Strong July Jobs Report May Prepare Federal Reserve to Slow Bond Buying Program

Strong July jobs report puts Federal Reserve on track to slow bond buying – if the spread of Covid-19 doesn’t hurt the economy and hiring later in the summer .

Hiring was the fastest pace in a year. The economy created 943,000 jobs in July, nearly 100,000 more than the Dow Jones consensus estimate. The unemployment rate also fell to 5.4%, exceeding the expected unemployment rate of 5.7%. Employment in May and June was also revised upwards by a total of 119,000 payrolls.

“It’s a good number that prompts the Fed to pull itself together,” said Diane Swonk, chief economist at Grant Thornton.

Fed watchers expect the central bank to officially announce the end of its $ 120 billion monthly bond buying program – which was put in place to support the economy during the pandemic – when of one of its forthcoming meetings. Market pros also believe the central bank will begin the process of reducing its asset purchases by late 2021 or early 2022.

The S&P 500 and the Dow Jones Industrial Average surged, while Treasury yields rose. The 10-year rate edged up to 1.28% after hitting a low of 1.13% earlier in the week. Bond yields move in opposition to prices.

“There’s a lot to like about that number. It looks like stocks like it.… The dollar and rates are up and it suggests that investors think numbers like these will eventually cause the Fed to back down. do something, ”said the chief investment officer of State Street Global Advisors. said strategist Michael Arone.

The central bank has said it would like to see “substantial progress” towards its goals for the economy before it is ready to reduce its purchases of treasury bills and mortgage securities. Recently, Fed Chairman Jerome Powell said the Fed would like to see some solid jobs reports as proof that the job market is recovering.

The gradual reduction of this program would be a first step towards raising interest rates, which the Fed has forecast for 2023. The phase-out of asset purchases is expected to take 10 months or more.

“It will depend heavily on Covid for the timing. I still think they will do it by the end of the year,” Swonk said. “This is a pre-Covid report, and these are the kind of gains they wanted, with upward revisions as well.”

Some market professionals expected a high number of jobs to signal that the Fed will make an announcement as early as September, then continue with cutting back on purchases by the end of the year or early next year. .

“It looks like you are continuing to make substantial progress. That’s a good number,” said John Briggs, head of strategy at NatWest Markets. “I think that means to me that September is still on track for the Fed to talk about phasing out. I think if you get another number like this in the September report, you’re going to make substantial progress. . “

State Street’s Arone said that with job gains of more than 800,000 on average in recent months, it will take about seven months for the job market to recoup its losses from the pandemic. “This matches the expectations of many investors” that the Fed is starting to shrink, he said.

Grant Thornton’s Swonk said the composition of job gains showed real progress for the economy, which is still down more than 5.7 million in payrolls from its pre-pandemic level in February. 2020.

“It was dominated by all the sectors we expected – education, recreation and hospitality. Movies are coming back. Everything that has been hit hardest by the pandemic,” she said. Plus, there are encouraging signs from the mining industry that we may get some relief on oil prices. Not only are we hiring workers, but workers are showing up as well. The turnout is increasing. have lost half a million jobs of the long-term unemployed. “

Employment in leisure and hospitality increased by 380,000, but employment in this sector is still down 10.3% from its February 2020 level.

“The transportation numbers have grown fairly healthily and manufacturing has been in a good trend over the past few months. This suggests to me that some of the supply chain bottleneck issues are starting to ease,” said Arone. The mass transit and ground passenger transportation sector added 19,000 workers and manufacturing added 27,000.

The Fed blamed supply chain congestion for some of the surge in inflation recently. The Fed has downplayed the rise in inflation as temporary.

But economists mostly watch wage inflation because it is stickier than other inflation.

In the jobs report, average hourly earnings rose 0.4% for the month and are up 4% from a year ago, more than expected. Economists are watching this figure closely, as inflation has generally accelerated in recent months.