the third quarter. some observers have lamented at the lack of stronger growth in consumption. but i would note that consumption growth has not fluctuated that much over the course of the recovery. i am encouraged by the u. s. consumers ’ persistence in the face of many challenges, including a payroll tax hike last january, a government shutdown, significant uncertainties about future tax policy, and the implications of health - care reform. consistent job growth has added to wage and salary growth, which has supported spending. the december employment report released last friday, which showed payroll gains of 74, 000 jobs, came in below many analysts ’ expectations. yet, i caution you not to read too much into one month ’ s number. december ’ s number was likely affected by the unseasonably cold and snowy weather, although it is not yet clear by how much. the number is also subject to revision, and such revisions can be significant. because of the month - to - month volatility and data revisions, i prefer not to read too much into the most recent number but, instead, look at averages over several months, and here the news remains positive. firms added an average of 182, 000 jobs per month last year, comparable to the pace in 2012. this consistent pace of job growth was enough to drop the unemployment rate to 6. 7 percent in december. this means that the unemployment rate fell 1. 2 percentage points last year, and, importantly, it is at a lower level than the fomc anticipated it would be at this point when we started the current asset purchase program in september 2012. that is, the labor market has performed noticeably better than expected, according to the unemployment rate measure. some people, however, feel that the decline in the unemployment rate overstates the degree of progress being made in labor markets because it reflects declines in labor force participation as well as increases in employment. there is even concern that the unemployment rate will move back up significantly when discouraged workers reenter the labor force. based on research by my staff, i am less concerned about this possibility. 1 first, it is important to realize that labor force participation rates have been declining since 2000. the declines are driven mostly by demographic changes, including the aging of the baby boomers. this trend is ongoing and was expected to accelerate. second, detailed analysis of the current population survey ’ s micro data indicates that much of the decline in participation since the start of the recovery can be accounted for

the fed ’ s balance sheet. bis central bankers ’ speeches the fed is also using forward guidance as a policy tool, which is intended to inform the public about the way monetary policy is likely to evolve in the future. in its december statement, the fomc indicated that it intends to leave the policy rate near zero well past the time that the unemployment rate falls below 6. 5 percent, especially if projected inflation continues to run below the fomc ’ s 2 - percent target. on asset purchases, the fomc has indicated that it will continue the purchases until the outlook for the labor market has improved substantially in the context of price stability. the fed has structured its latest round of asset purchases as a flow - based program, with the idea that policymakers could fine - tune the rate of purchases in response to the economy. the fomc decided in december to reduce the purchases from $ 85 billion to $ 75 billion per month. thus, we are still adding monetary accommodation but at a slightly slower pace. asset purchases are not on a preset course and will continue to be contingent on the fomc ’ s economic outlook. however, the fomc did indicate in december that if economic conditions evolve as expected, with improved labor market conditions and inflation moving back toward its goal, then the fomc will likely reduce the pace of asset purchases in measured steps at future meetings. chairman ben bernanke indicated in his december press conference that if we are making progress in terms of inflation and continued job gains, then the program would be concluded late in 2014. the december employment report has not changed my belief that the economy has already met the criteria of substantial improvement in labor market conditions. so my preference would be that we conclude the purchases sooner than this, but i am glad that we have taken the first step on the path to ending the program. eventually, monetary policy will be normalized, but the way in which that is done will depend on what operating framework we plan to use in the normalized environment. i believe that the exit strategy principles laid out by the fomc in june 2011 still apply. more specifically, we need to return to an operating framework in which a market interest rate is our policy instrument. we also should shrink the size of our balance sheet, which is now about $ 4 trillion, and return to an all - treasuries portfolio as part of the normalization process. this sounds easy in principle, but i believe the size and