How surprising is the texture and pace of this economic recovery? Perhaps it's not so surprising given the nature of the downturn that preceded it. Economic studies have found that the aftermath of a financial crisis is usually associated with substantial declines in output and employment and that it takes much longer to return to pre-crisis levels of economic activity. This unusually weak recovery can be at least partly explained by the large drop in house prices and severe slump in housing activity that played such a major role in the recent recession. Even though, technically speaking, the housing market contraction preceded the financial crisis, the financial crisis undoubtedly magnified the depth of the housing bust as the erosion in the net worth of households and the severely strained balance sheets of financial institutions led to a sharp tightening of mortgage credit.

Lockhart also said that he remains comfortable with the Fed's conditional pledge to keep interest rates very low through late 2014, saying the language "is still broadly aligned with the reality of the economy and the forecast."

When asked whether the central bank planned a third round of bond-buying to boost the economy, Bernanke said the Fed was prepared to respond to “however the economy evolves” and hadn’t ruled out any options.

If real GDP does not grow more rapidly and unemployment remains at its current unacceptably high level, monetary policy may need to be more accommodative. The U.S. unemployment rate remains well above a level that could be considered full employment, while we are likely to undershoot our inflation targets.

"I think QE3 would require the economy to deteriorate somewhat from where it is right now," Bullard said. "The basic story on the U.S. economy is that we've had good news over the last six months or so, especially compared to the recession scenario that was being painted in the August-September time period of last year."

In light of the somewhat different signals received recently from the labor market than from indicators of final demand and production, however, it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery.

The final force I want to mention is the depressing effect on spending and investment caused by uncertainty. By almost any measure, uncertainty is high. Businesses are uncertain about the economic environment and the direction of economic policy. Households are uncertain about job prospects and future incomes. Political gridlock in Washington, D.C., and the crisis in Europe add to a sense of foreboding. I repeatedly hear from my business contacts that these uncertainties are prompting them to slow investment and hiring. As one of them put it, uncertainty is causing firms to “step back from the playing field.” Economists at the San Francisco Fed calculate that uncertainty has reduced consumer and business spending so much that it has potentially added a full percentage point to the unemployment rate.

The broadest barometer of economic conditions is gross domestic product, which measures the nation’s total output of goods and services. My forecast calls for GDP to rise nearly 2½ percent this year and about 3 percent in 2013. That’s an improvement from 2011, when I estimate GDP grew about 1¾ percent. Unfortunately, such moderate growth will not be enough to take a big bite out of unemployment. The unemployment rate is currently 8.5 percent. I expect it to remain over 8 percent well into next year and still be around 7 percent at the end of 2014.

I expect continued moderate recovery in 2012. My forecast is for the unemployment rate to gradually (and perhaps fitfully) move lower and for inflation to settle over coming quarters at or below levels consistent with the Federal Reserve's dual mandate. In this environment, I believe that the current stance of monetary policy is appropriate.

Without new developments or changes in policy, I don’t believe the U.S. economy is poised to achieve escape velocity anytime soon.

“The data have come in stronger than expected, so I think the logical thing now is to wait and see,” Bullard said in an interview in New York today at the Bloomberg Hedge Fund Conference.  “See if we continue to get a good read on the holiday season and start out the New Year stronger or weaker, and also assess the situation in Europe and see how that feeds back to the United States.”

“I’m more comfortable now in terms of not -- this is me personally speaking -- not anticipating greater accommodation,” he said yesterday in an interview at Bloomberg’s headquarters in New York. “The direction we’re moving in is positive.”

MBS purchases and treasury securities purchases are one set of tools that we have. The other set of tools that we have are communication tools which essentially tie interest rate decisions to economic conditions or to time.

Those are, with interest rates close to zero, those are basically the two tools that we have, and we need to continue to work on how best to use them and in what combination to use them to achieve our objectives.

Without robust growth, the economy is more vulnerable to negative shocks, which unfortunately seem to keep coming. It is like riding a bicycle—at a slow speed, the bicycle wobbles and the risk of falling rises. Politics here and abroad have not helped. The intense debate around raising the debt ceiling and the subsequent downgrading of the federal debt took a toll on household and business confidence. More recently, the difficulties in Europe, along with lower U.S. growth prospects made investors less inclined to take risks. So, we saw a major stock market sell-off and widening credit spreads. All these events increase the downside risks to the growth outlook.

[Tag:  Escape velocity]

 Without robust growth, the economy is more vulnerable to negative shocks, which unfortunately seem to keep coming. It is like riding a bicycle—at a slow speed, the bicycle wobbles and the risk of falling rises.