Federal Reserve Chairman Ben Bernanke in June outlined the planned scenario for bringing an end to quantitative easing. The Fed would begin reducing its monthly bond purchases from $85 billion "later this year," Bernanke said, and ultimately would phase out the program altogether to coincide with unemployment falling "in the vicinity of 7 percent," which he projected would be around mid-2014.
Now, near the end of 2013, unemployment has fallen to 7 percent. But the Fed hasn't even begun to wind down quantitative easing, much less finished the process.
Bernanke backed off the 7 percent threshold at the Fed's September meeting, telling reporters that the asset purchases were "not on a preset course" and could be extended if the economy didn't improve as planned.
The failed 7 percent threshold highlights the dangers facing the head of the Fed in providing specific guidance about its plans to markets in the face of uncertainty about the economy. Part of the reason the Fed decided not to taper its purchases in September or October was that the incoming economic data was weaker than expected, and Fed officials didn't know what the outcome of the fiscal showdowns that led to the government shutdown would be.
In their latest projections, Federal Reserve governors and regional bank presidents estimated that unemployment would fall to about 6.5 by mid-2014. But a Wall Street Journal survey of economists found that a majority don't expect the Fed to start tapering its asset purchases until after the January meeting and don't think the program will end until the fourth quarter of 2014 or later. Those perceptions, however, may change following Friday's relatively strong employment report.
The Fed might face a similar challenge with another threshold it has set, namely that it won't raise interest rates from their current near-zero level until unemployment is under 6.5 percent. The Barnichon-Nekarda model of the unemployment rate, which has performed well in recent months, suggests that the unemployment rate could dip below that level as soon as February -- before many investors expect the Fed to have begun tapering its asset purchases, let alone raised interest rates.
Perhaps with the possible confusion over that timeline in mind, both Bernanke and Janet Yellen, President Obama's nominee to take over the Fed in February, have communicated in recent appearances that they anticipate the central bank keeping rates near zero until after unemployment falls below 6.5 percent, and possibly for a long time after.