The big issue is how strong the upturn will be.  With such enormous reservoirs of slack in the form of high unemployment and idle productive capacity, we need a strong rebound to put unemployed people back to work and get underutilized factories, offices, and stores humming again.  Unfortunately, my own forecast envisions a less-than-robust recovery for several reasons.  As the impetus from government programs and inventories diminishes in the quarters ahead, private final demand will have to fill the breach.  The danger is that demand may grow at too anemic a pace to support vigorous expansion.

This landscape presents clear challenges for monetary policy. We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation.  With the federal funds rate already at zero for all practical purposes, the Fed’s traditional policy tool is as accommodative as it can be. To provide more stimulus, the Fed has used unconventional policy tools, including emergency lending programs to promote liquidity and push longer-term interest rates lower. However, many of these programs are winding down or nearing completion. That is why the FOMC stated that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period” following our meeting last week.

At some point, of course, we will have to tighten policy—and we certainly have the means and the will to do so. We are—and always will be—steadfast in our determination to achieve both of our statutory goals of full employment and price stability. Until that time comes though, we need to provide the monetary accommodation necessary to spur job creation and prevent inflation from falling any further below rates that are consistent with price stability. 

To repeat my current assessment, while the CRE problem is very worrisome for parts of the banking industry, I don't see it posing a broad risk to the financial system. Nonetheless, CRE could be a factor that suppresses the pace of recovery. As the recovery develops, the CRE problem will be a headwind, but not a show stopper, in my view.

Uncertainty about the course of the economy is a lot lower than it was just a few short months ago. But we cannot lose sight that this uncertainty remains quite high; we are still in largely uncharted waters when it comes to fully understanding how our economy will recover from the severe recession and financial disruptions of the past several years and how that recovery and inflation will be affected by the extraordinary actions we took. We need to base policy on our best estimate of the evolution of inflation and output relative to our objectives, but we also need to be ready to adjust our plans if events don't turn out as predicted in either direction. We have the tools to exit our unusual policies when the time comes. And we must act well before demand pressures or inflation expectations threaten price stability.

This turnaround is certainly welcome, but it should not be overstated. Although we can expect positive growth to continue beyond the third quarter, economic activity remains relatively weak.

[I]t is far too early to celebrate.  Our economy has, without question, taken a staggering blow...  [However], I do detect a sense of optimism about the economy that I was not hearing a few months ago."

I agree with all who are declaring that a technical recovery is underway. We are technically in recovery when a contracting economy gives way to growth. But even vigorous growth off a low bottom does not necessarily bring back prior activity levels for some time. By most estimates, it will be the second half of 2010 before the 2007 levels of national output are reached.

After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good. Notwithstanding this noteworthy progress, critical challenges remain: Strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit. Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.

Even if the economy grows as I expect, things won’t feel very good for some time to come. In particular, the unemployment rate will remain elevated for a few more years, meaning hardship for millions of workers. Moreover, the slack in the economy, demonstrated by high unemployment and low utilization of industrial capacity, threatens to push inflation lower at a time when it is already below the level that, in the view of most members of the Federal Open Market Committee (FOMC) best promotes the Fed’s dual mandate for full employment and price stability.

I expect the recovery to be tepid. What’s more, the gradual expansion gathering steam will remain vulnerable to shocks.

[T]he U.S. economy is improving but still fragile. Stabilization is proceeding, and the first stages of recovery are under way.
...
Often a deep recession is followed by a sharp rebound in business and overall economic activity. As I look ahead, at least beyond the third quarter, I do not foresee this trajectory. Over the medium term, I see a slow recovery with ongoing repair of the financial sector and structural adjustments in the broad economy.

[T]here are presently some signs that the economy is stabilizing and even reviving in certain areas, despite mixed signals.
...
Given both the monetary accommodation we at the Fed have put in place and the stimulus of fiscal policy, it is now reasonable to expect a gradual resumption of economic growth in a context of price stability.

[F]or the immediate future, the risk to price stability is a deflationary risk, not an inflationary one.
...
[W]e are likely to see a prolonged period of sluggish economic performance and uncomfortably high unemployment as businesses reallocate capital and labor to fit the new economic landscape.

Given the expected slow adjustment rate of the other components of final demand, my guess is it will be a long time before we see growth strong enough and sustained enough to make an appreciable dent in excess capacity. I envision an output path going forward from here that looks something like a check mark, with the Johnny Mercer effect giving us a near-term snapback from the short, intense downstroke, followed by a transition to a long period of slower growth corresponding to the elongated side of the mark.

[A]fter many months I am finally able to say with a reasonable degree of confidence that the outlook is improving. We’ve endured the worst downturn that the economy has experienced in most of our lifetimes, and conditions remain distressed in many industries and localities. Yet the economy appears to have leveled out and I believe we can look forward to better times ahead.

…

The typical forecast calls for positive GDP growth in the current quarter and a gradual improvement beyond that. I agree with this outlook. Indeed, since the beginning of this year I have been expecting positive growth before year-end – but I must emphasize that the recovery is likely to be slow and uneven for some time.