The Federal Reserve “stands ready to take additional actions as needed” to protect the wider economy from the current turmoil in the markets, Ben Bernanke, the body's chairman, said today in a closely-watched speech calculated to calm fraught investors.

Wall Street shares advanced after a speech that could decide how Mr Bernanke's tenure is judged in future years, though the Fed chairman also gave warning that “it is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions”.

The Dow Jones industrial average was up 107.63 points at 13,346.36.

Analysts said Mr Bernanke's remarks were consistent with expectations of a 0.25 percentage point cut in the Fed's headline interest rate on September 18.

Mr Bernanke added that fallout from the financial markets can spill over to be “felt by many outside the markets”, and the Fed had to “take those effects into account”.

Mr Bernanke was opening the annual monetary policy symposium in Jackson Hole, Wyoming, hosted by the Kansas City Federal Reserve Bank.

The remarks came as President George Bush was expected to unveil a bailout plan for struggling American homeowners later today.

In what would be the first political intervention to stem the unfolding US housing market crisis, Mr Bush is expected to propose legislation that will help prevent sub-prime mortgage borrowers defaulting on loan repayments.

Soaring default rates among sub-prime borrowers, who pay higher interest rates because of their patchy credit histories, have sent shock waves across international markets and threatened to spark a slump in the US economy.

The value of mortgage securities, traded on the wholesale markets as highly tailored investments, has tumbled in an unfolding crisis that has spilled across Asia and into Europe.

The credit market has seized up as investors have rushed to safer havens such as government bonds.

Mr Bush is expected to propose that borrowers in difficulty should be allowed to refinance their debt at cheaper rates. This would be good news for American homeowners, but mixed for markets. US Treasuries fell today in anticipation of Mr Bush's plans.

The Fed has previously signalled its willingness to act in the wake of the turmoil gripping the credit markets. It is also keen to avoid uncertainty about its plans, which would further fuel market concerns.

The US central bank has already cut the discount borrowing rate in order to shore up liquidity in the financial system.

Barclays Capital said in a note to clients: “If [Mr Bernanke] does discuss policy, we would expect him to note that the Fed is trying to improve market liquidity through its recent actions, and we would expect him to keep his options open regarding the possibility of cuts to the Federal Funds rate by indicating the Fed is continuing to monitor events.”

Markets responded to the anticipated moves by the two most powerful men in America. The dollar and the euro rallied, while the yen slipped. Share markets in Japan, Hong Kong and Singapore all closed higher, boosted by news of Mr Bush's likely move.

In his speech, Mr Bernanke said that while “some increase” in risk premiums was “probably a healthy development ... liquidity dried up” in recent weeks.

“The shift in risk attitudes has interacted with heightened concerns about credit risks and uncertainty about how to evaluate those risks to create significant market stress,” he said.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive