We still have a little bit of an output gap.  We have unused resources.  If we move towards closing the gap, [that] means our growth rate could be a little bit above potential.

According to many researchers both inside and outside of the Federal Reserve, the accuracy of contemporaneous measures of potential GDP is not encouraging…One Fed Researcher, Athanasios Orphanides finds that more recent measures of the output gap lie almost uniformly above the contemporaneous estimates: The real-time estimates of potential output over this period were systematically overly optimistic.

This gap [between potential and actual GDP] is important in that it not only provides an output objective, but it also provides information about possible future inflationary pressures. If the economy were to grow faster than the growth in potential output for a sustained period of time, inflation would be expected to accelerate over time. By contrast, economic growth slower than potential would lead to less than full employment.

I still think there is slack in the economy.  I still think that we can grow above potential to reduce that slack before we get back on a long-term sustainable growth path.

[I] want to emphasize the uncertainty of this assessment and how difficult it is to quantify the output gap. So, while we don't think that the gap has fully closed, we must be vigilant for any signs of emerging resource constraints generating inflationary pressures.

If the gap is still significant, lingering slack resources will diminish inflationary pressures, and policy accommodation can be removed at a gradual pace. However, if the output gap has nearly closed and inflation becomes more of a threat, then monetary policy can respond accordingly.

My own judgment is that there still are excess resources in the economy, both certainly in the labor market side and facilities, plants, and equipment...So I personally think that there still is an output gap. I think it is closing. I think we are growing both at potential growth, but I don't think it has closed at this point, but it's something we have to keep monitoring on a regular basis.

Going forward, I anticipate continued strong growth in demand but, given persistent solid gains in productivity and potential output, only a gradual closing of the output gap. Under these circumstances, ongoing competitive pressures in labor and product markets should help to contain cost and price increases. The downward pressure will probably diminish over time, but at least for a while, economic slack should continue to operate as a restraining force on the overall trend in inflation.

I should note that the course of aggregate demand is not independent of the course of potential aggregate supply. Both economic theory and empirical evidence suggest that households and businesses make decisions about spending with an eye to future incomes and sales, so that a rosier long-term outlook tends to raise demand today. Thus, as the FOMC notes frequently in its statements, robust underlying growth in productivity is providing ongoing support to economic activity...

As with the transition in demand, the transition to less-spectacular growth of potential supply involves important risks. We have been persistently surprised by the extent of the pickup in productivity and could be facing a higher level and growth rate of productivity than many expect. If we are so fortunate as to be confronting these circumstances, policymakers will need to be alert to the need for a faster expansion of aggregate demand to match the stepped-up pace of supply. Conversely, perhaps the transitory factors boosting productivity will recede more sharply than most observers anticipate, and the output gap will close more rapidly. It appears to me that uncertainty in our current situation is at least as great for potential output as it is for demand.