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A better-than-expected jobs report for July shows the economy may soon be ready to operate with reduced support from the Federal Reserve.
US Bureau of Labor Statistics data released Friday morning showed 943,000 non-farm payroll gains last month, with the unemployment rate falling to 5.4%.
The economy continues to move closer to the pre-pandemic form. At the height of the economic shutdown, employment levels fell by 22.4 million. In July 2021, the economy appeared to be recovering nearly 17 million of those lost jobs.
The central bank is still determined to maintain its easy money policies as millions sit on the sidelines, but good July figures could give some policymakers a reason to start scaling back their asset purchase program later this year.
“The timing now depends on the August jobs report, which may soften in response to the spread of the Delta variant, but the reduction is now pretty much built into the pie by the end of the year. year, “said Diane Swonk, chief economist at Grant Thornton LLP.
The Fed absorbed about $ 120 billion a month in U.S. Treasuries and agency mortgage-backed securities as part of its quantitative easing program.
Fed Chairman Jerome Powell hinted last Wednesday that the slowdown in the pace of those purchases could begin shortly, but left Fed watchers with no further clues as to exactly when that might happen. produce.
Probable taper in November
With inflation already exceeding the Fed’s 2% target, the central bank is looking to determine when to tighten policy while continuing to monitor the labor market.
Senior Fed official Christopher Waller told CNBC earlier in the week he could see the Fed announce a cut as soon as its next meeting in September – if the July and August reports indicated 800,000 to 1 million. job gains each.
Still, Powell said last week that the economy had “some way to go” before meeting Federal Open Market Committee standards for policy making.
BofA Securities senior US economist Joe Song told Yahoo Finance on Friday that the rapid spread of the Delta variant may prompt the Fed to be patient in its approach to withdrawing monetary support.
“This is one of the reasons President Powell and some of the FOMC members want to see several employment numbers well above the trend before making any significant changes to the policy path,” Song said.
Fed watchers like JPMorgan and Evercore ISI expect the Fed to formally announce a phased reduction in two policy meetings (following the Fed meeting on November 2-3).
“We are adjusting our baseline scenario so that the Fed – which always decides in November – begins the reduction process either right away or in December rather than waiting until January,” Evercore’s Krishna Guha wrote on Friday. ISI.
More clues from the Fed could come at its Jackson Hole conference, which is scheduled to take place August 26-28.
Brian Cheung is a reporter covering Fed, Economics and Banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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