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Strong jobs data likely to lead Fed to cut stimulus

Economists say the nation’s unemployment rate held steady despite strong growth in jobs because previously discouraged job seekers re-entered the labor market looking for work, which is considered a good sign for the economy.  

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Economists say the nation’s unemployment rate held steady despite strong growth in jobs because previously discouraged job seekers re-entered the labor market looking for work, which is considered a good sign for the economy. 

WASHINGTON — The government's unexpectedly strong June jobs report leaves the Federal Reserve on track to start tapering its bond-buying stimulus efforts as early as September, analysts said Friday.

"The labor market has very strong momentum," Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York, said of the 195,000 net new jobs added last month.

The figure, along with upward revisions to job growth in April and May, put the average monthly figure at 202,000 this year.

That should mean that a reduction in the Fed's $85 billion in monthly bond purchases — known as quantitative easing — is "locked and loaded" for the central bank's September meeting, Rupkey said.

Gus Faucher, senior macro economist at PNC Financial Services, described the June jobs report as "very solid" and said he expected Fed policymakers to reduce the amount of bond purchases by about a third in September or October.

If the economy and labor market continue to grow at the same pace, he said, the Fed could shave another third off its monthly bond-buying in early 2014 and end the program around the middle of next year.

The only thing that could give the Fed pause would be a continued rise in long-term interest rates, which would pose a threat to the improving housing market and could ratchet back strong auto sales, Faucher said.

Federal Reserve Chairman Ben Bernanke and other officials have indicated they could start tapering the bond purchases as soon as September and end them in mid 2014 if the economy and job market continued to improve as the central bank expected.

The program — the Fed's third round of quantitative easing — was launched in September 2012 with the goal of pushing down long-term interest rates to stimulate economic growth and reduce unemployment.

Despite the strong jobs growth, the unemployment rate remained at 7.6 percent in June. But economists said the rate stayed steady because more discouraged people re-entered the labor force looking for work, which is a good sign for the economy and shouldn't deter the Fed from starting to pull back on the stimulus.

What could deter the Fed is a continued increase in interest rates. And the bond market probably will continue to be volatile as investors try to figure out what the Fed is going to do, said Stephen Oliner, a resident scholar at the American Enterprise Institute think tank.

"I think we're going to continue to see outsized market moves because the market is very nervous and uncertain about what the Fed is going to do," he said.

By the numbers

7.6 percent

June's U.S. unemployment rate, unchanged from May

195,000

Net new jobs added last month

202,000

Average monthly net new jobs created so far this year

Strong jobs data likely to lead Fed to cut stimulus 07/05/13 [Last modified: Friday, July 5, 2013 9:37pm]
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