his committee to do more QE. I would guess he will use the extra day at September's meeting to put pressure on other members for further stimulus."
US stocks fell at first in response to Mr Bernanke's speech but rallied later. At 6pm in New York, the Dow Jones Industrial Average was up 1.3 per cent at 11,292.63.
The Fed has already bought $2.3trn of bonds, mainly US Treasuries, to reduce borrowing costs and free up money for investment elsewhere. But the recovery is weakening and unemployment remains painfully high, raising the prospect of a dip back into recession for the world's largest economy.
The grim picture was confirmed shortly before Mr Bernanke's speech when official figures showed growth was 1 per cent in the second quarter, a figure revised down from last month's first estimate of 1.3 per cent.
In yesterday's speech, Mr Bernanke highlighted unemployment, which stands at more than 9 per cent, as a key danger to the economy and hinted he would support tax and spending measures designed to boost jobs. But he emphasises that such measures were the job of politicians.
"Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank," he said.
The Fed has stepped in as Congress and the White House have been locked in an impasse over fiscal policy but right-wing politicians have attacked its activism. The Republican presidential hopeful Rick Perry recently attacked QE as "almost treasonous".
Possible actions less radical than QE mooted by Fed watchers include cutting the rate paid to banks on funds deposited with the central bank and replacing short-term T reasuries with longer-dated government securities to target lower borrowing costs.