A better-than-expected jobs report for July shows the economy may soon be ready to run with reduced support from the Federal Reserve.
Data from the U.S. Bureau of Labor Statistics released Friday morning showed 943,000 non-farm payroll gains last month, with the unemployment rate falling to 5.4%.
The economy continues to inch closer to pre-pandemic shape. In the depths of the economic shutdown, employment levels dropped by as much as 22.4 million. As of July 2021, the economy appeared to recover almost 17 million of those lost jobs.
The central bank is still intent on maintaining its easy money policies as millions remain sidelined, but the strong July numbers may give some policymakers reason to start paring back its asset purchase program later this year.
“The timing now rides on the August employment report, which could soften in response to the spread of the Delta variant, but tapering is now pretty much baked into the cake by year-end,” said Grant Thornton LLP’s Chief Economist Diane Swonk.
The Fed has been absorbing 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 slowing the pace of those purchases could begin not long from now, but left Fed watchers with no further clues on the exact timing of when that might happen.
Taper likely in November
With inflation already overshooting the Fed’s 2% target, the central bank is balancing when to tighten policy as it continues to watch the labor market heal.
A top Fed official, Christopher Waller, told CNBC earlier in the week that he could see the Fed announcing a taper as soon as its next meeting in September — if the July and August reports show 800,000 to 1 million job gains each.
Still, Powell said last week that the economy had “some ground to cover” before meeting the policy-setting Federal Open Market Committee’s standards to taper.
BofA Securities Senior U.S. Economist Joe Song told Yahoo Finance Friday that the rapid spread of the Delta variant may give the Fed incentive to be patient on its approach to a pullback in monetary support.
“This is one of the reasons why Chair Powell and some of the FOMC members want to see multiple employment prints that are well above trend before making any meaningful changes to the path of policy,” Song said.
Fed watchers like JPMorgan and Evercore ISI expect the Fed to formally announce a taper two policy meetings from now (at the conclusion of the Fed’s Nov. 2-3 meeting).
“We tweak our base case so the Fed — still deciding in November — starts the tapering process either right away or in December rather than waiting until January,” Evercore ISI’s Krishna Guha wrote Friday.
More clues from the Fed could come during its conference at Jackson Hole, which is set to take place August 26-28.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.