Analysis-U.S. jobs report bolsters case for Fed to taper asset purchases

By Ann Saphir

(Reuters) – U.S. employment data showing strong job gains, a sharp drop in the unemployment rate and a rise in wages last month is likely to push the Federal Reserve closer to paring its massive support for the economy.

It certainly helps meet Fed Governor Christopher Waller’s bar for doing so.

Earlier this week the newest addition to the U.S. central bank’s policymaker panel said he felt the Fed could start tapering its $120 billion in monthly asset purchases by October if 800,000 to 1 million jobs were added in both July and August.

The U.S. Labor Department reported on Friday that nonfarm payrolls rose by 943,000 jobs last month, beating the forecast of economists in a Reuters poll. Job gains for June and May also were revised higher. The unemployment rate also fell sharply to 5.4% while wages rose at a solid pace.

Graphic: U.S. worker pay is rising faster https://graphics.reuters.com/USA-ECONOMY/lgvdwmbympo/chart_eikon.jpg

U.S. employers have now added an average of about 832,000 jobs each month for the past three months; before Friday’s report, that three-month average was about 567,000.

Graphic: How much progress is substantial? https://graphics.reuters.com/USA-EMPLOYMENT/FED/movanmrzopa/chart.png

Other Fed officials, including Vice Chair Richard Clarida, also said this week they could envision a reduction in the central bank’s purchases of Treasuries and mortgage-backed securities if the job gains accelerated, though none set such a bright line as Waller.

“Today’s bumper payrolls report highlights a roaring recovery in the labour market and increases the chances of the Fed tapering their asset purchases sooner rather than later,” said Mike Bell, global market strategist at JP Morgan Asset Management.

The better-than-expected labor market report card, however, won’t put an end to the debate among Fed policymakers about the exact timing or pace of a reduction in the asset purchases, or of the eventual interest rate increases that some feel should start next year but others not until 2023 or even later.

That’s in large part because the bar the Fed set for reducing its bond-buying program – “substantial further progress” toward the Fed’s 2% inflation and full employment goals – has never been precisely defined.

Graphic: “Substantial further progress” for the Fed? https://graphics.reuters.com/USA-ECONOMY/FEDPROGRESS/yzdvxmmmdpx/chart.png

It’s fairly clear the benchmark has been met on the inflation front, where a surge in post-pandemic spending and bottlenecks in supply chains have helped push the rate of price increases at least temporarily well above that goal.

But the interpretation of progress toward full employment varies by policymaker.

A still-large 5.7 million jobs hole versus the pre-pandemic level, a surprising drop in Black workforce participation, and the threat that some say the latest surge in coronavirus cases poses to future job gains all may raise questions for some.

“The progress will likely still not be viewed as ‘substantial’ enough for tapering and we don’t expect the data for August to be as strong as the data for July,” TD Securities economists wrote in a note earlier this week in which they forecast a million jobs would be added last month.

Fed Governor Lael Brainard last week said she would be more confident about labor market progress once she has September data in hand, because it won’t be until then that reopened schools and the lapsing of pandemic unemployment benefits will propel more people back to the labor market. The first Fed policy meeting after the September jobs report is in November.

San Francisco Fed President Mary Daly, for her part, has said she could support tapering of the bond purchases later this year or early in 2022, a later time frame than Waller and a few other policymakers like Dallas Fed President Robert Kaplan, who wants the taper to come soon.

For Daly, particularly telling are trends for people aged 25 to 54, the so-called prime-age worker bracket. Their employment-to-population ratio – a measure of their likelihood to work – rose sharply to 77.8% in July, up from 76.3%. But it’s still well down from the 80%-plus range it had reached before the pandemic.

Graphic: How substantial is that progress? https://graphics.reuters.com/USA-FED/JOBS/xmpjogwkqvr/chart.png

(Reporting by Ann Saphir; Additional reporting by Karen Pierog; Editing by Paul Simao)