Since the early 2000s, however, the job reallocation rate has slowed...

Interpreting this apparent loss of dynamism across firms is not straightforward. It could be that these slowing dynamics are not a bad thing if we get the same growth of productivity we've enjoyed in the past without so much churning of jobs. But that doesn't quite fit with the low productivity growth we've experienced during this recovery.

…

The likely direction of productivity measures in our economy is the subject of considerable debate. Another, more concerning possibility is that the slow advance of productivity reflects a fundamentally less dynamic economy.

…

The question I posed at the outset was whether the economic dynamism of the United States is declining. Is America losing its economic mojo? There is some evidence to the affirmative. I believe some of what we observe can be explained by the recent recession and frustratingly slow recovery. There are reasons to believe that some of the decline is cyclical in nature and will reverse itself over time.

The central bank need not make a “direct, targeted” response to the disaster because any harm to the U.S. economy would be transitory, Lockhart said. "That impact is likely to pass and therefore it is not necessarily something that monetary policy can or should address.”

Lockhart said “it would not surprise me if there is a measurable fourth quarter effect” on growth from Sandy, given the large population of the Northeast. Rebuilding after the storm could be “a form of stimulus.”

 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.

Central banks should be wary of placing too much faith in model-based analyses, which are necessarily predicated on past empirical correlations and relationships. As we have seen, financial innovation can induce structural changes that can importantly alter the way financial institutions, markets, and the broader economy respond to shocks. For this reason, policymakers should take a critical approach to evaluating analyses of this sort, and should always probe to find the sensitivity of results to unstated assumptions that may no longer be valid.

I have been convinced for some time that financial conditions in the wake of the shock are reminiscent of, although certainly not identical to, those prevailing during the “headwinds” episode of the early 1990s. At the least, that experience provides a useful framework for analysis of the current state of the credit markets, the economy, and intermediate-term prospects.

I used to think of monetary policy as dealing with generally normal periods interrupted by shocks. I’ve decided that it’s really the other way around. In fact, the Fed has had to face a whole series of shocks interrupted by occasional periods that we call “normal.” If you were to take the 10 years as a whole and divide it between periods of shocks or the threat of shocks vs. the “normal” periods, I think you’d find a lot more months in the first category.

We have a way to go before full recovery and must acknowledge that shocks and accidents might happen. Phrasing it politely, as an Aussie-Texan, I suspect some real "cow patties" remain in some prominent institutional punchbowls in the U.S. and abroad, and they will undoubtedly come to light before too long. I would submit, however, that we are on our way back to markets priced by reason rather than fantasy and that systemic risk has been lessened substantially.

The U.S. economy has proven to be very resilient to all sorts of shocks over the past several decades. In part this reflects the fact that not all sectors of the economy move together, and a decline in one sector does not always imply major problems in the economy as a whole. The economy withstood Hurricane Katrina, oil shocks, and 9/11 with remarkable resiliency.

These changes [in the U.S. and global financial system] appear to have made the financial system able to absorb more easily a broader array of shocks, but they have not eliminated risk. They have not ended the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure.

Surprises are inevitable; aggregate supply and demand curves shift for reasons that cannot be anticipated. But improvement should be possible in several dimensions. We could identify shocks sooner and get a better understanding of their likely effects on inflation. And we could attempt to narrow the definition of "shock." I suspect that much of what we consider to be exogenous is the working out of endogenous events that we do not understand very well.

Negative shocks, whether they come from poor macroeconomic policy outcomes or from bad luck, will most likely be less acute for the system as a whole in a world of more integrated financial markets.

These favorable fundamentals are reflected in low risk premia of many forms -- low credit spreads, low and quite stable inflation expectations, and low actual and implied volatility. Market participants appear to believe that future macroeconomic shocks will be more moderate, less frequent, and less damaging than past shocks have been. To say this another way, the price of insurance against a less benign world is now quite low.

This combination of fiscal sustainability problems, large external imbalances, and the tension in the existing exchange rate system creates the risk of unanticipated shocks to financial prices, even in a context where monetary policy credibility is strong. The probability of these shocks may be low, but it is higher than it has been, and higher than we should be comfortable with. These shocks could be large enough to lower future growth outcomes.

The first principle is that the FOMC will not respond to “shocks” that are seen as very transitory. Policy should only react to “shocks” that are longer lasting—highly persistent. The reason for this principle is quite straightforward—nothing that the FOMC can do will offset the impact on the economy of a “here today, gone tomorrow” event. While economists continue to debate exactly how “long and variable” the response of the economy is to a policy action, there is a consensus of professional opinion that it takes at least several months before the economy responds. Of course, judgment is always necessary to determine whether any particular shock is likely to be transitory.

Allowing for known measurement biases, these inflation indexes have been in a neighborhood that corresponds to effective price stability--a long-held goal assigned to the Federal Reserve by the Congress. But we can pause at this achievement only for a moment, mindful that we face new challenges in maintaining price stability, specifically to prevent inflation from falling too low. This is one reason the FOMC has adopted a quite accommodative stance of policy. A very low inflation rate increases the risk that an adverse shock to the economy would be more difficult to counter effectively. Indeed, there is an especially pernicious, albeit remote, scenario in which inflation turns negative against a backdrop of weak aggregate demand, engendering a corrosive deflationary spiral.