"We must not lose sight of the daunting economic challenges that confront our nation," Bernanke said in a speech at the Kansas City Fed's annual symposium in Jackson Hole, Wyo., which attracts an elite group of global central bankers and prominent economists.
However, Bernanke gave no clear signal that the Fed will take action at its Sept. 12-13 meeting. Initially, Bernanke's remarks sparked a sell-off on Wall Street. Yet, after having time to digest all of his remarks, investors began buying stocks, appearing to take comfort in Bernanke's willingness to take action as needed.
In the speech, Bernanke said "the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."
That language echoes the Fed's statement after its early August policy making meeting, which conveyed a stronger inclination than in previous statements to take action if the economy doesn't pick up noticeably.
Many economists predict the Fed will decide to buy more Treasury bonds or government mortgage-backed securities, possibly at its September meeting, to lower long-term interest rates and spark more economic activity. Alternatively, the Fed could say it will likely keep short-term interest rates near zero for even longer than its current 2014 expiration date.
Yet while Bernanke left the door open to such action soon, he stopped short of telegraphing the timing of any further steps that many investors and Fed watchers were seeking.
"He essentially did lay out the case for doing more action," says Nigel Gault, chief U.S. economist for IHS Global Insight.
And while Bernanke appears to support more asset purchases, other members of the Fed's policy-making committee have voiced varying views. Bernanke generally tries to build a consensus for Fed policies. "He's not going to ram it through," Gault adds.
Investors did have reason to think Bernanke might go further than he did Friday. At a meeting in Jackson Hole two years ago, the Fed chief strongly hinted the central bank was poised to buy more Treasury bonds, a strategy that lowered rates well before the Fed actually voted two months later to purchase $600 billion in Treasuries.
A similar foreshadowing this year seemed possible. At its meeting early this month, many Fed policymakers determined that additional stimulus would be needed unless economic data "pointed to a substantial and sustainable strengthening in the pace of economic recovery," according to minutes of the meeting.
While growth remains subpar three years into the economic recovery, the latest round of economic reports have been mixed. In July, employers added a better-than-expected 163,000 jobs, consumer spending picked up and pending home sales climbed to the highest level in two years.
At the same time, manufacturing activity has weakened recently, consumer confidence in August fell to its lowest level in 10 months and second-quarter economic growth was revised up slightly last week to a still-tepid 1.7% annual rate.
In his speech, Bernanke said the economy is "far from satisfactory" and he called job growth "painfully slow."
New jobs created fell from a monthly average pace of 226,000 the first quarter to 73,000 a month on average in the second quarter. Bernanke said obstacles to a stronger recovery include a still weak housing market, the European financial crisis, tight credit standards and looming federal tax increases and spending cuts in January that could push the U.S. back into recession if a divided Congress can't agree on a solution.
Bernanke also said further Fed action could help the economy because there's little evidence that the slow decline in the unemployment rate - now at 8.3% - reflects structural labor-market problems that would be immune to Fed action. Structural problems could include a high number of laid-off manufacturing or construction workers who lack skills needed for new high-tech or health-care jobs.
Bernanke also cited studies showing that the Fed's previous initiatives to buy more than $2 trillion in government securities have lowered yields on 10-year Treasuries by about a percentage point, lowering borrowing costs for consumers and small businesses, and possibly led to the creation of 2 million jobs.
He pointed out that "the possible benefits" of more asset purchases "must be considered alongside its potential costs."
One by one, Bernanke discussed possible risks of further Fed asset purchases and explained why they were navigable.
A third round of stimulus, for example, would likely invite criticism from Republicans that the Fed's actions risk eventual inflation, a charge that could be particularly controversial less than 100 days before this fall's presidential election.
Bernanke acknowledged the Fed could stoke inflation or become too dominant a player in the Treasury market, damping private trading. He said the Fed has plans and tools in place to deal with those risks as necessary.
The Fed chairman said such costs of nontraditional policies "appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant."
Many Fed watchers say the Fed might buy government-guaranteed, mortgage-backed securities, rather than Treasuries, to help lower mortgage rates faster and help jump-start the housing market. However, while mortgage rates are already near historic lows, many consumers can't qualify for home loans because their existing houses are worth less than what they owe.
There's no doubt that each round of Fed stimulus has had less impact than the previous one, analysts say.
Since the 2008 financial crisis, the Fed has purchased more than $2 trillion in Treasuries, mortgage-backed securities and other debt in an unprecedented effort to lower long-term rates and coax investors to shift assets to stocks, boosting markets. It decided in early 2009 to buy $1.7 trillion in Treasury and mortgage bonds, followed by the $600 billion in Treasury purchases in 2010.
Under a program begun last September - and extended in June through 2012 - the Fed plans to buy $667 billion of short-term Treasuries and use the proceeds to buy longer-term Treasuries. By reducing the supply of long-term Treasuries in the market, the Fed hopes to exert downward pressure on long-term interest rates.
IHS Global Insight's Gault says the recent modest uptick in economic activity isn't enough to head off another round of Fed stimulus.
"It's hard to argue that the evidence of the last month or two constitutes a substantial and sustainable improvement," Gault says.
Still, he says that the cloudy economic picture suggests that Fed policymakers will look closely at upcoming data, particularly the government's employment report for August, which is due out Sept. 7. TheEuropean Central Bank also could take additional steps at a Sept. 6 meeting to ease Europe's debt crisis.