Weak Jobs Report Could Cool Fed’s Tapering Plans

The Federal Reserve building in Washington on May 1, 2020. Kevin Lamarque/Reuters

Friday’s lackluster non-farm payrolls report, which showed American employers adding far fewer jobs in August than expected, is likely to cool enthusiasm among Federal Reserve policymakers for a quick roll-back of stimulus, some experts believe.

The Labor Department’s jobs report, released Sept. 3, shows that non-farm payroll employment rose by 235,000 in August, down from an upwardly revised 1.05 million jobs added in July and far below the FactSet-provided consensus forecasts of 750,000.

“While revisions were favorable, it’s a big surprise and very disappointing,” economist Mohamed El-Erian, president of Queens’ College, Cambridge University, said on Twitter. “Some will point to the #DeltaVariant impact. Others will add the malfunctioning of the labor market in matching workers to #jobs. Look for more talk of stagflationary winds,” he added, referring to a scenario in which growth slows while inflation remains stubbornly high.

The disappointing jobs report is a major data point for investors fixated on clues for when the Federal Reserve will initiate the much-anticipated rollback of its massive $120 billion in monthly purchases of Treasury and mortgage securities, one of the crisis support measures the central bank deployed last year to help lift the economy from the pandemic recession.

Some experts argue the weak print in Friday’s non-farm payrolls data weakens the case that enough progress has been made in the labor market recovery and is likely to draw out the timeline for a Fed decision on trimming asset purchases, known as tapering.

“This latest employment snapshot interrupts the process of substantial further progress as called for by the Federal Reserve as it considers dialing back on boosting the economy,” Bankrate senior economic analyst Mark Hamrick said in an emailed statement to The Epoch Times.

“The immediate question for the central bank is when to begin dialing back on monthly asset purchases as a prelude to an eventual increase in benchmark interest rates.”

“This jobs report appears to give Federal Reserve officials some more time to decide or begin,” Hamrick added.

The labor market is the key touchstone for the Fed, with Federal Reserve chair Jerome Powell hinting at the Jackson Hole Symposium last week that reaching full employment was a pre-requisite for the central bank to start tapering asset purchases.

Federal Reserve Board Chairman Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee in Washington, on July 15, 2021. Win McNamee/Getty Images

The Fed’s bond-buying program, along with dropping the benchmark interest rate to near zero, has led to a sharp expansion of the money supply, boosting the economic recovery, buoying markets, and contributing to inflationary pressures.

Speaking at the Jackson Hole symposium last week, Powell acknowledged a “sharp run-up in inflation,” though pointed to signs that upward price pressures were moderating.

At the same time, he struck a dovish tone, saying the central bank would continue buying bonds at the current pace until “we see substantial further progress” toward the Fed’s dual goals of price stability and maximum employment. While Powell said the “substantial further progress” test had been met for inflation and there had been “clear progress” toward the maximum employment objective, the Fed chief expressed concern around labor market recovery in the face of rising CCP (Chinese Communist Party) virus infections.

Powell said that if further signs confirm the strength of the labor market recovery, this could make it “appropriate to start reducing the pace of asset purchases this year,” with some analysts predicting a possible announcement as soon as during the Fed’s next policy meeting over Sept. 21–22.

Friday’s disappointing jobs report has now prompted a revaluation of tapering expectations.

Wells Fargo analysts wrote in a note (pdf) that the downbeat non-farm payrolls number means the door is “fully closed” on a September taper announcement.

“It strikes us as highly unlikely the FOMC will announce a taper of its asset purchases at its September 21–22 meeting. Today’s miss on nonfarm payroll growth will disappoint top Fed officials who have signaled that it would take a couple more reports of 500K–1M jobs per month in order for ’substantial further progress’ to be achieved,” they wrote.

“However, not all is lost. The monthly job numbers have been very volatile throughout the re-opening process, and it is quite possible August’s miss will be offset by stronger numbers in September,” they added, predicting that Fed officials will announce a taper at their December 14–15 meeting.

Another factor of possible concern to Fed officials is that Friday’s non-farm payrolls report showed unemployment rising for black workers, teenagers, and those with some college or an associate degree.

While the national unemployment rate fell to 5.2 percent in August from 5.4 percent in July, the decline in unemployment was not universal across all groups surveyed for the report. From July to August, the unemployment rate rose for blacks (from 8.2 percent to 8.8 percent), teenagers aged 16–19 (from 9.6 percent to 11.2 percent), and those with some college or an associate degree (from 5.0 percent to 5.1 percent), according to the report’s more granular breakdown.

While it’s normal for unemployment rates among all groups to see upward reversals amid a broader down trend, some economists expressed concern about the latest figures.

“The rise in Black unemployment in August is certainly troubling, considering their unemployment rates were already much higher than any other group,” Elise Gould, senior economist at the Economic Policy Institute, wrote on Twitter.

The uptick in black unemployment challenges the Federal Reserve’s goal that its “maximum employment” objective also be “broad and inclusive.” The figure creates tough optics for the Fed as it considers when to pull back on stimulus.