[A]s the year has unfolded, my colleagues and I at the Atlanta Fed have recalibrated our risk evaluation. While not fully factored into our baseline outlook, we're acknowledging darker possibilities. Risks associated with developments in Europe, the so-called fiscal cliff here in the United States, and a global economic slowdown have weighed more heavily on our outlook.

All 19 FOMC participants submit forecasts for GDP growth, inflation, and employment four times each year. The central tendency for 2012 GDP growth dropped from a range of 2.4 to 2.9 percent in April to a range of 1.9 to 2.4 percent in June. In my view, this was a rather abrupt and material adjustment to the outlook.

In recognition of this change of outlook, the FOMC decided last month to extend the so-called Operation Twist program until the end of 2012.

It's possible another policy decision looms. My colleagues and I on the FOMC may confront a decision on whether or not to respond more aggressively to the economy's apparent weakness.

I think the stakes in the policy discussion around the FOMC table today are very high.

[M]y support for the current stance of policy rests on a forecast that sees a step-up of output and employment growth by year-end and into 2013. If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it.

[A] quick resolution for European sovereign debt concerns and banking problems may remain elusive, and the same for the large deficit problems in many countries. This suggests that slow growth is likely to continue for quite some time.

European stocks were badly impacted by the financial shock from the U.S. during the last financial crisis. Were there to be a serious financial shock from Europe, these correlations suggest it is quite likely that it would have a large impact on financial stocks and the broader stock market in the United States. Such stock price declines could impact households and businesses on both sides of the Atlantic, and problems in Europe could potentially cause a more significant retrenchment by European financial institutions operating in the United States.

[W]hile Asian banks did not have a high correlation with U.S. and European bank stock returns during 2007 and early 2008, Asian banks are likely to be more impacted now should a significant shock occur in Europe. European bank presence in Asia has been rising, and Japan and Taiwan have relatively large claims in Europe. In short, I would say that as interconnectedness increases globally, it will be difficult for any one region to insulate itself from financial strains or crises elsewhere in the world.

The indicators of economic strength so far in 2012 have been underwhelming. I expect the recovery process to be slow and drawn out. I think the most reasonable expectation is moderate growth, a slow and possibly halting decline of unemployment, with inflation staying close to 2 percent.

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Lockhart told reporters after his speech he was going into next week’s FOMC meeting with an “open mind” to review the Fed’s “very thorough” staff analysis and other participants’ views, though he was not ready to back additional action today.

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"I don't think any of the options should be taken off the table under the current circumstances. But I'm not convinced at this moment that the circumstances quite yet call for additional action," Lockhart told reporters.

The European sovereign debt crisis threatens banks in that continent, and, by extension, elsewhere. Clearly, it represents a significant threat to financial stability. In the worst case, the European crisis could undermine the financial improvements in North America and Asia. But this crisis is by no means the only risk. Economic trends in many parts of the world appear to be deteriorating. Although growth in the United States remains moderate, Europe looks to be in recession. And, in China, recent indicators point to a marked deceleration in growth. Many large global financial institutions remain highly leveraged and rely on volatile wholesale funding. Others are still working through troubled loan portfolios. Efforts by regulators to close loopholes exposed by the crisis remain a work in progress. They will take years to complete.

This apparent slowing in the labor market may have been exaggerated by issues related to seasonal adjustment and the unusually warm weather this past winter. But it may also be the case that the larger gains seen late last year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession. If so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed, and, consequently, that more-rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions.

So that's the essential decision and the central question that we have who look at. Will there be enough growth going forward to make material progress on the unemployment rate?

So, my colleagues and I are still working on our own assessments, staff are working on their updated forecasts, we'll have a new round of economic projections by all the participants in the FOMC between now and the -- and the meeting. And that's I think a key question. If we decide that further action is required, then of course we also have to decide what action is appropriate or what communication is appropriate. We have a range of options. Obviously the traditional reduction in the short-term interest rate is no longer feasible, but we have options that we can consider. In looking at those we have to make some difficult assessments, both about how effective they would be and whether there are costs and risks associated with those steps that would outweigh the benefits they might achieve.

So we have -- obviously I can't directly answer your question, it's too soon for me to do that. And we have a committee meeting which will try to evaluate these questions but we both -- I think the key question we'll be facing will be, will economic growth be sufficient to achieve continued progress in the labor market. And our mandate for maximum employment says that we should be looking to try to achieve continued improvement.

"[Low inflation and the weak U.S. job market] gives us some flexibility to think about additional monetary-policy accommodation,” Rosengren said today at an Institute of International Finance conference in Copenhagen.

Rosengren said he expects U.S. gross domestic product to grow 2.3 percent this year. Inflation will probably be lower than the roughly 2 percent target the Fed aims to preserve, he said, citing forecasts for personal consumption expenditure measures.

[M]y forecast calls for real gross domestic product to expand at a moderate pace of about 2¼ percent this year and about 2½ percent next year. I expect the unemployment rate to remain at or a bit above 8 percent for the remainder of this year, and then gradually decline to a little above 7 percent by the end of 2014.

The May employment report, combined with downward revisions to the March and April jobs statistics, was clearly a disappointment. There remains some question about the degree of weather-related payback from the robust job growth earlier in the year. Losses in construction jobs, for example, were unexpectedly large in May. But it is nearly impossible to escape the conclusion that we are replaying in some manner the spring-summer slowdowns of the past two years.

It is my sense that material risks to the economic outlook are gathering, so it is worthwhile to spend some time talking about risks in some detail.

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However, as the employment report of last Friday illustrates, there continues to be a halting and tenuous character to the recovery.

Looking ahead, my viewpoint as regards further policy measures considers two possibilities. Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered.

In addition, the situation we face requires that the FOMC maintain a state of readiness to respond to financial or economic instability should the need arise. I am confident that the committee retains the capacity to act and the tools to promote stability.

Importantly, the economy itself is in a better condition to withstand threats to stability than it was at the time of the financial crisis in 2008 and 2009. I still think it is prudent to acknowledge a degree of fragility, but in its fundamentals, the U.S. economy has made substantial progress toward resilience.

Some Fed officials had started lobbying for more action before Friday's report that the unemployment rate rose in May to 8.2% and job growth slowed. Others have hesitated to move, but have held the door open to doing more if the economic outlook deteriorates.

One big question they face: Is the outlook actually worsening or have jobs data turned sour temporarily after stronger-than-expected improvements early in the year possibly driven by unseasonably warm weather?

"It could be that these weaker numbers could also be part of the seasonal adjustment pattern in the data," Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said in an interview with The Wall Street Journal.

Pianalto said she was still updating her forecasts for the economy. But she said Friday's report taken by itself wasn't likely to lead to "a substantial change" in her outlook and thus didn't change her view that the Fed should stand pat. She is in the camp of officials open to doing more if the outlook deteriorates, but not yet ready to do so.

“I currently judge the risks to the U.S. outlook as tilted modestly to the downside,” Lockhart said today in a speech in Hong Kong that repeated remarks by him in Tokyo yesterday. “Chief among them is the potential for broad spillover from Europe to the U.S. and global economy resulting from financial system disruption as well as further economic slowdown.”

Yet the economy has now grown for 11 consecutive quarters. To be sure, growth is not robust. But growth in the past year has continued despite significant risks and external and internal headwinds. Natural disasters in Japan, a sovereign debt crisis and banking problems in Europe, turmoil in North Africa and the Middle East that led to a steep increase in oil prices, and our own debt ceiling fiasco, all made growth difficult. But I also remind you that the U.S. economy has a history of being remarkably resilient.

Some commentators are urging the Fed to take additional action as long as the unemployment rate remains elevated. But if elevated unemployment reflects largely fundamental factors rather than insufficient spending, such stimulus might have little impact on unemployment and instead just raise the risk of pushing inflation up.

If our economy were a Kentucky thoroughbred, I’d say we have moved from a walk to a trot, but we’re far from a gallop.