Despite stronger employment data and hints of firmer inflation, Federal Reserve policymakers are not ruling out another round of monetary easing in the months ahead.

That's because many of them see plenty of risks that could derail the tepid pace of recovery that officials are projecting for this year and next.

A worsening of Europe's banking crisis and geopolitical tensions in the Middle East are two of the most obvious risks. But there are also domestic problems, including weak consumer demand and a job market that remains a shadow of its prerecession self.

A rapid decline in the jobless rate in recent months, to a three-year low of 8.3 percent in January from 9.1 percent in August, has surprised economists within and outside the Fed given the broader economy's relatively soft performance.

U.S. gross domestic product grew just 1.7 percent in 2011.

"We are seeing the unemployment rate doing something very different than we are seeing in the other indicators," John Williams, the San Francisco Fed president, told reporters earlier this month.

The Fed's forecasting record hasn't been all that stellar, so it's little wonder officials are reluctant to declare victory on mere inklings of strength.

Not only did Fed officials, including now-Chairman Ben Bernanke, downplay the prospect of a housing downturn and the possibility that it could derail the economy before the financial crisis, their early forecasts for 2011 growth also proved far too rosy. At the beginning of last year, they were expecting expansion of between 3.4 percent and 3.9 percent.

One possible explanation for the disconnect is that employers slashed jobs so aggressively when the economy plunged into recession that they may have gone too far, and are now being forced to make a fresh round of new hires. At the time, economists were struck by how deeply employers were cutting relative to the drop in demand.

However, if this is the right explanation, the boost to the labor market may quickly fade, giving way to another round of stagnation in the jobless rate.

Or perhaps it's the growth readings that have been undershooting, while the decline in the jobless rate is actually telling the real story. That's a harder theory to prove -- only time will tell.

One other thesis is particularly frightening to economists. It holds that the recession has severely and permanently reduced the potential rate of growth in the U.S. economy. This would leave the Fed much less room to ease and would potentially call for tightening of policy sooner than many expect.

As things stand now, the U.S. central bank, mandated by Congress to seek both price stability and full employment, is missing badly on the jobs side, recent progress in reducing the unemployment rate notwithstanding. So why isn't it engaging in another round of monetary stimulus?

There are a number of sticking points. The most important is a fear that Fed officials have quietly expressed - it may not prove very potent. Policymakers worry that the lower long-term interest rates that would be the goal of the policy might do little to boost an economic expansion hampered primarily by financially troubled consumers who are unable to keep spending up to levels consistent with stronger growth.

They also have reason to be leery of a potential political backlash. When they launched their second round of bond buying in 2010, they were lambasted by Republicans for courting inflation.

IN CASE OF EMERGENCY

Still, a small majority of economists at U.S. primary dealers, the large financial institutions that do business directly with the Fed, said in a Reuters poll on February 3 that they believed the central bank would end up expanding its balance sheet by buying mortgage-backed securities or a combination of MBS and Treasury bonds.

The Fed, which has held overnight interest rates near zero since December 2008, has already bought $2.3 trillion in bonds in two bouts of so-called quantitative easing, or QE.

The case for further monetary stimulus is bolstered by the prospect that inflation will remain under control for the foreseeable future given weak growth in incomes. If the Fed is undershooting both the employment and inflation sides of its dual mandate, further action becomes easier to justify - particularly to inflation hawks on the central bank's policy committee.

A robust reading on core consumer prices for January, linked to higher gasoline costs, raised some eyebrows in financial markets, since it would complicate the Fed's decision if it felt the economy could use a little more help from the central bank.

"This does not imply we should worry about undesirably high inflation, but it does call into question whether deflation is an imminent concern," said Michael Feroli, chief U.S. economist at JP Morgan in New York. "While this is only one report, at the margin it does lean against the case for more QE."

But the bigger threat from higher oil prices is a hit to consumption from higher gasoline costs, not inflation, analysts say.

If growth remains steady at current lackluster levels, the central bank would probably remain wary of taking additional action. But the low growth rate, forecast to come in at a 2 percent annual rate for the first quarter, leaves very little cushion against shocks. That means even a relatively minor crisis could lead the Fed into another round of bond buys.

Fed officials have made clear that they believe unconventional monetary policy is most effective in times of financial strain, or when deflation appears to be a risk. While deflation fears have all but receded for now, the central bank's own forecasts for inflation envision it remaining below the institution's new official target of 2 percent for some time.

In a speech on Valentine's Day last week, Atlanta Fed President Dennis Lockhart reached for a metaphor to capture the feeling at the central bank that positive news should always be taken with a grain of salt.

"If I were thinking of the national economy as a love interest ... I'm wary of being jilted. It's happened before and my heart was broken," he said.

(Additional reporting by Ann Saphir; Editing by Leslie Adler)

• A Permanent Economic Emergency