Forthcoming Jobs Report Could Direct Fed’s Approach to Economy

31 May 2021 · 3rd Party Analysis

Forthcoming Jobs Report Could Direct Fed’s Approach to Economy

WRITTEN BY ThorFX

In Summary

  • May’s nonfarm payrolls to show whether the US economy is recovering
  • Two straight months of not delivering on job expectations could complicate Fed’s work

Friday’s employment report for May will be the most significant and closely monitored economic data for June. As stocks enter the last month of the second quarter, which is usually associated with relative weakness in volumes and volatility, on the first Friday of the month, the markets will be paying attention to the non-farm payrolls report, alongside unemployment data.

The May report will be used by the Federal Reserve as a measure of how well its policies are playing out. The figure could shape up as guidance on whether the central bank should start formal discussions to gradually unwind the monetary support that has revved up the economic recovery.

For more than a year, the US central bank has been pouring as much as $120bn a month into the US economy by buying bonds. At the onset of the pandemic in March 2020, the Fed pledged to buy at least $80bn a month of Treasury securities and $40bn a month of agency mortgage-backed securities until “substantial further progress is made” toward reaching Fed’s goals.

The Federal Reserve aims at achieving maximum employment, which is still far from pre-pandemic levels, and stable inflation, which is currently above the Fed’s target of 2%. For the first four months of the year, US employers have added 1.8 million jobs. The number of employed is still 8.2 million below the peak before the coronavirus pandemic. On the inflation issue, the Fed’s preferred inflation measure, the personal consumption expenditures price index, rose 3.6% in the 12 months through April.

Easy-Money Policies Coming to an End?

Policymakers last week began talking about a potential start of tapering discussions that could put an end to the easy-money policies and introduce a different stance toward the economy and the future interest rate. Fed officials project a swift recovery in the jobs market this summer. If realized, this could prompt the Federal Reserve to tighten monetary policy to cool down the economy and bring inflation lower.

If the positive scenario fails to materialize, similarly to last month’s report, it could complicate matters for the Federal Reserve. The jobs data for April surprised the market as analysts and investors expected hiring to rise by nearly 1 million new jobs. Instead, the report showed job market growth slowed unexpectedly with 266,000 new jobs created in April.

Economists surveyed by Dow Jones estimate the economy added 674,000 nonfarm payrolls in May, significantly above the previous number. If this pace of job creation is maintained, the US will return to pre-pandemic levels of employment in about a year.

On that note, a stronger-than-expected bounce in May could push the Fed closer to reaching a point where it could signal a reduction in its asset purchases. Federal Reserve Chairman, Jerome Powell, has commented that when the central bank decides to scale back its policy, it will do so gradually and predictably so as not to cause any jitters in the markets, particularly the bond market.

The big event of June would be the meeting of Fed officials on June 15-16. During the meeting, policymakers will be discussing the latest jobs report as the freshest gauge of the healing phase of the economy. In addition, they will also assess if higher inflation readings are transitory.

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