June jobs report bolsters case for Fed to start slowing down bond-buys this year

The strong growth in U.S. employment in June supports the forecast that the Federal Reserve will start to slow down its asset purchases this year, said Michael Gapen, chief U.S. economist at Barclays, in an interview with MarketWatch.

The Fed is buying $80 billion of Treasurys and $40 billion or mortgage-backed securities each month, while keeping its benchmark interest rate close to zero, to support demand in the economy as it recovers from the coronavirus pandemic.

The central bank said it would keep buying bonds at least at this pace until there was substantial further progress on its twin goals of maximum employment and 2% average inflation over the long-term.

The economy added 850,000 jobs in June, above economists forecast, but the data was mixed, with the unemployment rate actually moving up to 5.9% from 5.8% in May.

A number of Fed officials have stated a clear preference for starting to reduce the pace of asset purchases soon, noted Stephen Stanley, chief economist at Amherst Pierpont Securities.

While many of their colleagues have expressed a desire to wait for more data, these dovish Fed members will have a tough time arguing that the 662,000 gain in private employment in June was weak, Gapen said.

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Barclays expects the Fed to send a strong signal in August or September that it will soon taper asset purchase, with a start in November.

The June job report “keeps that in play,” Gapen said. It won’t force the Fed to taper sooner, he noted.

If job growth stays at this pace, the economy could create 3.5 million jobs before the Fed takes its foot off the gas.

A gain of 662,000 jobs in the private sector “is a healthy number,” Gapen said.

Inflation has been rising at a faster-than-expected clip this year. Many economists think the Fed should taper its asset purchases so that it doesn’t have to slam the brakes on economic growth and risk a recession in order to contain inflation.

Gregory Daco, chief U.S. economist at Oxford Economics agreed with Gapen that the Fed would signal a taper in August.

“While today’s report was shy of the coveted 1-million mark, it paints a picture of a steadily recovering jobs market. With further progress toward the Fed’s dual mandate likely over the summer, we anticipate a Fed tapering announcement at the Jackson Hole Symposium in August,” Daco said, in a note to clients.

Daco doesn’t think the Fed will start tapering until early 2022.

Stanley of Amherst also expects the Fed to announce the initial taper at its September meeting.

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Not all economists agreed. Jim O’Sullivan of TD Securities said it would take “several more months” of strengthening before the Fed would achieve its “substantial further progress” criterion.

Fed officials next hold a policy meeting on July 27-28. Economists think the central bankers will hold a wide-ranging discussion on slowing down asset purchases during this meeting.

The annual Jackson Hole Summit is set for late August, with Fed Chairman Jerome Powell expected to speak on Aug. 27. The Fed’s September policy meeting is set for Sept. 21-22.

Minutes of the Fed’s June meeting will be released next Wednesday.

Stocks
DJIA,
-0.34%

SPX,
-0.24%
were higher after the stronger-than-expected headline jobs figure. The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.564%
was down slightly after the jobs data and has remained well below recent high of 1.75% hit in late March.

View more information: https://www.marketwatch.com/story/june-jobs-report-bolsters-case-for-fed-to-start-slowing-down-bond-buys-this-year-11625238698

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