More summer lull activity this week, but Friday’s jobs report likely sets up one of the main themes for this fall – when will the Fed start to slow their asset purchases?
Over the last few months there has been a lot of debate about how strong the economy will need to be to start the Fed on the path towards pulling back some of the COVID crisis support measures. The first step is widely expected to be a reduction in their monthly bond purchases currently running at roughly $120bn a month. Most pundits think the key trigger for the Fed would be a much stronger labor market.
Friday’s report will probably start the clock ticking for the Fed. The report for July was solid across the board. Employment increased by 943,000 last month, a little better than expected, and revisions added another 119,000 to the May and June figures. After making only halting progress over the prior five months, the unemployment rate tumbled more than expected, falling from 5.9% in June to 5.4% last month (chart below).
It’s important to note that the labor market isn’t fully healed from the COVID hit. As you can see below, close to 6 million workers remain unemployed compared to the pre-pandemic peak. But the gap is closing relatively fast.
And there is every reason to think that job growth continues to be reasonably robust in the months to come. Certainly, the recent increase in COVID cases will lead to regional disruptions, but the number of unfilled job openings relative to the number of unemployed is about as high as it has ever been.
The Fed is probably going to look at this data and conclude that they can start to lean into the wind a little bit, especially with wage growth ticking higher.
This doesn’t mean rate hikes anytime soon. Probably not anytime in the next twelve months. But it does mean the Fed will slow the rate of their asset purchases. They have been buying roughly $120bn a month of both Treasury and mortgage bonds since June 2020, and over that time their balance sheet has ballooned, as you can see below.
First the Fed will start to slow the ascent of the line, then stop it growing altogether. This won’t happen all at once, but will evolve over many months. Goldman took at stab at the timeline you see below. Basically, the balance sheet won’t stop growing until late next year under this projection.
All very slow and methodical. Probably more immediately, Friday’s job report could put the low in for longer-term rates, at least for a while. After all, the amount of global bonds with negative yields has soared to almost $17tn in the last few weeks, close to the crisis highs. This is looking more and more unsustainable.
Charts We Found Interesting
1. Obviously, the rising case count is the one issue that could derail both the Fed’s plans and any increase in rates.
2. There is definitely a regional component to the recent increase in cases. Florida’s numbers are surpassing the previous highs.
3. One side effect of the rising case count is the pick-up in vaccinations.
4. This is going to be worth tracking regarding the inflation question. Rental prices are roughly a third of the consumer price index.
5. A lot going on in this chart, and a lot of it is sobering.
6. From the Washington Post – ‘State officials said in a statement that the Hyatt Power Plant was taken offline after water levels at Lake Oroville, located next to the plant, fell to slightly above 640 feet, or lowest in decades. That is just over the 630-to-640-feet level needed to produce power.’
7. The longest straight line you can walk without hitting the ocean. Anyone up for a hike??
Have a good weekend.
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