Federal Reserve chairman Ben Bernanke says the US central bank is ready to act aggressively to counter a deep housing slump and credit market strains that are putting economic growth at risk.
"In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary," Mr Bernanke told an event sponsored by two finance groups. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."
Analysts welcomed Mr Bernanke's forthright acknowledgement of the dangers faced by the US economy, which some fear may have already slipped into recession.
"I think he's come to terms with the fact that while inflation may be a concern down the road, he has to take care of the train that's coming at him right now, which is the fear of a recession," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore, Maryland.
Mr Bernanke cautioned that conditions can change quickly. That means the Fed "must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability."
US stock markets initially surged after Bernanke's comments but later retreated, before turning higher again on a report that Bank of America was in talks to buy mortgage lender Countrywide Financial Corp.
At the same time, the dollar weakened and prices for short-term government debt rose, as investors bet the Fed would lower benchmark overnight rates by a hefty half-percentage to 3.75 per cent at a meeting on January 29th.
Interest-rate futures contracts shifted to price in a near certainty of a half-point cut. The Fed already has cut rates a full percentage point since mid-September.
Mr Bernanke suggested policy-makers now were more worried about sustaining growth than they were fearful of inflation. He said inflation expectations were "reasonably well anchored" and pledged to monitor those expectations closely.